Felix Salmon

Otiose shareholder of the day, B&N edition

By Felix Salmon
September 30, 2010

Steven Davidoff goes into lots of detail today on the close-run fight between Ron Burkle and Leonard Riggio for control of three board seats at Barnes & Noble. It was a nailbiter of a vote, and informed opinion had it that Riggio, B&N’s founder, was going to end up the loser, despite controlling a large chunk of the outstanding shares. After all, the most powerful shareholder advisory firm, Institutional Shareholder Services, favored Burkle — and big investors like Vanguard and BlackRock generally follow ISS’s lead.

This time around, however, they didn’t, which is interesting. But what’s absolutely astonishing, in a vote of this importance, is the pathetic showing from State Street, which controls about 1 million shares, or about 1.75% of the company. In a vote as close as this, that’s a massively important stake, which can easily tip the outcome one way or the other.

State Street somehow came to the conclusion that it wanted to vote for an unholy mixture of the two antagonists: for two of Burkle’s nominees, but against Burkle himself, and against Riggio’s poison-pill plan. It was a vote which would have satisfied no one — had it counted.

But then, just to add an element of utter farce to the proceedings, State Street contrived to vote its shares late, thereby ensuring that none of its votes were counted at all.

If State Street had simply intended to vote for one side or the other, the move could have been some kind of weird schoolyard attempt to curry favor with the winner had the vote gone the other way: State Street could always have said “I did vote for you”, or “I didn’t really vote against you”, or something annoying like that.

But since the attempted vote itself was so lily-livered, this looks to me like simple incompetence.

Maybe a shareholding worth $17 million or so is ultimately just not all that important to a firm the size of State Street. But it’s surely important to Burkle, Riggio, and B&N’s board, and these kind of antics come close to openly mocking the concept of shareholder democracy.

We hear a lot about the obligation that companies have to their shareholders. But equally, large shareholders have an obligation to the companies they own: to take their stake seriously, and not to play silly games by delaying borderline-incomprehensible votes until it’s too late to cast them. If this is how State Street treats the companies it owns, I wouldn’t want to entrust them with my heard-earned savings.

Update: Some good comments here, surrounding State’s Street’s status as a custodian and the difficulties it faces in learning from the shares’ beneficial owners how it should vote. But Davidoff made it sound as though State Street was going to vote all its shares the same way; is that not true? And the delay in voting seems to have been a matter of minutes, rather than days. In any case, it seems to me that voting shares is one of the few things that custodians are expected to do well, and that State Street obviously failed on that front, this time.

5 comments so far | RSS Comments RSS

You’re missing a piece. It’s not enough to say that the vote was close and that they had a big share. You should also argue that they actually have some preference between the outcomes.

Ego fights like this only matter if you have an opinion about the relative competence of the combatants. Is it obvious State Street should have had a preference here?

Posted by absinthe | Report as abusive

Felix, I am reasonably certain State Street is acting as custodian for a number of different beneficial owners. Afterall, that is their principal business. They voted several ways on behalf of different underlying investors. They were late because it takes a long time to send the information down the custody chain and then send the voting instructions back up the custody chain especially if the holdings are cross-border which is quite likely as State Street acts as custodian for many non-US institutions.

Posted by Gennitydo | Report as abusive

Gennitydo brings up an important issue here.

Felix notes that “State Street contrived to vote its shares late.” It probably was no contrivance. It was endemic to the outdated shareholder/bondholder registration system. And this outmoded system has shaped how stock Custodians (and bond Trustees) define their obligations of timeliness, among other things.

But more to the point, there is a terrible inefficiency in our “modern” US shareholder/bondholder vote collection and delivery mechanism. Custodians not only have non-U.S. institutions to deal with, but also may go through one or more U.S. sub-custodian chains (with medallion stamps or other verification mechanisms), operations departments of financial or other institutions, and numerous additional links in the delivery chain before getting a response from the qualified decision-maker which, many times, may be more than one person or a committee. I would bet State Street hasn’t a clue who the ultimate real decision maker is. Nor are they required to. So it’s not their problem.

And what is true for stock custodians is also true for bond indenture Trustees: think about trying to process a vote on a subprime CDO or on a pooled bank trust preferred. Doesn’t happen very often. The voting requirements are too cumbersome. And you wonder why mortgage securitizations have left bondholders and servicers paralyzed to act in their best interest to clear the market? The financial engineering got way ahead of the physical/legal plumbing used for voting.

So we should worry about and try to correct the egregiously outmoded manner in which votes relating to corporate governance are processed. And it is not trivial. Forget about hanging chads and rigged voting machines. This system is ripe for all sorts of vote tampering. In the BN case, it probably gave the incumbents a significant edge.

Voting one’s economic interests in important governance and resource allocation decisions is a critical assumption of well-functioning capitalism.

And an outmoded voting system means that gaming the voting process outweighs managing the substance of governance in too many cases.

Is that really how we want corporate managers, shareholders and bondholders spending their time and resources–figuratively stuffing ballot boxes?

Posted by AABender1 | Report as abusive

The problems with the voting system for equities are explained very well in Marcel Kahan & Edward B. Rock, The Hanging Chads of Corporate Voting, 96 Georgetown Law Journal 1227 (2008).

Available at
http://papers.ssrn.com/sol3/papers.cfm?a bstract_id=1007065


Never has voting been more important in corporate law. With greater activism among shareholders and the shift from plurality to majority voting for directors, the number of close votes is rising. But is the basic technology of corporate voting adequate to the task? In this Article, we first examine the incredibly complicated system of US corporate voting, a complexity that is driven by the underlying custodial ownership structure, by dispersed ownership and large trading volumes, and by the rise in short-selling and derivatives. We identify three ways in which things predictably go wrong: pathologies of complexity; pathologies of ownership; and pathologies of misalignment of interests. We then discuss the current legal treatment of these pathologies and consider a variety of directions for reform, ranging from incremental modifications to fundamental redesign. We show that, absent a fundamental reconstruction of the ownership structure, the existing system will continue to be noisy, imprecise and disturbingly opaque. The problems with the existing system pose fundamental challenges for both proponents of direct shareholder democracy, who advocate more extensive voting rights for shareholders, and for proponents of indirect shareholder democracy, who advocate deference to a board of directors the legitimacy of which ultimately also rests on shareholder elections.

Posted by bklawyer | Report as abusive

In all probability, these votes represented ETF shares, and State Street’s voting was determined by some very complex interests. I’ve voted a lot of these, and they can be done over the phone or via Internet, weeks in advance. If State Street was representing multiple voting blocks, they could have processed them as the decisions came in. However, considering that they were voted consistently across all the shares, it does not appear that they were polling the holders to determine the vote.

If they were ETF shares, State Street likely would not vote something egregiously anti-shareholder, but it also doesn’t want to get in between two powerful interests that may try and make their lives difficult. My best guess for the strange split, late vote was that State Street was trying to vote whoever was winning, was unable to get a proxy tally until the start of the meeting (as it is highly material, inside info), got a close tally, and then rushed to put in a split ticket, too late to count. They might have been sued if they did not attempt to vote at all, but this gave them some cover.

The growth of ETFs = the death of shareholder democracy.

Posted by Derrida | Report as abusive

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