"But now critics are pushing back [at proxy advisers], accusing the firms themselves of conflicts of interest and secrecy. Corporations are aiming to limit what they see as inappropriate influence."
– "Proxy advisers face challenge from corporate critics", Jim Spencer, Star Tribune, 2013-11-30.
Proxy advisers are firms that advise large institutional shareholders about voting for or against the management and boards of corporations.
I think the irony of this push back is that the large corporations don't consider being members of ALEC (American Legislative Exchange Council) or any of their own lobbying efforts or political contributions as "inappropriate influence" on "the government of the people, by the people, and for the people".
Showing posts with label shareholders. Show all posts
Showing posts with label shareholders. Show all posts
Friday, December 06, 2013
Wednesday, November 13, 2013
Democratic capitalism is an oxymoron
Democratic means government by the people. It is commonly understood that each person has one vote.
Capitalism is raising money for an enterprise with the contributions of a few people or thousands of people. Each contributor of capital to the enterprise has as many votes as the number of shares he or she holds. One can argue that this is fair; the person who put one million dollars into the company had a greater interest than the person who put one hundred dollars into the company.
In practice, capitalism becomes distorted to the rule of a few. Capitalism leads to a plutocracy both in the enterprise and in the various governments.
In the enterprise, members of the board periodically award themselves and the top executives shares in the enterprise, thus increasing the number of votes they have, at no or low cost.
In government, the executives and other large shareholders put a lot of money into lobbying government for laws in their favor and into campaigns of political candidates who they believe will be sympathetic to their interests. Regular readers of this blog know what Adam Smith thought of that influence. See "The Invisible Adam Smith".
Capitalism, when there are many companies with similar focus, is a very good idea. It means that there are many people working on bringing new or lower cost products to the market. This doesn't mean that government can't produce good ideas; it just does not have enough resources to produce as many good ideas as are needed. And often government is needed to encourage good ideas in certain fields or to curtail bad ideas that are harmful to the public. In fact, corporations fall all over themselves to get government contracts to build roads or build more lethal weapons.
You might be able to come up with a better blended phrase that reflects the need for both democracy and capitalism. My best shot today is balance of democracy and capitalism. Now the next question is: when will this balance be achieved?
Capitalism is raising money for an enterprise with the contributions of a few people or thousands of people. Each contributor of capital to the enterprise has as many votes as the number of shares he or she holds. One can argue that this is fair; the person who put one million dollars into the company had a greater interest than the person who put one hundred dollars into the company.
In practice, capitalism becomes distorted to the rule of a few. Capitalism leads to a plutocracy both in the enterprise and in the various governments.
In the enterprise, members of the board periodically award themselves and the top executives shares in the enterprise, thus increasing the number of votes they have, at no or low cost.
In government, the executives and other large shareholders put a lot of money into lobbying government for laws in their favor and into campaigns of political candidates who they believe will be sympathetic to their interests. Regular readers of this blog know what Adam Smith thought of that influence. See "The Invisible Adam Smith".
Capitalism, when there are many companies with similar focus, is a very good idea. It means that there are many people working on bringing new or lower cost products to the market. This doesn't mean that government can't produce good ideas; it just does not have enough resources to produce as many good ideas as are needed. And often government is needed to encourage good ideas in certain fields or to curtail bad ideas that are harmful to the public. In fact, corporations fall all over themselves to get government contracts to build roads or build more lethal weapons.
You might be able to come up with a better blended phrase that reflects the need for both democracy and capitalism. My best shot today is balance of democracy and capitalism. Now the next question is: when will this balance be achieved?
Friday, April 12, 2013
Dictatorship of the directorate
I've long promoted the idea of withholding votes for directors of companies who are paid too much. Well, even if all the shareholders withhold their votes, the directors of many companies get to keep their jobs. All that is required is a plurality of votes. Since one vote with no opposition is a plurality, they get to keep their jobs. And their perks. And accumulate more shares. And run the company without any consideration for the owners. Instead of Milton Friedman's corporate purpose of "shareholder value", they run the company for "director value".
For more, see "When Shareholder Democracy is Sham Democracy", James B. Stewart, New York Times, 2013-04-12.
For more, see "When Shareholder Democracy is Sham Democracy", James B. Stewart, New York Times, 2013-04-12.
Sunday, April 07, 2013
Limerick of the day - Corporate accountability
Poor decisions don't merit praise,
Just a compensatory raise,
Corp Directors deserve
A big raise for their nerve,
In weathering wan woeful days.- Larry Eisenberg, a comment to "Little Accountability for Directors, Despite Poor Performance", Steven M Davidoff, New York Times, 2013-04-05
My comment to this article was:
"I read once that most of the stock in many companies is held by mutual funds and other financial institutions. They vote with management because of policies of 'fiduciary responsibility'. Individual shareholders who vote against overpaid management are just a minor nuisance."
Thursday, November 29, 2012
Let's Look at Entitlements
Political reporting is full of stories about the need to rein in entitlements, mostly meaning Social Security and Medicare. Remember these are insurance programs for which people pay premiums.
Consider auto insurance. Suppose you buy a car and buy collision insurance for it. The day after you pay your annual premium of, say $1,000, you are involved in a crash that totals your car. Is the insurance reimbursement an entitlement? Of course it is. Is it an unjustified entitlement. Well, if you've been paying car insurance payments for years and never had a claim, you might think so. It's your premiums that are giving the owner who had made only one payment the reimbursement.
The question with Social Security and Medicare is if enough premiums are being paid in to cover the payouts, not whether those who paid in are entitled to the benefits or not. One can question the level of payouts but not the fact that payouts are made.
In both the auto insurance and Social Security cases, the recipients are not determining the benefits. It is either the insurance companies or the Federal Government.
However, there are other benefits that are being determined by the recipients, not some "disinterested" second party.
Consider CEO salaries. It is not an independent group of shareholders that are determining the ever increasing CEO salaries. It is a board often picked by the CEO!
Consider board member salaries and fees. Who determines that board members will get $100,000 plus for five or six board meetings a year plus expenses? The board members! Who determines the stock benefits given to executives and board members to "align their interests with those of the shareholders"? It's certainly not the shareholders.
Consider the "golden parachutes" given to fired executives. Do you think a laid-off worker would receive a few million dollars and lifetime high-value health insurance? If the worker receives any benefits at all, they are often considered entitlements, especially if part of a union contract. Why don't more supporters of "capitalism" recognize the golden parachutes as undeserved "entitlements"?
Consider that corporations depend on employees and customers to succeed. Employees are often treated as costs rather than investments. Customers are often treated as annoyances rather than supporters and free advertisers. And too often, executive pay is inversely related to customer satisfaction. See "Executive Pay and Customer Satisfaction". That certainly smacks of entitlement on the part of the executives.
Consider that the owners of professional sport teams strong-arm cities and states to provide a larger portion of their increasingly expensive stadiums. They argue that the newer, bigger stadium will be an investment in the local economy. I wonder how many of these owners are willing to pay for all the schools, roads, sewers, and so on that modern communities need and provide. Oh, the stadium will pay for those. That sounds like a multi-million dollar entitlement to me.
My guess is that the "entitlement" of Social Security puts more money into a local economy than all the corporate entitlements. My guess is that the "entitlement" of Medicare gives a lot of support to the local health care facilities than all the corporate entitlements, plus the employees of those facilities spend a lot of their wages in the local economy.
In short, an entitlement is something others receive, we only receive what is due us.
Consider auto insurance. Suppose you buy a car and buy collision insurance for it. The day after you pay your annual premium of, say $1,000, you are involved in a crash that totals your car. Is the insurance reimbursement an entitlement? Of course it is. Is it an unjustified entitlement. Well, if you've been paying car insurance payments for years and never had a claim, you might think so. It's your premiums that are giving the owner who had made only one payment the reimbursement.
The question with Social Security and Medicare is if enough premiums are being paid in to cover the payouts, not whether those who paid in are entitled to the benefits or not. One can question the level of payouts but not the fact that payouts are made.
In both the auto insurance and Social Security cases, the recipients are not determining the benefits. It is either the insurance companies or the Federal Government.
However, there are other benefits that are being determined by the recipients, not some "disinterested" second party.
Consider CEO salaries. It is not an independent group of shareholders that are determining the ever increasing CEO salaries. It is a board often picked by the CEO!
Consider board member salaries and fees. Who determines that board members will get $100,000 plus for five or six board meetings a year plus expenses? The board members! Who determines the stock benefits given to executives and board members to "align their interests with those of the shareholders"? It's certainly not the shareholders.
Consider the "golden parachutes" given to fired executives. Do you think a laid-off worker would receive a few million dollars and lifetime high-value health insurance? If the worker receives any benefits at all, they are often considered entitlements, especially if part of a union contract. Why don't more supporters of "capitalism" recognize the golden parachutes as undeserved "entitlements"?
Consider that corporations depend on employees and customers to succeed. Employees are often treated as costs rather than investments. Customers are often treated as annoyances rather than supporters and free advertisers. And too often, executive pay is inversely related to customer satisfaction. See "Executive Pay and Customer Satisfaction". That certainly smacks of entitlement on the part of the executives.
Consider that the owners of professional sport teams strong-arm cities and states to provide a larger portion of their increasingly expensive stadiums. They argue that the newer, bigger stadium will be an investment in the local economy. I wonder how many of these owners are willing to pay for all the schools, roads, sewers, and so on that modern communities need and provide. Oh, the stadium will pay for those. That sounds like a multi-million dollar entitlement to me.
My guess is that the "entitlement" of Social Security puts more money into a local economy than all the corporate entitlements. My guess is that the "entitlement" of Medicare gives a lot of support to the local health care facilities than all the corporate entitlements, plus the employees of those facilities spend a lot of their wages in the local economy.
In short, an entitlement is something others receive, we only receive what is due us.
Tuesday, August 28, 2012
Can't corporations live within their means?
Many complain about government borrowing and say that government should live within its means. But few complain about corporate borrowing. Shouldn't corporations live within their means?
From the semi-annual report of the AllianceBernstein Income Fund (Ticker AWF):
AT&T, 6.50%, due 2037
Ford Motor Co., 7.45%, due 2031
Citigroup, 8.50%, due 2019
Pacific Life Insurance Co., 9.25%, due 2039
Weyerhauser Co., 7.375%, due 2032
Borrowing does have its purposes, among other things having the capital for expansion or to smooth out cash flows. But how much borrowing is too much?
For example, Citigroup as of June 2012 had a debt to equity ratio of 3.024, that is, it owed bondholders three times as much as the value of shareholders' stock. See http://ycharts.com/companies/C/debt_equity_ratio. On the better side, General Motors had a debt to equity ratio of 0.3555. See http://ycharts.com/companies/GM/debt_equity_ratio. On the worse side, Ferrellgas Partners has a debt to Equity Ratio of 25.36. See http://ycharts.com/companies/FGP.
But why is Citigroup paying bondholders 8.50% when it pays savers 2% or less? See "Taking a Look At Citigroup's Latest Fixed-Income Prospectus", Rajiv Tarigopula, Seeking Alpha, 2012-07-11. Remember when savings and loans were required to pay 5% by law (which they used to justify not paying more)? And this 2% is not being paid for demand deposits, but three-month notes.
It gets even a bit screwier. Citigroup does offer a fixed-rate 15-year mortgage at 4.375 percent. So, it is borrowing at 8.50% to finance mortgages returning 4.375%. That doesn't sound like it's living within its means! See "Who Are the Best Mortgage Lenders for Bad Credit", Beth Lytle, eHow Contributor, no date.
From the semi-annual report of the AllianceBernstein Income Fund (Ticker AWF):
AT&T, 6.50%, due 2037
Ford Motor Co., 7.45%, due 2031
Citigroup, 8.50%, due 2019
Pacific Life Insurance Co., 9.25%, due 2039
Weyerhauser Co., 7.375%, due 2032
Borrowing does have its purposes, among other things having the capital for expansion or to smooth out cash flows. But how much borrowing is too much?
For example, Citigroup as of June 2012 had a debt to equity ratio of 3.024, that is, it owed bondholders three times as much as the value of shareholders' stock. See http://ycharts.com/companies/C/debt_equity_ratio. On the better side, General Motors had a debt to equity ratio of 0.3555. See http://ycharts.com/companies/GM/debt_equity_ratio. On the worse side, Ferrellgas Partners has a debt to Equity Ratio of 25.36. See http://ycharts.com/companies/FGP.
But why is Citigroup paying bondholders 8.50% when it pays savers 2% or less? See "Taking a Look At Citigroup's Latest Fixed-Income Prospectus", Rajiv Tarigopula, Seeking Alpha, 2012-07-11. Remember when savings and loans were required to pay 5% by law (which they used to justify not paying more)? And this 2% is not being paid for demand deposits, but three-month notes.
It gets even a bit screwier. Citigroup does offer a fixed-rate 15-year mortgage at 4.375 percent. So, it is borrowing at 8.50% to finance mortgages returning 4.375%. That doesn't sound like it's living within its means! See "Who Are the Best Mortgage Lenders for Bad Credit", Beth Lytle, eHow Contributor, no date.
Thursday, October 20, 2011
The 1% earned their money?
Anybody who reads the news regularly knows that there is plenty of back-scratching in the executive suites and board rooms of large companies. Not only do they provide bribes, er, campaign contributions to OUR supposed representatives, but they reward each other handsomely with no justification other than some mumbo-jumbo about performance in the proxy statements.
There is little mention of all the people who are paid far, far, far less but made all this "performance" possible. It's a bit like d'Artagnan of Three Musketeers fame who kicked his servant Planchet for "poor performance" but the servant did almost all the work except the sword fighting.
For some examples of this over-compensations see "The Most Outrageous Acts of Corporate America", The Daily Ticker with Daniel Gross, 2011-10-20.
There is little mention of all the people who are paid far, far, far less but made all this "performance" possible. It's a bit like d'Artagnan of Three Musketeers fame who kicked his servant Planchet for "poor performance" but the servant did almost all the work except the sword fighting.
For some examples of this over-compensations see "The Most Outrageous Acts of Corporate America", The Daily Ticker with Daniel Gross, 2011-10-20.
Thursday, August 25, 2011
Customers - the forgotten element in business
"In this new era, Goldman's first duty was to its own bottom line,
which accrued to the shareholders. Clients were a means to that end,
not an end in and of themselves."
- "All the Devils Are Here: The Hidden History of the Financial Crisis", Bethany McLean and Joe Nocera, p 157
The business mottos "customers first" and "the customer is always
right" have become "shareholders first" and "the shareholders are always right."
which accrued to the shareholders. Clients were a means to that end,
not an end in and of themselves."
- "All the Devils Are Here: The Hidden History of the Financial Crisis", Bethany McLean and Joe Nocera, p 157
The business mottos "customers first" and "the customer is always
right" have become "shareholders first" and "the shareholders are always right."
Tuesday, March 01, 2011
Free markets and capitalism – their supporters don't want them!
Disclaimer: We own shares in some companies and mutual funds. In our retirement we will depend more and more on dividends and interest. However, we don't feel compelled to hide the warts in the system.
We read many complaints that the U.S. is becoming socialist and turning against free markets and capitalism. Well, we are seeing many efforts to erode free markets and capitalism, but these efforts are being made most strongly by those who proclaim them.
The classical definition of a free market is one with many buyers and many sellers and with both buyer and seller having all the information they need to make a decision. Oh, also, either the buyer or seller should be free to enter or leave the market.
We see many moves to reduce the number of sellers as companies gobble up their competitors. We also see some moves to reduce the number of buyers - Wal-Mart has become the sole buyer for many suppliers.
Many large corporations fight efforts to give buyers important information to make a good decision. The tobacco companies denying their products caused harm is one of the more egregious distortions of important information. Agribusiness companies don't want foods labelled as genetically modified. Many large dairy companies don't want competitors products labeled BGH-free (bovine growth hormone). Telecommunication companies make it difficult to know the exact cost of their services before a customer makes a purchase. How come the billing computers know exactly what a customer should pay but the sales computers supposedly don't have that information?
Freedom to enter and leave the market exists in varying degrees. There are certainly many products we can choose to buy or not buy. Suppliers with a single buyer can stop selling to that buyer, but they will have a lot of work to replace that buyer.
Capitalism - ah, a lovely concept when it started. Some people got together and pooled their money to form a company, each getting shares proportional to their contribution. Then markets developed to buy and sell those shares as owners wanted to reallocate their investments. All well and good. If Smith wanted to sell his shares in XYZ to buy a house and Jones was glad to buy XYZ shares because he missed out when they were issued, that's all above board.
I won't get into day-trading versus investing or all the derivatives that Wall Street thinks up. This is almost all smoke and mirrors and a long, long way from capitalism.
As economies grew, so did the companies originally financed with stock. But as they grew, the shareholders became more and more distant from the operation of the company. They had to hire executives and board members to run the company. All well and good. But with all the buying and selling of shares, the shareholders had little interest in the company other than it grew and turned a profit. Few had any interest in the day-to-day running of the company.
As time went on, the board members nominated themselves for successive terms, without any competition. Shareholders could either accept them or withhold their votes; the boards made any mechanisms to offer a different slate extremely difficult. To make matters worse, many of the shares were owned by mutual funds and other institutions; in general, the operators of these institutions exercised their "fiduciary responsibility" and voted with the board.
In many democratic countries, the boards lobbied their friends in governments to put up various hindrances to any shareholder control beyond the above yes or no votes.
These board members grant their appointed executives shares in the company for their "performance" and grant themselves the same. In other words, they are giving themselves more and more of the company and more and more of the votes. The board members often get over $100,000 per year for showing up for six meetings. Nice work if you can get it.
Many define this whole process as capitalism and as a great good. I call it capturism; the few have captured control of a company to run as they see fit. At least, unlike many oligarchies, they don't throw dissidents in jail.
We read many complaints that the U.S. is becoming socialist and turning against free markets and capitalism. Well, we are seeing many efforts to erode free markets and capitalism, but these efforts are being made most strongly by those who proclaim them.
The classical definition of a free market is one with many buyers and many sellers and with both buyer and seller having all the information they need to make a decision. Oh, also, either the buyer or seller should be free to enter or leave the market.
We see many moves to reduce the number of sellers as companies gobble up their competitors. We also see some moves to reduce the number of buyers - Wal-Mart has become the sole buyer for many suppliers.
Many large corporations fight efforts to give buyers important information to make a good decision. The tobacco companies denying their products caused harm is one of the more egregious distortions of important information. Agribusiness companies don't want foods labelled as genetically modified. Many large dairy companies don't want competitors products labeled BGH-free (bovine growth hormone). Telecommunication companies make it difficult to know the exact cost of their services before a customer makes a purchase. How come the billing computers know exactly what a customer should pay but the sales computers supposedly don't have that information?
Freedom to enter and leave the market exists in varying degrees. There are certainly many products we can choose to buy or not buy. Suppliers with a single buyer can stop selling to that buyer, but they will have a lot of work to replace that buyer.
Capitalism - ah, a lovely concept when it started. Some people got together and pooled their money to form a company, each getting shares proportional to their contribution. Then markets developed to buy and sell those shares as owners wanted to reallocate their investments. All well and good. If Smith wanted to sell his shares in XYZ to buy a house and Jones was glad to buy XYZ shares because he missed out when they were issued, that's all above board.
I won't get into day-trading versus investing or all the derivatives that Wall Street thinks up. This is almost all smoke and mirrors and a long, long way from capitalism.
As economies grew, so did the companies originally financed with stock. But as they grew, the shareholders became more and more distant from the operation of the company. They had to hire executives and board members to run the company. All well and good. But with all the buying and selling of shares, the shareholders had little interest in the company other than it grew and turned a profit. Few had any interest in the day-to-day running of the company.
As time went on, the board members nominated themselves for successive terms, without any competition. Shareholders could either accept them or withhold their votes; the boards made any mechanisms to offer a different slate extremely difficult. To make matters worse, many of the shares were owned by mutual funds and other institutions; in general, the operators of these institutions exercised their "fiduciary responsibility" and voted with the board.
In many democratic countries, the boards lobbied their friends in governments to put up various hindrances to any shareholder control beyond the above yes or no votes.
These board members grant their appointed executives shares in the company for their "performance" and grant themselves the same. In other words, they are giving themselves more and more of the company and more and more of the votes. The board members often get over $100,000 per year for showing up for six meetings. Nice work if you can get it.
Many define this whole process as capitalism and as a great good. I call it capturism; the few have captured control of a company to run as they see fit. At least, unlike many oligarchies, they don't throw dissidents in jail.
Tuesday, January 25, 2011
One way government should be run like a business
When a public corporation has its annual shareholder meeting, and the shareholders vote for a certain number of board members, to approve the auditing accounting firm, and such other business that may come before meeting, the results are almost always announced as the number of shares voting for a proposal out of the number of shares outstanding. It's been a while since I attended a shareholder meeting, but I don't remember if they give the number of votes withheld or abstaining for a proposal. I don't think they were.
Wouldn't it be great if the results for elections for public office where announced similarly? It would be a bit of guesswork as to how many eligible voters there were, but the number of registered voters is known.
Then we might get newspapers reporting that a presidential candidate received 44 million of the votes of the 140 million registered voters. Reporting like this would give pause to any declaration of mandates or the will of the people.
Of course, we don't want some of the other goings on of corporate elections.
The board chooses a single slate of candidates for each election and recommends that shareholders vote for these candidates. We wouldn't be happy if we had a single list of candidates for the legislatures that were picked by the legislatures.
The board hires and fires the chief executive officer, who often also sits on the board. We would not be happy if the legislatures hired and fired the governors or the president.
The board also sets its own compensation. Few complain about this, but hoo boy!, let the legislatures raise their salaries and the newspapers are flooded with letters.
Corporations don't have one person, one vote, but one share, one vote. The person with one million shares has a lot more clout than the person with one hundred shares. If we were to run government like a business, maybe we should have one vote for each dollar of taxes paid. Gosh, that sounds like a great way to raise taxes.
Wouldn't it be great if the results for elections for public office where announced similarly? It would be a bit of guesswork as to how many eligible voters there were, but the number of registered voters is known.
Then we might get newspapers reporting that a presidential candidate received 44 million of the votes of the 140 million registered voters. Reporting like this would give pause to any declaration of mandates or the will of the people.
Of course, we don't want some of the other goings on of corporate elections.
The board chooses a single slate of candidates for each election and recommends that shareholders vote for these candidates. We wouldn't be happy if we had a single list of candidates for the legislatures that were picked by the legislatures.
The board hires and fires the chief executive officer, who often also sits on the board. We would not be happy if the legislatures hired and fired the governors or the president.
The board also sets its own compensation. Few complain about this, but hoo boy!, let the legislatures raise their salaries and the newspapers are flooded with letters.
Corporations don't have one person, one vote, but one share, one vote. The person with one million shares has a lot more clout than the person with one hundred shares. If we were to run government like a business, maybe we should have one vote for each dollar of taxes paid. Gosh, that sounds like a great way to raise taxes.
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