Politics! Infighting! Gridlock! A plan to make shareholders happy could just wind up ticking everyone off.
It was supposed to be a bold strike for democracy in the boardroom. The Securities and Exchange Commission’s recent decision to change the rules on who can nominate corporate directors was designed to make it easier for shareholders to have a bigger voice, and to break up the clubby atmosphere that dominates so many boards.
Instead, the move is proof that it’s hard to draft policies that make everyone happy. Corporate management teams hate the new rule — they’ll undoubtedly be facing much more uncertainty as the proxy season approaches once again, with more shareholders getting the chance to derail their planned slate of directors. Corporate gadflies are disappointed because many of them won’t meet the threshold set by the SEC: To be eligible, investors must own at least 3% of a company’s shares outstanding for a period of at least three years. Large activist investors, for whom the move was supposed to be an incredible boon, aren’t cheering either.
Mario Gabelli is exactly the kind of investor who would stand to gain from the ruling: His Gamco Investors Inc. owns 3% or more of 164 public companies. Gabelli is a hard-core long-term investor; when he buys into a company, he has an investing time horizon of at least five years before he plans to even consider selling his stake.
And he’s willing to rabble rouse. His first proxy battle was in the 1980s, and he’s been involved in about 10 proxy initiatives in just the past two proxy seasons alone. He knows very well that even a somewhat friendly investor can get a cold reception from a management team once he suggests his own nominees for the board. “You don’t want a skunk at the cocktail party, and any outside director is a skunk at the party,” Gabelli says.
Though the new SEC ruling would give Gabelli a much stronger hand at the negotiating table, he’s eyeing the change warily. Because while Gabelli now has the ability to propose his own directors, he also recognized that many other investors and interest groups do too. (Although that’s what you’d get in a true democracy.)
That’s because he’s not sure all those other investor groups have the same agenda he does. What if it’s a union that wants better benefits for its members? Or an environmental group that wants a power company to destroy a dam for the benefit of a fish species? “Our clients want me to make sure that every company we invest in has directors who are focused on the underlying shareholder value, and that means focusing on profits,” he says.
This major potential shift in the balance of power has many longtime watchers concerned, and plenty expect that legal challenges are inevitable. Professor Joe Grundfest of Stanford Law School, who was an SEC commissioner from 1985 to 1990, thinks the agency may have bitten off more than it can chew with this ruling.
As he sees it, the opponents have a strong case under the Administrative Procedure Act, which regulates government agencies. The big weakness for the new ruling, Grundfest says, is that it is lopsided in its enforcement. Under the new rule, shareholders are allowed to set an even lower bar for proxy nominations: They could, for instance, vote to require that shareholders need to own only 1% of the shares outstanding for one year. But the shareholder base would not be allowed to vote to raise the bar — requiring, say, 5% ownership stakes for director proposals. His point is that this is an asymmetric, irrational, and unfair choice.
Long-term investors point out that all companies are different, and that what is good for one company might not be good for another. Grundfest has a simple solution: Just allow shareholders of every company to vote for whatever threshold they decide is right. “If you really believe in shareholder democracy, then let the shareholders decide,” he says.
Of course, in a true democracy, things can get a bit messy. And that’s when the real problems kick in: If everyone gets a voice, will the boardroom start to more closely resemble Congress? Now, there’s something we can really look forward to: corporate politics, gamesmanship, and gridlock on a grand level.
–Becky Quick is co-anchor of CNBC’s Squawk Box.
