Dan Gallagher is leaving his post as a Securities and Exchange Commissioner shortly. But on his way out, he had some pretty bleak words about the state of the market.
In a speech on Tuesday at a Stanford conference on corporate governance, Gallagher said he was worried about the culture of short-term thinking in Corporate America and in the market. “We are not in a happy place,” he said.
The speech was focused on the growth of shareholder activism, but Gallagher said the rise of activists was only part of the problem. He said that traditional investors push corporations to meet quarterly earnings numbers, and companies often respond with overly ambitious goals. Activists add fuel to that fire. Gallagher, though, said the move away from staggered boards, in which only a portion of a company’s directors are elected each year, was adding to the problem. That change has been pushed by advocates for shareholder activism, who think every director should stand for election each year. Gallagher criticized the SEC for playing a role in enabling these changes.
In general, Gallagher, a Republican who has tussled with activist shareholders and their proponents in the past, says that activists are driven by “the profit motive,” which he thinks is a good thing. He says he’s not convinced by the data pushed forward by either side of the debate over whether activists are good for companies. Nonetheless, he mostly thinks the SEC should get out of the way and leave corporate boards to fight their own battles with activists.
Gallagher said that the situation is not helped by the fact that institutional investors often blindly go along with activists or the recommendations of proxy advisory firms. He noted that the SEC may want to look into whether other institutional shareholders are upholding their fiduciary responsibilities to their clients, who are often long-term investors.
Gallagher suggested that institutional investors may consider offering clients an option decide in advance if they would like to vote with management, with a certain pension fund, or with a particular proxy advisory service. That would likely tip the scales against hedge fund advocates, because investors asked in advance are likely to side with management. After all, most people make investments thinking the executives who are running the business are doing pretty good, or they assume that’s the opinion of the professionals they have hired to decide where to put their money. Gallagher’s suggestion is likely aimed at reducing the influence of activists, and that may very well be what is ultimately best for investors. But handing out blind votes to management teams that might not be up to snuff seems an odd way to get there.
