Conversations on Corporate Governance

There are many more excellent suggestions. However, I did express one serious reservation. Read below for what became an exchange with Scott Newquist.

McRitchie's Critique: While Newquist and Russell offer a wealth of information to board members, I've got at least one serious problem with it. In the forward Bogle writes, “The next step must be to give substantial investors ‘access’ to corporate proxy statements, so we can place both nominations for directors and business proposals directly in the corporate proxies.”

Yet, Newquist and Russell discount direct nomination by shareholders, explaining “this has already been tried” at United Airlines, now in bankruptcy. Of course, this comparison is far from anything contemplated by the SEC, Council of Institutional Investors, or even the AFL-CIO.

No one I know is suggesting that specific constituencies, such as unions, nominate directors as Newquist and Russell imply. Their solution on this issue is to suggest that nominating committees seriously consider nominations from shareholders and that they nominate two candidates for each available position.

This would give shareholders a chance to recommend candidates and a choice in elections. It would also allow them to throw out board members, but it seems to leave true decision-making power with the board, not shareholders. Shareholders are left to ratify one candidate or another, neither of whom is likely to have been chosen by them.

While I believe the book has much to recommend it, in the minds of the authors putting investors first doesn't appear to require that directors yield any power to investors. That seems a bit paternalistic.

Women in the US won the right to vote in 1920. Perhaps you can imagine with me a book written in 1910 called "putting women first" in which the authors proposed many reforms to better the lives of women but failed to include that one essential reform...giving them the vote. Perhaps it is a bit of a stretch, but I don't believe we can seriously put investors first while denying them an independent mechanism to hold directors accountable.

Newquist: Mr. McRitchie and I are not very far apart at all and I am surprised that he focused on one suggestion out of many in the book. This is undoubtedly because the SEC is considering this very issue this week and Mr. McRitchie is clearly an advocate for open proxy access. He will probably get his way because boards of directors feel that direct proxy access for two or three directors out of twelve is less of a threat to the status quo of board power than my suggestion.

Mr. McRitchie should know that I have debated this topic with one of the large state pension funds. The conclusion was that over time my proposal would cause real change by making all directors accountable to shareholders. It was preferred over limited proxy access by the labor-oriented fund, but the fund felt my proposal would not get through the SEC and would be fought even harder by the Business Roundtable et al.

Putting Investors First makes a strong case for increased input by shareholders and more shareholder power. It also makes the case that directors are fiduciaries of shareholders and should be held accountable to them. On this major point we agree. The issue of small disagreement is the details by which that accountability is exercised.

Mr. McRitchie advocates direct nomination of directors by shareholders. The first problem I have with this is that it is likely that special interest groups will mobilize to nominate candidates that have a special interest in certain board policies. My book argues that all directors should act as fiduciaries for all shareholders and use their best judgment to act in the collective interest of all shareholders--past, present and future.

Contrary to Mr. McRitchie's claim, I do not discount direct proxy access. I simply point out that it may have unintended consequences. While I applaud the AFL-CIO activism, including efforts of State pension funds that manage union money, I must also note that it is this special interest group that will nominate directors. Having a minority of directors advocate labor rights or a reallocation of profits between labor and capital is a valid discussion (as noted elsewhere in the book) but I question if the resulting board structure will change anything.

Mr. McRitchie is correct that my solution leaves decision-making power with the board. As explained in chapter 2, boards were established to represent the interests of many diverse shareholders who cannot possibly absorb and understand all the details required to make informed decisions, so they rely on fiduciaries. As companies become more complex and have an increasing number of constituencies arguing a position, the need for a responsible, accountable board grows. The problem that Mr. McRitchie and I are struggling with is that directors have not done a good job. They have not been held accountable and need to be. The debate is over how to make them accountable.

My suggested solution provides a mechanism to hold the board –all directors, not just a few of them -- accountable. Mr. McRitchie argues that voting between two board nominated candidates is not a choice.Opponents of my proposal argue that the "old boy" existing directors would not run for election if they could lose. While I doubt this, I think this claim validates the belief that such a proposal would cause real change. Either a whole new crop of directors would run or existing directors, at risk for the first time, would start to act in the interests of shareholders. Additionally, I propose that directors should have to solicit the opinions of shareholders. This process is, in fact, what a primary election accomplishes.

In summary, Mr. Ritchie should like 99% of this book. He has focused on one issue that he believes is less "extreme" than he would like to empower shareholders. My view, supported by discussions with pension funds and directors would accomplish more in a shorter period of time and preserve the valid advantages of a well-informed group of fiduciaries. My view will probably not prevail because it would be too "extreme" to be supported by those desiring the status quo. They would prefer a process of "triggering events" followed by losing "control" of two or three seats.

McRitchie: Well put. I suppose my criticism stems more from an ideal, rather than what is likely to come out of new SEC rules.

Eventually, I see low cost contests existing at many corporations, not just for two or three seats but also for control, even if it takes a few years. In most cases “special interest groups,” such as unions, “socially responsible” mutual funds or public pension funds, would probably sponsor those board contestants. I agree that “directors should act as fiduciaries for all shareholders and use their best judgment to act in the collective interest of all shareholders--past, present and future,” so it is likely that most such contests would fail.

A majority of shareholders would only vote for shareholder nominees if they were convinced their election would raise or at least not hurt the value of the company. I’m sure that choosing between two candidates offered by the nominating would also result in a more informed debate. However, shareholders nominees are more likely to scrutinize existing policies and practices. The resulting debate would lead to the transparency and long-term enhanced value that most of us seek as long-term shareholders.