While most of the right is closely scrutinizing the concoction of liberal legislation of the new Congress, a more immediate threat to conservative policies may be brewing at a regulatory agency about a mile away from Capitol Hill.
Through letters, e-mails and personal visits, activists of the left are swarming the Securities and Exchange Commission, the powerful agency that supervises the U.S. stock market. A court ruling that requires the SEC to clarify its rules on company proxies is being used to push the agency to enact policies that would give unions and other liberal pressure groups an enormous lever of power over U.S. companies.
These groups are pushing for what they call “shareholder access” in the elections of publicly-held companies’ boards of directors. They want the SEC to force companies to include directors nominated by specific groups of shareholders on the company voting proxies that are mailed out to all shareholders. Advocates of “shareholder access”—and their champions in the press—say this would empower U.S. shareholders against corporate management. The entity that filed the lawsuit that forced the SEC to reconsider this issue, a large government employees’ union called the American Federation of State County and Municipal Employees (AFSCME), has called shareholder access rules the “holy grail of corporate governance.”
But who this type of rule would mostly empower would be unions such as AFSCME, the AFL-CIO and other pressure groups. Through the pension funds that unions directly run as well as the state and local government employee pensions that unions and other liberal activists have influence over, the left has control over a large number of shares in America’s public companies.
Many activists are planning to use this new “shareholder” power as a lever to force U.S. companies to bow to their various wish lists—on everything from union demands to animal rights to boycotts of Israel. As Larry Ribstein, professor of law at University of Illinois and widely read business blogger has put it, “This isn’t about shareholder ‘democracy,’ but about shifting power from powerful managers to powerful shareholders (i.e. unions) who are even less likely to champion the interest of shareholders generally.”
Observers say SEC Chairman Chris Cox, a former GOP House member from California, is under tremendous pressure from the media and new congressional committee heads, such as House Financial Services Chairman Barney Frank (D.-Mass.), to give in to the demands of activists such as the AFL-CIO. And while Cox was justly praised for fighting for important conservative principles in Congress, conservative experts are troubled by the fact that he is reportedly searching for consensus with the two Democrats on the five-member SEC, and that he has not publicly taken “shareholder access” proposals of liberal groups off the table.
That’s why conservatives say Cox needs to be reminded what is really behind the push of some of these groups. The danger is not just that left-wing groups will get their own candidates on the boards of directors. It’s that board members will strike deals with the left in return for activists’ informal agreements not to nominate opposing candidates. Jay Falk, president of SRI World Group, which advises pension funds on “socially responsible” investing, admitted gleefully that enhanced “shareholder democracy” would be used to enact the agenda of the left. He recently told the website Social Funds, “The strengthening of shareholder democracy this year promises to further empower investors to address governance issues such as out-of-control executive pay as well as environmental and social issues such as climate change.”
Even now—without “shareholder access”—the public pension managers and union bosses haven’t been shy about asserting union and other social priorities that would reduce returns for their own pensioners as well as other shareholders. They’ve also used their control over worker funds in obvious efforts to aid the Democratic Party.
In 2004, when Sinclair Broadcasting was planning to air “Stolen Honor,” a documentary critical of presidential candidate John Kerry, New York’s Democrat Comptroller Alan Hevesi fired off a threatening letter to Sinclair saying that airing the program would hurt “shareholder value.” The claim was pretty dubious, as the controversy about the program would almost ensure high ratings. But Sinclair ended up airing only clips from the documentary in a news special.
Similarly, when President Bush was pushing private accounts for Social Security, the AFL-CIO threatened to pull its $400 billion fund away from any financial services company backing the accounts. “We have no intention of letting any of these companies get away with this while they manage our workers’ funds,” said top AFL-CIO lobbyist Gerald Shea, according to the Wall Street Journal. After this “pension fund blackmail,” as the Journal called it, several companies pulled out of coalitions supporting private accounts.
Other shareholder groups are pushing corporate policies that would endanger both health and American foreign policy. The radical animal-rights group People for the Ethical Treatment of Animals has sponsored shareholder resolutions to stop companies from conducting animal research for potential life-saving drugs. The left-leaning Human Rights Watch pushed Caterpillar to stop sales to Israel of bulldozers, because the dozers could be used to destroy Palestinian homes. The proposal was defeated 97% to 3% by Caterrpillar’s shareholders.
But a 3% stake is all that’s needed by for shareholders to collectively run candidates, as some of the shareholder access proposals are designed. And activists could be “swing votes” in close director elections. This would give corporate boards and management a huge incentive to cave to various demands, such as not selling products to Israel or other U.S. allies. “The possibilities are endless and endlessly dangerous,” says one business observer following the issue.
Shareholder access rules would also undermine principles important to conservatives such as entrepreneurship and federalism. Currently, the director nomination process is governed by the states. In states such as Delaware, where many firms are incorporated, shareholders can and do nominate their own director candidates, but they have to do so by sending out alternate ballots to shareholders at their own expense.
Boards and CEOs should be accountable to investors, and members of the public of course have a right to protest and boycott corporations if they disagree with a company’s decisions. But “shareholder democracy” is a misguided concept. Even if unions did not have the power they do through pensions, and even if, in some instances, the right could use this tool to get boards to agree to conservative objectives, this policy would still violate conservative principles. Not only would a federal “shareholder access” rule go against federalism by usurping state corporation law, it would also abridge freedom of contract between investors and entrepreneurs.
Shareholders may be the “owners” of the company, but no one forces them to buy a stock. When they buy a share of a company, they implicitly agree to the firm’s bylaws about the board nomination process. If board members had to constantly bow to the demands of everyone with a stake in the company, this burden would hold back dynamic firms that create jobs and wonderful new products. Imagine if, in their early days, the boards of Microsoft and eBay had to constantly worry about being knocked out of their authority by multiple groups with easy access to the proxy.
Market signals such as the share price, along with activity such as short-selling and hostile takeovers (what economist Henry Manne calls the “market for corporate control”), can discipline boards and execs to create value for shareholders much better than the government ever could. But, for some reason, many proponents of “shareholder access” don’t want to lift barriers on these institutions and devices to hold firms accountable to shareholders. They only want to use shareholder ballots as another political playing field. Conservatives need to remind their old ally Chris Cox that forced “shareholder access” is nothing more than government-sanctioned trespassing on free enterprise and state law.
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