NY Times Article of note

December 9, 2005
Do Companies Need a Little Democracy?
By FLOYD NORRIS

FOUR years after Enron's bankruptcy shocked investors - and revealed that there was almost nothing there once the lies were stripped away - reforms have changed many things in corporate America.

Corporate directors are newly empowered, and in many cases a lot better paid than they were in the old days. Auditors are more closely regulated, but in ways that have improved their income significantly. Wall Street's way of doing stock research has been turned around. Corporate officials must now personally certify their companies' financial results and the quality of the internal controls that assure accuracy. Mutual funds, with more independent directors, may seek to avoid paying too much to the managers who run and market the funds.

But one change that seemed likely - an increase in shareholder power - has not been realized.

Shareholders legally own companies, but in practice they have little influence. Elections of directors are seldom contested. The ballots companies send out allow shareholders to withhold votes from directors, but do not provide alternatives. If 99 percent of shareholders vote against a director, but he votes for himself, he will win.

It is possible to mount a proxy battle but that involves a lot of expense, because someone running against the incumbents cannot even get on their ballot. Insurgents must send out their own ballots, as well as campaign literature, and pay for it. Few even try.

William H. Donaldson, when he was chairman of the Securities and Exchange Commission, promised to change that. The rule the S.E.C. proposed was a mild one: it would have allowed institutional investors in some cases to put forth, on the company's ballot, a so-called short slate of directors that, if successful, would control only a minority of seats on the board. But even that infuriated corporate America, and after intense lobbying Mr. Donaldson did not pursue the plan. There is no indication that his successor, Christopher Cox, plans action in that area.

Some doubt the wisdom of shareholder power. Iman Anabtawi, an acting professor of law at U.C.L.A., argues that differing groups of shareholders can have divergent and conflicting interests, and that board power is needed to mediate. Her point is reinforced by efforts of hedge fund managers to influence companies in ways aimed more at short-term stock performance than long-term value creation.

But defenders of the status quo should ask whether any additional limits on the power of self-perpetuating boards are needed.

If so, they might be wise to act now, rather than after abuses create another stampede for change.

An interesting suggestion comes from Leo E. Strine Jr., a Delaware vice chancellor and as such a judge who can decide the outcome of corporate battles. In a coming issue of The Harvard Law Review, he sets forth a proposal, which he is careful not to endorse, that could thread a middle line between reformers and traditionalists.

It suggests changes in state laws to allow contested elections of director - outside of the takeover context - every three years. If insurgents, who could appear on the ballots sent out by management, received 35 percent of the votes, they could get some of their expenses reimbursed. And, of course, they might win.

In return for getting real authority, shareholders would no longer be able to propose nonbinding resolutions that now appear at annual meetings every year.

The risk now is that reforms have freed boards from domination by chief executives without creating any other controls, other than the courts, over directors. A limited dose of democracy might help to ensure we are not entering the era of the imperial board of directors.