To paraphrase Harry Truman: What this country needs is a good one-handed Securities and Exchange Commission chairman.
His comment supposedly was prompted by economists who provided him advice by saying: “On one hand … On the other hand.”
SEC Chairman Christopher Cox acted like one of Mr. Truman’s economists late last month when he voted for two contradictory proposals concerning shareholders’ ability to affect corporate governance.
One proposal, favored by the two Democratic SEC members, would allow shareholders who owned 5% of a company for one year to propose changing bylaws governing how directors were elected.
This would make it possible for dissident shareholders unhappy with management’s performance to put forward bylaw changes that could make easier the election of individual directors or even whole slates of directors.
The proponents of this proposal argue that giving shareholders more clout in this way would improve director oversight of management. Boards of directors would know that if they failed, they could be replaced.
Opponents, including the two other Republican members of the commission, argue that it would allow boards to be captured by directors beholden to special interests — for example, unions — and less concerned about the interests of individual shareholders.
Mr. Cox voted in favor of this proposal.
But he also voted, along with his two fellow Republicans, in favor of the second proposal, which would forbid shareholders from putting forward election-related proposals.
It restates what has been the agency’s stance since 1990 — one that was called into question last year by a federal appeals court decision.
Tame watchdogs
The opponents of the status quo argue that change is necessary, because corporate boards too often become tame watchdogs. Directors often owe their board position to the chief executive and therefore are beholden to them for their lucrative directors’ fees and perks. As a result, they often fail to discipline management, and vote in favor of excessive chief executive pay packages.
The opponents argue that the current corporate-governance structure is impossibly weighted toward management and against shareholders. Shareholders can voice their displeasure with management only by selling their shares.
That, they say, is virtually impossible for large institutional shareholders whose stock sales would drive the prices of the shares down enough to inflict significant costs on the shareholders.
Mr. Cox has spoken in the past of the desirability of giving shareholders more access to the proxy process, which implies giving them more say in the election of directors.
Perhaps Mr. Cox’s contradictory votes are, as he portrayed them, a strategy for gaining more input, not a sign of indecision. Both proposals will now be put out for public comment.
Perhaps, as a result of the comments, a compromise proposal will become apparent, allowing the SEC to put forward a new rule unanimously.
But most likely, Mr. Cox will have to tie one hand behind his back and vote for a single proposal.
That vote should be in favor of greater shareholder democracy. Perhaps the 5% ownership threshold is too high, though coalitions of shareholders should make it reachable. Perhaps the one-year holding period is too short. Perhaps it should be two years; after all, it is long-term shareholders who are most interested in strong management focused on long-term performance.
It is Mr. Cox’s responsibility as chairman to devise a workable solution for better shareholder democracy that is fair to all shareholders, not just management shareholders, individual shareholders or institutional shareholders.
He must ensure that in putting some reins on management through more responsive directors, he does not hand control of the board, and ultimately management, to special-interest groups at the expense of other shareholders.
