Tuesday, November 17, 2009

Do Stockholders Really Know Best? - News Analysis - NYTimes.com

Great article by Andrew Ross Sorkin at the NY Times:

DealBook Column - Do Stockholders Really Know Best? - News Analysis - NYTimes.com:
"British takeover law essentially handcuffs the board of a target company from doing anything to block a deal. No poison pills. No staggered boards. No changing the shareholder vote date. The potential for a C.E.O. or entrenched board to block a deal — or otherwise act in its own self- interest — is virtually nil. In other words, England is as close as any country gets to a true shareholder democracy. Any bid gets put to a vote, and all the board can do is offer an opinion.

To many people, this is how the rest of the world should work."
It should be noted that I include myself in this camp.

That said, the other side does have some merits. The article quotes some who believe this democratic system can lead to too much of a short term orientation. For instance professors at Yale (Jeffrey Sonnenfeld) and Stanford (Joseph Grundfest) point out that this can lead to chasing short-term profits as longer term investors sell out to hedge funds and others that merely want to get a fast profit.

This sets the stage for the best explanation (apology?) as to why we (in the US) tend to give boards (management) so much power to block takeovers.

"That’s been the argument of people like Martin Lipton, the takeover lawyer who invented the poison pill. He has long argued that shareholders don’t necessarily know what’s good for them, and that companies need someone looking out for their best interests. That best interest may include holding out for a higher offer, or even roping in other bidders.
Which is clearly true, but it can also entrench management.

Who is right? We really do not know. The evidence is very mixed.

Middle ground? I would come down on letting shareholders have more (but not all) power. Giving the management too many tools to fight takeovers entrenches them and hurts the firm.

BTW I can not help but think back to Constitutional times (possibly a Freudian slip? I meant when the Constitution was being written, HONEST), when the idea of a pure democracy was seen as too fluid and hence the US went with a republic as a means of checking what could amount to "short-termism."


Ken said...

I don't know how realistic this solution is (or if it is even possible considering the active secondary markets), but I believe there is a middle ground to this issue. Why not increase the voting power of long-term shareholders? For example, if a person/business holds a share for less than a year, it is worth 1 vote. If a person/business holds a share for 1-3 years it is worth 2 votes. If a person/business holds a share for 4+ years it is worth 3 votes, and so on. I'm sure this would have unintended consequences (just like every other decision ever made) and the structure of preferred stock would probably have to be altered as well, but at least this gives long term shareholders a greater voice.

FinanceProfessor said...

Interesting take. Of course there can be multiple classes of voting rights but there is nothing to say that the longer term holders have the shares that have more votes. BUt it is a very interesting angle.

Indeed we do something somewhat similar in our "SIMM" Student Investment class. Some students take the class for credit, others just to learn and get experience.

We weight the vote on a portfolio matter (essentially) as a function of class attendance and participation.

thanks for the commment...