January 08, 2004

Power to the Shareholders II

Though I doubt he was writing to answer me, Professor Bainbridge has sounded a negative note to shareholder involvement in corporate governance. It is expensive and inefficient and will break up the delicate balance that makes a board successful.

The easiest points to debunk are expense and inefficiency. The very reason that shareholder votes are difficult and expensive is that there is no management interest in making them efficient and inexpensive. When your good on offer is management and the substitute good that can compete with you is shareholder management, an entry barrier of complexity and cost to that substitute good is in your interest as a manager. Why would you ever voluntarily lower the barrier?

The delicate balance argument is a bit tougher to dispose of. I am very leery of the idea that corporate board members are tough negotiators for the company who are sharp, savvy, and able to compete with the company's rivals but are such hothouse flowers that they are unable to find common ground with people elected to the board who are not necessarily in the same social club as they are. It doesn't ring true to my ear but I don't have data to back that up.

The idea that the management will keep the board in the dark if they don't like everybody on the board has a two word retort, "you're fired". Management's job description does not include becoming a rogue operation that does not provide the Board of Directors adequate information to optimally do the job a Board is supposed to do. If management wants to play such games, they shouldn't be in positions of such responsibility at the firm. In fact, it means they shouldn't be at the firm unless they grow up and do the job they were actually hired to do which includes properly informing the Board of Directors.

The main merit in Prof. Bainbridge's article is that it is a complaint about the SEC imposing a shareholder right's rule as a bureaucratic fiat. Here, I am with the good professor. Ideas, even good ideas that I fully approve of, suffer mightily from the homogenization and deadening hand of government enforcement with detailed regulations and nit-picking enforcement provisions.

Such innovations are best done by shareholder initiative and adjustment, customization, and experimentation inside individual firms, mutual funds, and exchanges. Best practices will be developed and what sounds like a good, or terrible untried idea will gather actual evidence of efficiency and effectiveness, track records which will permit a process of continuing innovation and improvement.

Posted by TMLutas at January 8, 2004 11:02 AM