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Brian D. Butler
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Table of Contents
Potential conflicts of interest between shareholders and managers of corporations
Division of responsibilities in a corporation
1. shareholders (owners)
2. directors (Board of Directors)
3. managers, corporate officers who manage the company for the owners
This separation of ownership and management gives corporations an advantage over other structures, but it also raises some very important conflicts of interest between shareholders and managers of corporations; Some of these issues arise because shareholders want the value of the firm to increase, and the stock price to rise, but the managers of the firm may be more concerned about increasing their own personal salaries, or job security.
Who really controls a corporation? Management or investors?
Many people argue that investors in large companies such as GE are too small, and ownership is too spread out in order for an individual investor to have any say over the management of the firm. By this reasoning, the large corporations are actually run by the management with little concern for overall shareholder value.
To counter this argument, there are many steps taken to ensure that management acts in shareholders best interests:
1. Shareholders determine the board of directors by voting. The board then selects managers, so shareholders indirectly affect the management selection.
2. Stock options are given to management so that they have a financial incentive to make the stock price rise.
3. Competition in the human resources (labor market) should allow firms to hire managers that are willing to put shareholders interests at the top priority. If not, then they should be replaced as shareholders voice their displeasure at the results.
4. Fear of a takeover (acquisition) of the firm if the share price drops too low. If the firm were to become a takeover target (by private equity or by other firms), then its likely that outside investors would believe that the firm has more value potential than is currently reflected in the share price. They might believe that a change in management is all that is needed to unlock share price value, so they may force a takeover (LBO) and replace management. This threat of a takeover should force management to act in the best interests of shareholders.
Innovations to help individual shareholders have a voice:
Although individuals own more than 25 percent of US equity, only about 20 percent of such investors bother to participate in proxy voting. Why would so many give up their voting rights? A big part of the reason is the difficulty of researching the issues, says ProxyDemocracy founder Andrew Eggers, who is also a doctoral student in Harvard University's Department of Government.
ProxyDemocracy is a non-profit, non-partisan project that aims to change all that by helping individual investors get the information they need to produce positive changes in the companies they own. Owners of stocks in an individual company, for example, can sign up for ProxyDemocracy's email alerts providing advance notice of the company's shareholder meetings as well as information on how respected institutional investors at CalPERS (a state pension fund), Calvert, CBIS (an investment adviser to Catholic institutions) and Domini plan to vote at the meeting. "Just as citizen voters take account of endorsements from respected groups like the Sierra Club or the NRA (depending on one’s political persuasion), individual investors can use these cues from known institutional investors to arrive at a principled vote more cheaply," Eggers explains.
Meanwhile, the free site also offers voting profiles on 77 mutual funds from 33 leading fund families, as well as CalPERS and CBIS. Mutual fund investors can search a database of agendas and institutional investor votes for more than 12,000 shareholder meetings since July 1, 2003, and quickly see how their funds rank on the site's activism scale for director elections, executive compensation, corporate governance and corporate impact. If they don't like a particular fund's voting record, they can contact the company and let them know, or even move their money to a different one.
For some time now transparency tyranny has been causing ulcers among leaders in the travel, hospitality and automotive industries—to name just a few—and now ProxyDemocracy promises to spread the joy of accountability to a wider range of companies than ever. Once again, the Web leaves nowhere to hide!
Website:www.proxydemocracy.org
Contact: info@proxydemocracy.org
read more: http://springwise.com/weekly/2008-06-26.htm#proxydemocracy
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