Stockholders: The New Special Interest Group
By Daniel O'Connor of Integral Ventures, LLC
In an era in which the central debate in corporate governance circles is that between the traditional model of stockholder governance and the progressive model of stakeholder governance, it is always a shock to discover the extent to which some corporate executives cling to the positively regressive notion that they are accountable to neither stakeholders nor stockholders. The latest example is profiled in this recent article in The New York Times: Managers to Owners: Shut Up.
IT'S annual shareholder meeting season again: that Groundhog Day moment when executives emerge from their rarefied world of corner offices, corporate jets and staffs of yes-men, to meet the company's owners and field their questions. For all their shortcomings, these annual meetings are the only time when democracy begins to enter into the investor experience today.
But even that may be too much for Weyerhaeuser, the giant forest products company based in Federal Way, Wash. At its annual meeting last Thursday, the company's board and management broke with their longstanding tradition of taking shareholder questions from an open microphone on the floor. Instead, they required that shareholder questions be submitted in writing, either before or during the meeting. And Steven R. Rogel, the company's chief executive, announced that his directors and managers would devote just 15 minutes to answering the written questions.
It's a disturbing precedent to abolish the single spontaneous interaction that executives - who, after all, are hired help - have with their owners every year. But Weyerhaeuser went even further, according to an investment manager who attended the meeting, by gaveling down several shareholders who tried to ask questions from the floor. And when management cut short the answer period and a proxy holder stood up to make a point of order and ask why, a beefy security guard removed him from the meeting.
"It was a show of force that shareholders should be seen and not heard," said Bruce T. Herbert, president of Newground Social Investment in Seattle, the man who was escorted from the room. "I have never been to an annual meeting that didn't have Q.& A."
To be sure, companies are not required by law to answer shareholders' questions from the floor at annual meetings. And it is certainly understandable that companies want to rein in gadflies and disruptive questioners whose agendas do not match those of most shareholders.
Still, controlling the give-and-take between shareholders and executives that occurs just once a year and lasts for only a few minutes does seem rather Kremlinesque.
Frank Mendizabal, a spokesman for Weyerhaeuser, said: "What we were trying to do was ensure the meeting was orderly and that as many questions as possible were answered. It's a business meeting, not a forum for special interest groups."
We know we have a bit of a problem in corporate governance when executives regard institutional investors and other stockholders as a "special interest group" to be ignored if possible, silenced when necessary, and forcibly removed when all else fails. Furthermore, to express pride in their corporate governance and ethics in the wake of such conduct strikes me as even more troubling.
It's a perfect example of what Michael Jensen of Harvard Business School calls agency cost. Whenever principals, such as stockholders, hire agents, such as corporate directors and officers, to perform work on their behalf, there arises a specific type of cost associated with the inherent misalignment between principal and agent. This agency cost is due in large part to the conflicts of interest between these different groups, with agents being inclined to create value for themselves sometimes at the expense of principals.
I regard agency cost as one more example of Market Learning costs, because it is a cost incurred in the mutual pursuit of transparency, choice, and accountability by principal and agent. When agents, like corporate officers and directors, engage in unilateral strategies designed to avoid agency costs, they necessarily reduce transparency, choice, and accountability between them and their principals, the stockholders, thereby precluding some of the shared understanding that might otherwise emerge and some of the mutual value that might otherwise be created. Whether or not these agents can nevertheless gain from this strategy at the expense of their principals will depend upon how highly the stockholders value and how proactively they demand transparency, choice, and accountability from their agents.
See Also:
Comments