Recently in Corporate Governance Category
by Steve Eide
Senior Fellow, Manhattan Institute's Center for State and Local Leadership
This entry is cross-posted at publicsectorinc.org, where Steve Eide is a regular contributor.
American states differ, but generally not so much in how they operate their pension systems. Consensus reins over investment allocations and benefit structures. Most trustees and administrators don't believe radical pension reform is necessary, regardless of if they hail from a rich or poor state or red state or blue state. Shareholder activism is an exception. A few blue state pension funds, particularly in New York, adopt a highly activist posture during proxy voting season, while most funds are barely active at all. Proxy Monitor, a project of the Manhattan Institute's Center for Legal Policy, lays out the details in a new report.
Shareholder activism can take various forms. Public pension funds are particularly keen to advance "agenda[s] unrelated to share value" which attempt to "mobilize the power of the capital markets for public purpose" (that's former California state treasurer Phil Angelides speaking).
Public-employee pension funds...have generally been much more likely to sponsor proposals related to social or public-policy issues unrelated to corporate governance or executive compensation--such as those involving the environment, corporate political spending or lobbying, and human rights--than have other shareholders. Social and policy issues have been the focus of only 38 percent of shareholder proposals sponsored by investors generally dating back to 2006 but 64 percent of all shareholder proposals sponsored by state and local employee pension funds.
And public pension funds have been increasingly active, putting forth even more proposals this year than private union funds, traditionally the leading source of shareholder activism.
But mostly just in New York (see charts).
Even CalPERS, despite its vocal commitment to socially responsible investing, has not been anywhere near as active on the proxy front as the New York City and State funds. According to Proxy Monitor, CalPERS' few recent proposals have focused on corporate governance issues with at least an arguable connection to shareholder value. By contrast, the New York funds' proxy agendas are unabashedly social. In addition to going after companies for failing to toe the line on gender identity and the environment, Comptroller DiNapoli, trustee of the $160 billion New York State Common Retirement Fund, has employed the proxy process to harass companies for giving money to Republicans and for lending support to public collective bargaining reform. Among the 119 shareholder proposals the New York City pension funds have sponsored since 2006, 89 have been about "social or policy issues." (Nearly all have been voted down by shareholders.)
Here's the problem. Public pensions' shareholder activism tends to advance a very partisan understanding of taxpayer/shareholder interests, and it politicizes a government function--pension fund management--that should be purely administrative. There's no smoking gun evidence that New York funds' activism have caused the funds to lose value. But using pension funds to advance a social agenda aggrandizes pension policy, which already consumes far too much public attention. The dreamers among us yearn for a time in which public officials may devote their attention exclusively to matters that may yield some benefit to the public, such as how to improve park service, snow removal, or the schools. Pensions, by contrast, should be a minor administrative responsibility guided only by the humble principle of stewardship: don't lose the money, and make a small return with it. Elected comptrollers and treasurers should stick to their knitting. We elect them to collect revenues, not advance social agendas.
In pre-market trading, Procter & Gamble market cap is up $7 billion on the return of A.G. Lafley to the CEO's chair—more if you consider that the market as a whole is down. Either the collective wisdom of the market is en masse making a huge mistake in valuing the difference an executive makes to shareholder value, or Mr. Lafley's $2 million base salary is a bargain. If a company I held stock in could make an investment with a 350,000% return, I'd sure want them to do it.
This morning, the Manhattan Institute released my latest finding in the Proxy Monitor series: 2013 Proxy Season Underway: JPMorgan Chase Chairman vote looms large in busy May proxy season. As of May 3, 175 of America's 250 largest publicly traded companies, tracked in the ProxyMonitor database, had filed proxy documents and 72 of these had held annual meetings. In addition to summarizing proxy submission and voting results to date, I look at JPMorgan Chase's looming --and widely publicized--May 21 annual meeting, in which shareholders will consider a proposal sponsored by the pension fund of the American Federation of State, County, and Municipal Employees (AFSCME) to separate the bank's chairman and CEO positions, which the market may read as a referendum on the leadership of incumbent chairman and CEO Jamie Dimon--and which may, if the board reacts to the vote by stripping him of his chairmanship, prompt Dimon to leave the bank he steered ably through the financial storm.
Key statistics on filings to date include:
In a front-page story in yesterday's New York Times, Nicholas Confessore reports on the pending rulemaking petition at the Securities and Exchange Commission on corporate political spending, which was submitted in August 2011 by a group of professors led by Harvard's Lucian Bebchuk and Columbia's Robert Jackson. There's nothing really new in the report that hasn't been known to those following these issues for months; it could be the case that the SEC acts on this rather soon, now that former U.S. Attorney for the Southern District Mary Jo White has been confirmed as the Commission's Chairman.
A couple of points in Confessore's piece call for clarification/correction:
- Professor Jackson states, "Shareholders have been demanding this information for some time." Well, some shareholders have, to be sure, but Jackson's statement, without qualification, has a Bizarro-world-type character. Dating back to 2006, not a single shareholder proposal related to political spending has received majority shareholder support among the 250 largest companies in the Manhattan Institute's Proxy Monitor database, excepting a 2006 proposal at Amgen that management backed. As I noted in my winter report, in 2012, such proposals won "on average the support of 18.3 percent of shareholders, down from 24.3 percent in 2011." And "the seven largest such investors--Vanguard, BlackRock, State Street, Fidelity, Capital World Investors, Capital Research Global Investors, and T. Rowe Price--supported only 3.6 percent of all proposals calling for increased disclosure of corporate political spending."
- The article states that "advocates" for the proposal analogize corporate political spending to executive compensation. While that's true, their analogy is strained. Executive compensation and related-party transactions are both directly pertinent to the classic agency-cost case for management monitoring, whereas Bebchuk and Jackson's political-spending-as-management-misappropriation hypothesis simply lacks the theoretical rigor and empirical foundation underlying management-pay and self-dealing disclosures.
In sum, the SEC rulemaking petition simply amounts to a certain group of political activists attempting to get an election-regulation regime they can't achieve through normal legislative, legal, or regulatory channels by going to an already-overtaxed agency statutorily charged with "promot[ing] efficiency, competition, and capital formation." Were the SEC to act in this area, they'd be not only outside their statutory mandate but acting against the revealed preferences of most shareholders themselves.
Laura Finn, web editor for BoardMember.com, and James Copland discuss the results of ProxyMonitor.org's first finding in the 2013 proxy season.
The most numerous class of proposals to have been introduced again this year are those involving corporate lobbying and political spending. - Copland
The Manhattan Institute's Proxy Monitor project, featuring the first publicly available database cataloging shareholder proposals and Dodd-Frank-mandated executive-compensation advisory votes at America's largest companies, released its first Finding of the 2013 proxy season.
In 2013 to date, as in 2012, the most regularly introduced class of shareholder proposals seeks limits on or greater disclosures of corporate political spending and lobbying. The second-most frequently introduced type of proposal, again consistent with 2012, seeks to require companies to have an "independent chairman" separate from the company's chief executive officer.
This finding summarizes early 2013 trends in shareholder-proposal submission and voting, as well as executive-compensation advisory voting, paying special attention to proposals seeking to split the chairman and CEO roles. The finding also highlights the shareholder proposals of interest on the horizon between now and mid-May, focusing on four classes of proposals of particular interest: splitting the chairman and CEO, political spending and lobbying, board declassification, and proxy access.
Jim Copland, director of Manhattan Institute's Center for Legal Policy, discusses shareholder activism with Pimm Fox on Bloomberg Television.
The late Sen. Daniel Patrick Moynihan (D-N.Y.) famously remarked, "Everyone is entitled to his own opinion, but not to his own facts." Tell that to the leaders of the social-investing funds Domini Social Investments and Green Century Capital Management, who along with Public Citizen's Lisa Gilbert, made the following claim in Politico: "The five largest U.S. mutual fund families supported [shareholder proposals seeking corporate political transparency] more than 80 percent of the time during the 2012 proxy season."
Whatever one's thoughts about corporate disclosure of political spending--about which I have written elsewhere--this claim is wildly inaccurate. In 2012, the seven largest mutual fund families--Vanguard, BlackRock, State Street, Fidelity, Capital World Investors, Capital Research Global Investors, and T. Rowe Price--supported only 3.6 percent of proposals calling for increased disclosure of corporate political spending, as is evident from a review of Form N-PX proxy filings publicly available from the Securities and Exchange Commission.
How could Public Citizen and the social-investing funds be so far off? Well, I don't know for sure--and Public Citizen has a long track record of playing fast and loose with the facts--but the claim probably originated with a February 3 Financial Times piece by Sarah Murray, which stated, "The five largest US mutual fund families supported corporate political disclosure more than 80 per cent of the time in 2012, according to the Center for Political Accountability (CPA), a Washington-based advocacy organisation."
The problem is, the CPA makes no such claim. To the contrary, in its December 2012 analysis of last year's proxy season, CPA states, "As in previous years, the three largest mutual fund families in the United States failed to support a single political spending disclosure resolution." Figure 2 on page 3 of that report does show five U.S. mutual fund families that supported more than 80 percent of such proposals--MFS, Alliance Bernstein, Morgan Stanley, Wells Fargo, and DWS--but those are hardly the five largest mutual fund families. (In terms of equity assets under management, MFS and Alliance Bernstein aren't in the top 10, Morgan Stanley isn't in the top 20, Wells Fargo isn't in the top 40, and DWS isn't in the top 50.)
One would think such an obvious error--in which FT's attributed fact is contradicted by a published account from its own purported source--would warrant a quick and clear correction. But when I brought the matter to the attention of Politico's editor-at-large, Bill Nichols, he replied, "The writers of the response have provided documentation which, while I'm sure arguable in your view, does not allow me to put my thumb on the scale one way or the other."
As Moynihan notes, opinions are arguable, but facts are facts. Given the inability of press "fact checkers" to tell the difference between the two, I understand Nichols' decision not to "put his thumb on the scale," but this is really cut and dried, and his choice is disappointing.
(The Financial Times has yet to respond to my request for a correction.)
The Manhattan Institute's Margaret M. O'Keefe, manager of the ProxyMonitor.org database, contributed to the above discussion.
As Hester Peirce notes, AIG has rejected a shareholder demand to sue the government over the bailout that transferred ownership of AIG to taxpayers. But as John Carney notes (h/t Bainbridge), the shareholder, Hank Greenberg, no fan of frivolous litigation, may have a point:
A judge on the Federal Claims court ruled last summer that if what Greenberg argues is true, the government may really have acted illegally.
Greenberg's legal team, led by David Boies, argues that the government pushed away sovereign wealth-funds and other foreign investors who might have been willing to invest in the company before it was bailed out. This, they argue, prevented AIG from being able to raise capital and contributed to its downgrading by ratings agencies, which in turn put the company into even more dire straits. This forced AIG to accept the unfair terms the government offered in its loan agreement, the lawyers say.
Greenberg's lawyers also raise questions about the events around one of the oddest episodes of the AIG-Treasury relationship. You might recall that in the summer of 2009, the government converted its preferred shares into 79.9 percent of the common stock of AIG, something that it was entitled to do under the terms of the government's loan. This was accomplished by means of a reverse 20:1 stock split.
You might not recall precisely why the stock split occurred. At the time, then-chief executive Ed Liddy said it was necessary to prevent the stock from being delisted on the New York Stock Exchange. That might be true. But it is also true that the split was a necessary part of the conversion from preferred shares because AIG's charter didn't authorize enough common stock to allow the government to take 79.9 percent of the common stock. So when the government converted to common, it was issued unauthorized common stock.
When common shareholders were asked to authorize the additional common stock--which would have badly diluted their interest in the company--they voted no. Because the government's stake was in unauthorized shares, it didn't get a vote.
So another vote was held about the reverse split of all issued stock--including the government's unauthorized shares. This time, the government got to vote its 79.9 percent stake on this question because its unauthorized shares were also affected. And so the measure prevailed. After the split, the total number of shares outstanding no longer exceeded the number authorized in AIG's charter, so the government's shares were now officially authorized.
That's more than a little bit confusing, I'll admit. And it does sound more than a bit questionable, even to someone as jaded about shareholder rights as I am. But Greenberg's lawyers say it's even worse. They say that this procedure was engineered to circumvent a Delaware court order meant to protect the rights of the common shareholders when the government took over the company.
More from Professor Pirrong.
Now, of course, being allowed to proceed on a complaint means only that there is a legal cause of action if the facts alleged in the complaint are true; Greenberg still has to prove his case, and the allegations may not be true. But if they are, it wouldn't be the first time government officials shortchanged AIG shareholders and Hank Greenberg at the expense of the rule of law. Others have suggested that that earlier Spitzer action resulted in incompetent AIG management that led to its future financial problems. (Related: Manne; Ribstein in 2006; Ribstein in 2005.)
(By the way, the late Larry Ribstein's Ideoblog posts seem to have disappeared from the web. Perhaps Truth on the Market could find a way to archive them so that they remain Google-searchable? I hate to lose the wisdom of any posts I don't know to look for on archive.org.)
To prove securities fraud, one has to prove reliance upon the allegedly fraudulent statement. This would be a problem in a class action: individual shareholders have relied upon different things in their decision to purchase, and some have never even seen the allegedly fraudulent statement. Under normal circumstances, the individualized nature of this inquiry would prevent class certification.
There is a way around this, though. The efficient market hypothesis propounded by financial economists theorizes that information is automatically reflected within a stock market price. Thus, if fraudulent information was out in the marketplace, it would have artificially inflated the stock price; a stock purchaser who never even saw the fraudulent information could thus be said to have relied upon the fraudulent information—thus, "fraud on the market." We'll leave aside the academic debate over the degree of truth of the efficient market hypothesis. What's important for our purposes today is that the Supreme Court has endorsed the fraud-on-the-market theory in Basic v. Levinson, and billions of dollars have changed hands because of it.
Andrew Trask notes that in the Amgen Supreme Court argument Monday, Justice Scalia mused that perhaps the Supreme Court should reverse Basic. I agree with Trask that this is an unlikely outcome in the short run. But securities lawyers should be aware that a major plaintiffs' firm, Bernstein Litowitz, has successfully argued in a federal district court case that a court can ignore the efficient-market hypothesis, which would imply that Basic v. Levinson is wrongly decided.
You might remember that the Center for Class Action Fairness objected to a $0 settlement in Johnson & Johnson. The objector argued that the settlement provided no benefit to shareholders. Plaintiffs responded by putting forth an expert declaration from former SEC chair Harvey Pitt opining that the minor corporate governance changes would have dramatic benefits for shareholders. In response, CCAF put forward expert reports from Professors Todd Henderson and Kate Litvak noting that Pitt's say-so was not competent expert evidence of shareholder benefit. As the CCAF brief argued, if the settlement created benefit for shareholders, that benefit would be reflected in the price of the stock. But the plaintiffs provided no evidence that the marketplace positively reacted to the changes in corporate governance; indeed, the JNJ stock price declined relative to the rest of the market. In the absence of the market evidence, we argued, plaintiffs failed to carry their burden that the settlement was beneficial to shareholders, and had no claim for $10 million in fees.
The court, at plaintiffs' behest in briefing by Bernstein Litowitz, disagreed: Harvey Pitt was an expert, and if he said there was a benefit, there was a benefit, regardless of what the market said. [In re Johnson & Johnson (D.N.J. Oct. 26, 2012) via Smith @ Reuters]
This is remarkable for several reasons. As an initial matter, if Harvey Pitt's say-so can be conclusive on the question of shareholder value above and beyond what actual market value shows, and a district-court judge has the ability to divine the creation of shareholder value in the absence of empirical evidence, both Pitt and the district court judge are making a huge financial mistake in staying in their current line of work. Both of them should be finding work with hedge funds, and trading stocks based on their power to determine which corporate governance reforms the market is failing to appropriately value.
But more importantly, Bernstein Litowitz has successfully argued to a district court that the efficient market hypothesis is wrong. According to Bernstein Litowitz, the market price of JNJ doesn't reflect all public information about the value of the stock, and there exist people like Pitt and the district court judge, and presumably others, who can divine shareholder value in ways the market cannot. But if that is so, then Basic v. Levinson is wrongly decided, because it means that one can't assume reliance on public information because the price of the stock differs from the underlying value of the corporation. Thus, there is no such thing as fraud on the market. Either the district court decision in Johnson & Johnson is correct, or the Supreme Court decision in Basic v. Levinson is correct, but they cannot both be correct.
I leave to others smarter than me which is the right way to view things. (That Pitt isn't opening a hedge fund suggests which way Pitt actually thinks.) But it would be fascinating if it turned out that, in its effort to defend a requested $10-million fee in an abusive shareholder derivative case, Bernstein Litowitz killed the multi-billion-dollar golden goose—the fraud-on-the-market theory—that permits shareholder fraud class actions at all. If there's a securities defense firm out there that argues judicial estoppel against Bernstein Litowitz based on the Johnson & Johnson decision, please let me know, and I'll post about it.
(The Center for Class Action Fairness is not affiliated with the Manhattan Institute.)