John Carney Doesn’t Like Shareholder Democracy

How much do you care about shareholder democracy? John Carney, of Dealbreaker,

cares a lot. He’s a fan of people like Lynn

Stout and Larry

Ribstein, who say that shareholder democracy is a very bad idea, and he’s

willing to say so at great length: 1,360

words yesterday, and 1,026

words today, all of which are devoted to the idea that giving shareholders

greater control of managers is something which, counterintuitively, will work

against the interests of most individual shareholders.

I IMed Carney to try to understand what all the fuss is about. As ever with

Market Mover interviews, the interviewee gets the last word.

Felix Salmon: You are very opposed to shareholder democracy, ostensibly because

the interests of ordinary investors can be at odds with those of special interests.

But how often do those two interests diverge in practice? Can you give me some

obvious examples? By contrast, the interests of managers and owners nearly always

diverge, since the managers pay themselves with owners’ money. Doesn’t it make

sense to give the owners some actual power over managers?

John Carney: Two examples are in my first piece.

John Carney: Union dominated pension fund buys stake in company, negotiates

its workers pay with managers.

John Carney: Activist demands dividend which damages company’s long term prospects.

Felix Salmon: And in practice, not in theory? We can all come up with a parade

of horribles in theory on either side of the argument

John Carney: Well, arguably the second one happened with Carl Icahn already.

John Carney: But, in practice, union dominated pension funds have conflicts

of interest with ordinary investors right now. They just can’t act on them because

proxy rules make it difficult.

Felix Salmon: On the other hand, I don’t see ABN shareholders complaining about

Christopher Hohn

John Carney: Sometimes activists can be helpful, that’s definitely true.

John Carney: But that’s accidental.

Felix Salmon: Wait, when an activist investor is helpful, that’s accidental?

John Carney: Sure. It’s accidental that the interests of two different shareholders

with different motivations become aligned. Activists are active to make money

for themselves. Sometimes their interests align with other shareholders. Sometimes

they don’t.

Felix Salmon: OK, you’ve lost me. It seems obvious to me that a higher share

price is nearly always in the interest of nearly all shareholders.

Felix Salmon: Activist or not.

John Carney: Activists argue for more than a higher share price. They can argue

for dividends or a quick sale of assets. Either of these might not be optimal

use of money, and might deprive shareholders of value that can be realized longer


Felix Salmon: and they often want a level of leverage which smaller shareholders

might be uncomfortable with

John Carney: that’s true too.

John Carney: One of my points is that there is no such thing as a generic shareholder.

Shareholders are a diverse class.

Felix Salmon: but would you not agree that in most big companies, management

has effectively captured the board?

John Carney: Hmmm. I’m not sure, actually. I think the situation is a lot better

now than it has been in the past. Lots more independent directors, etc. etc.

And shareholders are pretty quick to oust underperforming management teams.

John Carney: What’s the average CEO tenure these days?

John Carney: It’s gotten a lot shorter.

John Carney: In any case, to the extent that management capture is still a problem,

I’m not convinced that special interest shareholder capture wouldn’t be worse.

John Carney: For one thing, there are legal checks on the activities of managers

that don’t check the activities of special interest shareholders.

This entry was posted in governance. Bookmark the permalink.