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
term.
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.