As proxy season winds down, the shareholders of some of Chicago's biggest companies remain disenfranchised. Most directors are still retained or elected under an arcane "plurality" vote standard, grudgingly allowing shareholders to withhold their support from incompetent or even crooked directors — but never to oust them.
And most directors, often handpicked by the very officers they're duty-bound to manage, face no opponents. Their seats are secure no matter how they perform.
The prevailing governance system is twisted, holding directors accountable only to the executives who are supposed to report to them, and not to the shareholders whose capital is at risk.
To their credit, shareholders at Boeing Co. recently approved a non-binding initiative requiring a majority vote in director elections. But when concerned shareholders fight for the right to vote like owners, too often they're rebuffed, even by their fellow shareholders.
Take the case of Allstate Corp.: The Massachusetts Laborers' Pension Fund recently bankrolled a stockholder proposal that would have required Allstate's directors to earn a majority of the votes cast at the annual meeting to keep their seats. The board unanimously resisted the move, arguing that the proposal didn't contemplate what would happen if too few directors were elected by a majority.
Regrettably, the company's shareholders bought management's logic and now are stuck with an emasculated policy that requires the resignation of an uncontested director only if he or she racks up more "withheld" votes than votes "for" election.
It's true that majority voting might on rare occasions destabilize a board by suddenly removing a director. And the embarrassment of possibly losing an election might discourage some good people from running.
But the benefits of shareholder democracy clearly outweigh the concerns. Accountability and transparency trump inconvenience and psychology every time.
Shareholders are bound to flex their collective muscle when they reclaim the power to name those who run their companies and demand the information they need to make judgments about board members. The Securities and Exchange Commission voted on July 26 to require companies to disclose their executives' compensation in dollars and cents and in plain English, starting next year. And recent news about companies' backdating stock options to boost executive pay underscores the urgency of aligning managers' interests with those of shareholders.
Once directors aren't forced to cozy up to officers, executive compensation will more directly be tied to performance and boards will become better guardians of shareholder money. Academic studies and our research prove the point: When directors are incented to serve shareholders, board performance will improve and so will investment returns.
This month's Lane Report is adapted from a guest editorial published in Crain's Chicago Business on July 24, 2006.
Marc J. Lane is the President of The Law Offices of Marc J. Lane, a Professional Corporation, and of its financial-services affiliates. He is a business and tax attorney, a Master Registered Financial Planner, and an Adjunct Professor of Law at Northwestern University School of Law, Mr. Lane pioneered Advocacy InvestingSM, a proprietary approach to values-based investing which is discussed in his 32nd book, “Profitable Socially Responsible Investing?” With Advocacy InvestingSM, both equities and fixed-income securities are selected first by exacting financial and governance standards, as well as criteria reflective of each investor's unique social and environmental concerns
The Lane Report is a publication of The Law Offices of Marc J. Lane, a Professional Corporation. We attempt to highlight and discuss areas of general interest that may result in planning opportunities. Nothing contained in The Lane Report should be construed as legal advice or a legal opinion. Consultation with a professional is recommended before implementing any of the ideas discussed herein. Copyright © 2007 by The Law Offices of Marc J. Lane, A Professional Corporation. Reproduction, in whole or in part, is forbidden without prior written permission.