Saturday, 25 April 2009

Inconsistency part 2

You get a few fund managers who play down the importance of shareholder voting. They have a bit of a point, in the sense that sometimes (often?) shareholders seem able to bring about more change through direct contact with the company, than through exercising their votes. Why then are some of these same fund managers lobbying for the introduction of a shareholder vote on remuneration in the US?

You could argue, or course, that the introduction of a shareholder vote on pay in the UK has had spin-off benefits. It certainly seems to have led to more dialogue between companies and investors over remuneration, even if it has (in my view) failed to bring exec pay under control (in fact I would argue that it has to some extent legitimised ever-increasing remuneration because of notional shareholder assent). But then doesn't that suggest that you need to see the vote as something more than a mechanism to be used. It builds on the idea of ownership (leaving aside some of the issues I've raised before for a sec) and therefore acts to give the investor the sense of a right to intervene. This is all pretty obvious I think?

So is it too cynical of me to suggest that those managers which play down the importance of voting yet lobby for its extension to new areas are at least in part seeking to downplay expectations of how they will exercise their voting rights. Translation: those that downplay voting may be less likely to vote against management. Again you could say fair enough. If they don't think voting has much power, why would they use the right to challenge management.

But I can't help thinking this is hugely counter-productive for those who genuinely think shareholders are/can be/should be comparable to 'owners'. The one big unanswered question in the corporate governance part of the debate on the crisis is whether more engaged shareholders may have mitigated some of the damage. Because shareholders (and we really mean fund managers primarily here) have so rarely opposed management on remuneration, for example, we can't be sure whether it could ever have a significant restraining effect on pay. But at present, based on recent experience, you could make a good case that it's not an effective way to address remuneration - if you think there is problem (not all fund managers do).

Those managers that demand further rights, yet fail to use them to challenge management are actually undermining the case for shareholder rights, and it's not surprising therefore to see progressive voices argue against the need to extend such rights.

Soren Kierkegaard famously said "People demand freedom of speech as a compensation for the freedom of thought which they seldom use." Something similar is going on with fund manager lobbying for greater shareholder rights.

PS. Part 1.

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