Tuesday, 23 April 2013

Votes against management are (not) a sign of failure

An argument you hear trotted out with reasonable frequency by people on the investor side of the corporate governance relationship is that we shouldn't get too hung up on votes against management because they are often/ultimately a sign of failure.

According to this view, what we should be aiming at is ongoing dialogue between companies and shareholders, primarily out of the public eye. If there really isn't a way to resolve a disagreement then, regrettably, a voice against may be in order.  

Having worked in this field for quite some time now I think this is a really troubling way of looking at the world. Imagine if we applied this approach in politics - votes against our MPs and councillors are a sign of failure, what we should be aiming at is seeing our representatives re-elected (like they are at PLCs) with 99% in favour. Anything less must mean the process of being ruled has failed. Or, closer to home, what about relations in the boardroom? Presumably we should be aiming at unanimous decision-making, and any dissent within the board is a sign of a problem. It sounds ludicrous doesn't it?

In any field where power is exercised there is - or should be - dissent. We should value the expression of such dissent, not characterise it as a problem. You do hear this from politicians, some worry when there isn't a coherent opposition facing them to challenge them. Similarly, surely investors recognise that boards where there clearly isn't internal challenge are not what they want. So why consider that the expression of dissent by investors, using the most appropriate signal they have - the vote - is a bad thing?

Sometimes people just disagree - they have different views/beliefs etc - and their opposing viewpoints cannot be reconciled. In such a scenario it is entirely right for one party to signal "I disagree with you". At some point we may have to find a way to deal with the competing claims, but for one party to simply state "I disagree" does not represent a failure.Consider, for example, Church groups who take a moral position on the level of executive pay. If they vote against the remuneration report of a company where they think pay is too high is this a sign of failure?

In my opinion, in all these sorts of cases the idea that our aim should always be to reach a consensus is a bit silly in theory, and disempowering in practice. I personally think that in these environments we should always expect tension (because we are dealing with the exercise of power) and this is actually a good thing. In contrast, "consensus" may often really mean "acquiescence". I think if we look at the limited exercise of power by shareholders in recent years it is the times when they didn't vote against which are by far the most troubling.

Votes against management are, first and foremost, a sign of dissent and dissent in the environment in which corporate governance people work is a good thing. It is when there is a widespread lack of dissent that we should get worried.

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