Mike Huckabee on Corporate Governance

On Bill Maher's November 12th episode, future presidential candidate that is not Sarah Palin Mike Huckabee pronounced that government shouldn't be in the business of regulating the health and welfare of its citizens.  He particularly honed down on the salt/transfat regulations born out of the not-exactly-uber-leftist mind of NYC Mayor Michael Bloomberg.

Normally, this is not a proposition that most residents of free democracies would protest with a whole lot of vehemence.  Progressives  don't want government in the bedrooms and in their bodies, either.  Though certainly there are external economic costs associated with obesity that society must suffer as a whole.

But Huckabee took it an extra step.  As an example of an ostensibly more desirable "market solution," he offers the following:

Kraft, after reviewing a government study, decided years ago -- and before it was a fad -- to eliminate trans fats from its products.  "Because they read the study and decided it was the right thing to do." Not, mind you, because of those invisible, inevitable and myopic "market forces."

It is difficult to discern how, exactly, it is better if a business enterprise, and not a government, unilaterally decides what's best for the society.  After all, the government is, theoretically, is responsible to the people.  

At least its legislators are elected by everybody, and not just by shareholders -- who aren't really allowed to directly influence corporate policy anyway.

Why Corporate Governance Matters: For Profit Schools as a Case Study

With all the shenanigans recently in the news regarding for-profit schools, one could legitimately speculate that the normal business model doesn't do justice to students (or the taxpayers that subsidize their loans).

That maybe there's a reason non-profit universities have complex governance structures based upon trusteeship, professor input, and, for certain items, even student consultation.  They all can serve as roadblocks to the path to the bottom line (nevermind the non-profit tax status -- have you seen the gymnasiums gracing the country's most expensive private schools?)

And maybe, just maybe, there's a reason at least some corproations shouldn't be just a mechanism for making money for investors.  Such as those corporations that impact the social welfare of young people and taxpayers all public corporations.

Not that non-profit schools don't have their own problems.  Still, they don't seem to have quite as many problems as The University of Phoenix.

Banksters in the Euro Zone

Often, one can look to Europe for tendrils of sanity amidst the robber baron heist that is American politics for the past 20 years or so.

Except not lately.  Per Dr. Krugman:

Eating the Irish:

The Irish story began with a genuine economic miracle. But eventually this gave way to a speculative frenzy driven by runaway banks and real estate developers, all in a cozy relationship with leading politicians. The frenzy was financed with huge borrowing on the part of Irish banks, largely from banks in other European nations.

Then the bubble burst, and those banks faced huge losses. You might have expected those who lent money to the banks to share in the losses. After all, they were consenting adults, and if they failed to understand the risks they were taking that was nobody’s fault but their own. But, no, the Irish government stepped in to guarantee the banks’ debt, turning private losses into public obligations.

Before the bank bust, Ireland had little public debt. But with taxpayers suddenly on the hook for gigantic bank losses, even as revenues plunged, the nation’s creditworthiness was put in doubt. So Ireland tried to reassure the markets with a harsh program of spending cuts.

Step back for a minute and think about that. These debts were incurred, not to pay for public programs, but by private wheeler-dealers seeking nothing but their own profit. Yet ordinary Irish citizens are now bearing the burden of those debts.

Unlike other countries in the Euro zone, whose industries depend upon bank-based financing for their livelihoods, Ireland resembles England and America: bankers turned into gamblers.

Update, November 28: now the Euros have guaranteed all debts until 2013.

Europe Banks Irish Rescue and New Rules on Bailouts

Germany's Stakeholder Regime

Through the 1990s and 2000s, for those paying attention to shareholder rights and corporate governance in general,  Germany's relative stagnation was held up, like a decapitated head, as an example of the tragic fate that befell economies that failed to develop deep and liquid equity markets.

You see, Germany, until relatively recently, didn't have big stock markets.  Rather, it had big long-term shareholders.  Its financial markets were dominated not by investors and hedge funds and mutual funds, but instead by creditors.  And... horror of horrors... German law mandated the inclusion of worker representatives on the supervisory boards of its public companies (sometimes even union members!) and the establishment of works councils.  This German variety of capitalism encouraged cooperation between workers, management and investors.  It also fostered stable, sustainable long-term growth (subject, of course, to the same kinds of cronyism that afflicts any economic concentration of power).

Warriors of the free market, of course, abhorred such characteristics.  Germany did, after all, loose out on making a ton of money on the bubbles.

But Germany did not, in fact, lose out on the crises that followed those bubbles.

Germany is leading the recovery, such as it is, for the entire Euro Zone:

David Jolly, German Business Confidence Jumps, New York Times, November 24, 2010

A Call to Arms for Pension Funds: Why Citizens United Demands A Revolution in Corporate Governance

The desirability of increased worker representation in corporate management is nowhere more greatly underscored than through the implications of the U.S. Supreme Court’s recent opinion in Citizens United v. FEC.[1]  And workers, through their pension funds, can wield such power if they choose.

In this controversial ruling, the Court, equating corporations to natural citizens when determining their rights under the U.S. Constitution, opined that Congress’ campaign finance reform bill, known popularly as the McCain-Feingold Act, infringed upon corporate free speech rights and was therefore unconstitutional. 

The opinion, while commonly criticized for allowing moneyed corporate and union interests[2] to unfairly invade the democratic process,[3] also highlights the familiar corporate agency cost dilemma.  In Justice Brandeis’ words, it allows corporate managers to “spend other people’s money” when deciding to support political candidates and agendas.[4]  Thus, not only does the "separation of ownership and control" lead to conflicts of interest and shirking when it comes to generating wealth for shareholders, it also forces shareholders to subsidize political causes which they may not themselves champion.[5]  The existence of mechanisms to make political contributions in secret only exacerbates the problem, as shareholders often cannot even identify the campaigns to which their directors donate.[6]  

Unfortunately, shareholders are dispersed and, like the typical American voter, exhibit rational apathy when the proxy season comes around.  However, unless and until either the U.S. Supreme Court overrules Citizens United – or American corporate governance laws change to include the voices of workers on corporate boards –  responsibility for controlling corporate political speech falls squarely on the shoulders of shareholders.  They must act to vote out directors that support candidates they do not like.  

A few glimmers of hope exist.  Recognizing the weakness of shareholder influence upon management’s discretion regarding political spending,[7] and the difficulty of amassing support for proxy campaigns, several congressmen proposed remedial legislation. The Schumer-Van Hollen bill would force corporations to disclose the amount of money they spend on broadcast campaign ads, disclose campaign spending on their web sites, and notify shareholders on a regular basis.[8]  Increased transparency will help motivate shareholders as well as direct their efforts.  

Another bill, introduced by Representative Michael Capuano, would require the board to obtain the express consent of a majority of shareholders before spending more than $10,000 on political donations in a given year.[9]  At the same time, certain institutional investors, including public pension funds, proposed shareholder resolutions requiring full disclosure of the company’s political spending.[10] 

Despite these encouraging efforts, a lingering question remains: whether institutional investors will act to protect the workers they represent, or whether they will instead fight only to enhance short term shareholder value.  

           

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[1] Citizens United v. Federal Election Commission, 130 S. St. 876, 175 L. Ed. 2d 753 (2010). 

[2] It is curious that the Court fails to draw any meaningful distinction between unions and corporations in its opinion.  Although certainly both kinds of entities are amalgamations of various individuals, they serve vastly different functions and represent vastly different interests.  A union exists to represent workers in collective bargaining.  Those workers elect their officials.  A corporation, on the other hand, represents a variety of interests and serves a variety of functions --  but do not, as explained supra, purport to speak for all of those interests and constituents. 

[3] Comments by Floyd Abrams, Esq., The Citizens United Case and Its Critics, presented to the Delaware State Bar Association and the Delaware Bar Foundation on October 14, 2010; Sidney S. Liebesman and Stefanie J. Sundel, Corporate Democracy in Action After ‘Citizens United,’ N.Y. L.J. Vol 243 No. 43 (March 8, 2010) (“[A]s Jefferson wrote, ‘I hope we shall crush in its birth the aristocracy of our moneyed corporations’”). 

[4] See, e.g., Austin v. Michigan Chamber of Commerce, 494 U.S. 653, 660, 110 S. Ct. 1391, 899-903 (holding that the government has an interest in preventing “the corrosive and distorting effects of immense aggregations of [corporate] wealth…that have little or no correlation to the public’s support for the corporation’s political ideas.”) (Overruled by Citizens United). 

[5] While supporting legislative reforms that reduce business costs, e.g., the elimination of environmental regulations, may arguably increase shareholder wealth (at least in the short term) and therefore fall rationally under the discretion afforded to directors under the business judgment rule, not every corporate donation links so squarely to the company bottom line.  See Jennifer Martinez and Tom Hamburger, “Target feels backlash from shareholders,” in Los Angeles Times (Aug. 19, 2010) (discussing shareholder outrage after company donated to campaign of a gubernatorial candidate that opposed gay rights); Center for Political Accountability, Hidden Rivers: How Trade Associations Conceal Corporate Political Spending, Its Threat to Companies, and What Shareholders Can Do (2008). 

[6] See, e.g., Michael Luo, “G.O.P. Allies Drive Ad Spending Disparity,” New York Times, Sept. 13, 2010 (discussing “501(c)(4)” entities, named for the portion of the U.S. Tax Code that regulates them, and the anonymity of donating to political campaigns through such entities); See also John C. Coffee, Jr., Comments before the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises of the Committee on Financial Services, United State House of Representatives, at 1 (March 11, 2010).

[7] Curiously, both majority opinion and Justice Scalia’s concurring opinion assume that shareholders can regulate and restrict the ability of management to make political expenditures.  For example, the majority stated that “[s]hareholder objections raised through the procedures of corporate democracy…can be more effective today because modern technology makes disclosures rapid and informative.”  Citizens, 175 L.Ed. at 802. 

As addressed above, such statements fly in the face of well-accepted corporate governance principles describing the relative lack of influence shareholders have over corporate management. More concretely, the SEC often permits boards of directors to exclude proxy access, under Rule 14a-8, for shareholder proposals regarding political spending.  Moreover, at least under Delaware corporate law, boards of directors can restrict shareholders’ ability to shape corporate policy regarding political spending through bylaw amendment.  Coffee, Comments, supra n. __, at 2-4 (citing CA, Inc. v. AFSCME Empl. Pension Plan, 953 A.2d 227 (Del.2008)).   

[8] H.R. 5175, S. 3295, 111^th Cong. (2009-2010).  For example, the bill would require the submission of “regular, periodic reports to [the corporation’s] shareholders, members, or donors on its finances or activities [and] shall include in each such report..the date of the independent expenditure or electioneering communication…the amount…the name of the candidate…the office sought by the candidate…and (if applicable) whether the independent expenditure or electioneering communication involved was in support of or in opposition…the source of such funds”).  S. 3295, Title III § 301(d)(1). 

[9] H.R. 4537, 11^th Cong. (2009-2010) (“To amend the Securities Exchange Act of 1934 to require the express authorization of a majority of shareholders of a public company for certain political expenditures by that company, and for other purposes”); see also Coffee, Comments, supra n. __ (discussing measures that congress can take to improve disclosure of corporate campaign expenditures). 

[10] Liebesman & Sundel, supra n. __. 

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