Corporate Political Speech and Proxy Access

If, thanks to Citizens United, corporations are free to spend bucks on political campaigns, it's about time shareholders were given the right to have a say over where those bucks are spent. 

Prof. Bebchuk sets forth a few practical suggestions for legal reform that could help the cause.  Full paper available here)

The business rountable, on the other hand, would paint shareholders as "third party outsiders" who have no business influencing corporate decision-making.  This is no surprise, of course.  And there are various and sundry "theories" of corporate governance and economics justifying this position.  E.g., investors "contract" away their rights to influence because it's more efficient to have a board of directors run the show.  Yes, yes, I know, this is about as realistic as the "social contract" theory espoused by Rousseau et al.  You ever sign a social contract with Uncle Sam???   

While observing all the briefing submitted in the case challenging Rule 14a-11, one wonders how the plaintiffs' bar would label workers.  Third party outsiders? But they are no more "outsider" than are shareholders.  Unlike many investors, they have a very vivid interest in the long-term success of the company.  So, shouldn't they have a say as to what their company does, too?  How it spends its campaign contributions?

Yet, it would be reasonable to suspect that investors will be jealous of any piece of the corporate coffer going to worker-specific interests.  Their business is -- no matter how passionate their PR campaign -- to make money for their beneficiaries.  Unless and until unions can get their acts together and make their pension funds pay attention to something else other than independent directors and "say on pay," at least.  (recognizing, of course, that state law authorities would scream bloody murder at such antics -- but that's an essay for another day).*

Under the favorite-son nexus of contracts theory, workers can have just as much a right to corporate governance as do shareholders -- it all depends upon the contracts they negotiate.   See also, e.g., Stout & Blair's team theory; workers as "residual" claimants in the success of the firm, etc.  And, given their unequal bargaining power, perhaps the state can step in, as it does with our collective bargaining laws, to give unions more influence in corporate decision-making, and thus corporate political speech.  Perhaps some day we can see a Rule 14a-8 for other stakeholders.  Or even a 14a-11.

So, any argument presented by investors that they can have a say to corporate free speech, while the workers can't, necessarily involves a moral judgment about who's more important when it comes to steering the corporate bastion.

Awk-ward.

Well, whatever.  Push comes to shove, American industry may just stop incorporating, and rid itself of the whole mess.

*updated - Feb. 1.  Nevermind - Race to the Bottom already did.

More to the point, shareholders wanting to communicate with other owners to make the case for a change in the board need access to information on board behavior.  On this score, Section 220 and the credible basis standard has been used to deny shareholders access to such basic information as the reasons for arguably excessive compensation (see Seinfeld) or the board's refusal to accept letters of resignation of directors who did not receive the requisite support under a majority vote provision (see Axcelis).  The courts in Delaware have long used excessive procedural thresholds to deny shareholders basic information that any owner of a business would want to have.  See Disloyalty Without Limits: Independent' Directors and the Elimination of the Duty of Loyalty.

In Case You Ever Wondered...

Who "they" were....

And if anyone was seriously thinking that Davos was actually supposed to involve genuine discussions about resolving the financial crisis and recessions -- and not a dog and pony show of political and business elite making various (frighteningly influential) PR stunts -- now you know.

Because they all felt the need to leave the forum early to "do anything for a drink" at a hoi polloi party in DC.  Where the motto is:

“You don’t have to have a drink to have a good time, but why take the chance?”

Ouch! I shot my foot!

Right now, pending before the District Court for DC, is a challenge by the Business Roundtable on a new rule, promulgated by the SEC under marching orders of Dodd-Frank, that mandates access to corporate proxy materials for certain larger and long-term investors.  Meaning, they get corporate campaign financing for their own director candidates.  Before 14a-11, normally only management could nominate directors; they reaped the benefits of access to corporate coffers to finance campaigns, and they don't suffer the collective action problems of a diversified shareholder base.

"Proxy access" is the jargon.  The rule under fire: Rule 14a-11.

Why do we care? Proxy access for larger, long-term investors can pressure corporate management to govern more in their interests -- hopefully, in a long-term, sustainable manner.  Which is good for children and other living things.

The thing is, advocates of proxy access had tried before to gain keys to the executive boardroom suite through an amendment of Rule 14a-8, which allows shareholders to propose bylaw amendments.  They could, if they got enough support at corporate general meetings, amend the company's by-laws to provide for shareholder proxy access -- in terms more restrictive, likely, than those currently mandated by 14a-11.

But the business roundtable fought it tooth and nail.

Is this either "take no prisoners," or a "D'oh" moment???

thanks to the folks at The Race to the Bottom for this one.

And in Related News

From Davos:

Governments around the world must stop banker-bashing and create the right environment for lenders to support economic growth, some of the world’s most powerful bankers will tell finance ministers on Saturday.

Bankers say the meeting will be an effort to replicate internationally the attempt by UK banks to persuade the government to make peace. “We need to stop authorities around the world throwing sticks and stones at us. We should be past that now,” said one.

Blankfein awarded $12.6m in shares

By Justin Baer in New York

Published: January 29 2011 00:45 | Last updated: January 29 2011 00:45

Goldman Sachs awarded its chief executive, Lloyd Blankfein, $12.6m in restricted stock and
more than trebled his annual salary, in a sign the public backlash against the bank’s pay
practices may have waned.

Waning public backlash? Or waning political backlash?

GE Corporate Tax Liability: When shareholders and stakeholders collide

Corporate management is supposed to make money for shareholders.  So says the centuries of case and statutory law.  Sure, corporate management can diverge from this primary focus to do things like "protect the corporate" bastion from raiders.  But they need not.  On the other hand, if corporate management exhibits enough negligence and bad faith to cause a drop in stock price, they may face liability to shareholders (who sue, ostensibly, on behalf of corporate interests).

Before globalization -- of securities and product markets -- this charge on corporate management did not necessarily harm workers.  A rising stock price generally indicates (or so says the common wisdom) a successful company.  A successful company hires lots of workers and pays them well.

When a corporation can pick up anchor and move operations overseas, this fragile balance unravels in devastating fashion.

Suddenly, management faces a conundrum: shareholder profits will increase if they hire lower-paid foreign labor.  Likewise, they increase if the company can avoid corporate income tax.  Indeed, without moving abroad for cheaper labor and lower tax rates, many argue that management would lose their entire business to the vagaries of free trade.  Certainly they would face derivative suits from disgruntled shareholders.

No where does this tension resonate more than with that grand old blue chip GE, who, according to Tax Analysts, enjoys a 3% effective U.S. corporate tax rate (for those taking notes, it's technically supposed to be 35%) because it moved enough of its operations overseas.  Because the U.S. doesn't tax income on foreign subsidiaries, so long as those subsidiaries are stuffed with a minimum amount of genuine business operations.

Meaning, the kind of operations that require the retention of workers.  Foreign ones.

And, if they move those operations to the right places, they don't even have to pay income tax to the foreign governments.  Who generally, to lure jobs and industry, are liberal with their tax rates.

But GE is such a great, stable investment for US workers saving for their retirement -- or at least it used to be, before the advent of GE Capital -- and many American pension funds benefitted from its global footprint.

It's all a bit perverse, no?

What can we do?

We could tax the income on all subsidiaries of any U.S. corporation, no matter where they are and what they do.  And pray the companies don't re-incorporate elsewhere.

We can demand corporations adopt fiduciary duties to corporate stakeholders.  And pray the companies don't re-incorporate elsewhere.

Obviously, a coordinated global response is necessary.

But, not the kind that advances the cause of unrestrained free trade.  Whoops.

You Can Give Your Bonus Back if You Don't Deserve It

Gil Meche, of the KC Royals, did.  After deciding that, due to injury, that he didn't deserve his last year of pay.

Any investments bankers want to step up?  For example, the people whose bonuses arose from the $2+B Goldman got for its own accounts due to the AIG bailout?

Bearing Down on State Pensions

This time, it's Moody's:

With the SEC's recent investigation into California, for misstating the financial health of CALPERS, it may come as good news to bond investors that Moody's recently decided to start incorporating pension fund liabilities into its rating of state debt securities.

And certainly it's not a surprise, as bankers at Davos warned of financial Armageddon, should Basel III force investors into the "risky" sovereign debt market.

But I can't help but think that the move is meant not to help markets, but to force States into a quick solution before we can have a serious national conversation about dealing with state budget woes.

It works like this.  The banks (so they say) want safe investments.  Now.  And what's safer than a government bond?  Indeed, they will be forced to buy these bonds, if and when Basel III gets implemented.  And states rely upon governmental bond markets to operate.  Moreover, everyone's scared of a new toxic-asset crisis.  So what happens next is a bit like blackmail:

Mr. Kurtter [from Moody's] said Moody’s had decided it was important to consider total unfunded pension obligations because they could contribute to current budget woes.

“These are really reflections of the budget stress that states and local governments are now feeling,” he said. A company with too much debt could close its doors, he said, but governments do not have that option.

“They have a tax base. They have contractually obligated themselves to make these payments. These are part of the ongoing budget stress,” he said. “It ultimately all comes back to being an operating cost. Addressing those problems is really what’s happening today.”

In other words, to get back their high-grade rating, and ensure access to credit, States have three options:

(1) raise taxes
(2) slash spending
(3) spin off pension funds through bankruptcy

Which one do you like???  I'm betting the pols and banks will bear down on #3.

Thanks Moody's.

Come Again?

The peacocks at Davos are strutting:

For example, the bankers argued that the so-called Basel III rules might encourage banks to load up on sovereign bonds, even though recent experience has shown that government debt is more risky than it used to be. Ultimately the overall economy will suffer, they said.

So... they should invest in unregulated derivatives based on toxic assets instead?  If I was a sovereign government that guaranteed those debts, and if I was a taxpayer funding those guarantees, I might be insulted.  And if I was a banker, I might further be insulted if those government bonds were funding things like bank bailouts.  But whatev.

Perhaps they are pandering to the likes of Paul Ryan, who Believe that Ireland had government deficits prior to the implosion, and that England has a currency problem.  And that we should cut spending on social services now because...otherwise we'd have to cut spending on social services later.

Query on Basel III

I'll begin with a tired accounting joke:

An engineer, a lawyer, a social worker and an accountant sit in an arithmetic classroom.

What's 2 + 2? 

asks the teacher.

The engineer -- he loves math and is a bit of a teacher's pet -- pulls out his slide rule, mumbles, and responds

Somewhere between 3.99999 and 4.000001, under stable conditions.

Looking pensive, the social worker raises his hand.

Everyone's experience can inform these kinds of answers.  Perhaps this is something we can best work out through honest discussion.  But commonly, human experience would indicate that the answer for most people is 4.

The lawyer, irritated that he's wasting so much billable time, glances at his watch and growls out

It's likely, under the precedent established by the Second Circuit in Einstein v. Sagan, that any litigation involving the question of 2 + 2 would result in liability resting with 4.  This is an excellent opportunity to settle under favorable terms.  I'd suggest starting at 3.8 and negotiating downward.

The accountant, patient with these wishy washy types, finally responds

What do you want it to be?

So the Basel system establishes, among other things, how much in capital reserves a bank's got to keep around to insure against the risk of bank runs.

But isn't a company's capital, under accounting rules, simply assets minus liabilities?  So the amount of "capital" a bank has at any one time depends upon how accurately it reports its assets and liabilities?

And isn't the thing firms like to play around with most is accounting for assets they don't really have, and downplaying their liabilities? By manipulating accrual rules, underestimating or discounting future liabilities, spinning off debts to "special purpose vehicles," etc?  Think Enron and the Banksters.  And most other securities fraud litigation.

In other words, a bank's "capital" reserves can be anything it wants it to be.

So what's the point of mandatory minimum capital reserves unless we get the auditing rules in line????

Breaking News: Captain Obvious Now Writing for the FT

Honest-to-goodness above-the-fold headline:

Record US budget deficit projected

Fiscal outlook weakens after tax deal

Ambac v. Sack of Sh*t*

The initial complaint is available here.  The facts detailing the proposed contents of the amended complaint is available here.

The double dip:  Bear Stearns bought bad home loans from banks.  They then repackaged the loans and sold them, in pieces, as bonds to investment trusts.  Bear Stearns then demanded their money back from the home loan lenders because the assets were toxic.  They didn't give the money to the bond holders.  They kept it to inflate their books.

So they get rid of the liabilities by dumping them on unwary bondholders, and increase their inflow by demanding money back from home loan lenders.

Voila.

You'd think the shenanigans they'd think up would be more complicated.

As a titillating tidbit:

Bear Sterns (or rather, its corporate successor) fought valiantly to keep this lawsuit under wraps.  In a motion to keep this mess secret, and the court docket away from prying public eyes:

The accusations in the Amended Complaint are conspiracy-theory fiction, with a commensurate amount of truth.  With no apparent reason to do so other than to tarnish their reputations and drive up the costs of this litigation and its burden on third parties Ambac also seeks to add 10 individuals as defendants in its Amended Complaint against EMC.

Surely, that's the concern, here -- evil plaintiffs wanting to maliciously and irrationally tarnish the sterling reputations of investment bankers hailing from bailed out banks.

Anyway.  They lost.  Obviously.  Read this stuff with a nice fluffy latte.


*The notorious Bear Stearns email, acknowledging the bullcr@p that they sold to investors.

.

Liftoff for Say-on-Pay

Beginning this year, exec compensation schemes will be subject to shareholder advisory votes for large public companies.

Will the shareholders vote? Will they just be shooting us all in the foot?  Tying compensation with corporate stock performance -- the source of most excessive compensation, i.e., stock options -- was supposed to help investors.  To encourage management to do whatever was necessary to increase share price and make those investors rich.

Just, it turned out, making investors rich over the short term isn't always great for the company in the long term.

So can we trust this babysitter?

Is there another, better, way to incentivize corporate management to behave better?  Hopefully say-on-pay initiatives will open the door for further exploration.

Tomorrow

The financial crisis inquiry report is due.

Wonder how much of it lines up with the content of Dodd-Frank?  Guess we have to make it through 576 pages of light reading first.

Delaware Doing its Bit on Toxic Assets

Not that Delaware doesn't have an economic and political interest in derivative litigation following the financial crisis arising from High Finance's love affair with toxic mortgage-derived assets -- making money for lawyers, if not shareholders (see Citibank and AIG opinions, from the Court of Chancery). 

But, apparently, the quaint folks down the hall at the Super Court think it might be more useful to local denizens, not to mention more politically correct for the Bidens of the world, to do their part on curtailing foreclosures ab initio. 

Or, at the very least, to demand that homeowners be notified and offered a chance of negotiation before facing a default judgment and the sheriff's billy club.  Cheers!

Unfortunately, mediation comes with a cap of settling debts at a monthly payment rate of no more than 38% of the unfortunate (fka) homeowner's pre-tax salary.

Wonder how helpful that is for the unemployed.  Which, in Delaware, is likely.