Dear Shareholders: We’re Part of the Problem

As investors, it’s easy to roll our eyes at corporate missteps and transgressions while forgetting our own role in the system of public ownership. As partial stakeholders in these companies, we, too, share some of the blame for their misbehavior.

It’s like when a dog bites a stranger, and people debate whether the dog is at fault. Was it a bad dog, anyway? Possibly. Should the owner have had it on a leash in the first place? Probably.

Lots to correct

Any quick glance across the investing universe reveals plenty of bad behavior in need of correction.

Over at Green Mountain Coffee Roasters (Nasdaq: GMCR  ) , CFO Frances Rathke misrepresented her CPA credentials for at least eight years. Yet, she remains the trusted financial architect of the company.

At Chesapeake Energy (NYSE: CHK  ) , we’ve seen Aubrey McClendon redefine "conflict of interest" through various jaw-dropping stunts, like borrowing $1.1 billion against his personal stake in company wells, and running a commodities hedge fund as an independent pet project.

Netflix’s (Nasdaq: NFLX  ) Reed Hastings made a comical series of head fakes and PR disasters when trying to navigate Netflix away from their DVD rental business, yet still remains both the chairman and CEO, while the company trades for 20% of its value from just one year ago.

JP Morgan (NYSE: JPM  ) lost a crazy $5.8 billion in a trading loss; meanwhile, Jamie Dimon called for less financial regulation. Shareholders still overwhelmingly voted him as both their CEO and chairman after the loss.

Yet little is done.

As shareholders, it’s our duty to demand action against these shenanigans, but we rarely do. Raise your hand if you’ve ever attended a shareholder meeting. Yeah, me neither. What about if you spend more time filling out your proxy votes than reading the latest magazine you picked up? I’m guilty there, too.

There are a lot of signs that indicate our shareholder apathy is only getting worse. According to NYSE Factbook, the average holding period for a stock has declined from eight years in 1960, down to just six months in 2010. According to Michael Hudson, if you consider the impact of high frequency trading, the average ownership period falls to a depressing 22 seconds. Hey, at least it’s up from 20 seconds a few years ago, right?

The problem here has been accurately compared to the difference between renters and owners. Investors used to act like we genuinely owned a part of these companies, and were therefore motivated to keep things in line. Now we’re acting like renters, moving through one company after another, with little regard for the condition they’re in for the short time that we’re there.

Let the pros handle it

We can always try relying on those few professional rabble-rousers among us -- activist investor -- to reprimand our companies on our behalf.  

There is something to be said for this group of outspoken owners. It was Carl Icahn’s disapproving glare that pushed Chesapeake’s board to strip Aubrey McClendon of his role as chairman. Though the division should really have existed all along, it’s a start, at least.

But if we just relied on this group of investors, most of us would still be left wanting. In 2010, there were only 69 proxy fights, and even then, they can go bad. Bill Ackman’s attempt at revitalizing JC Penney (NYSE: JCP  ) began that same year, and shares are still down 23% from where they opened in 2010.

DIY ownership

If we want something done right, we’ve got to do it ourselves. That means speaking up, and keeping our own businesses in line. One way is to call for a greater division of the chairman and CEO roles. In 2010, Businessweek reported that only 37% of S&P 500 companies had split roles, and the ones that did typically had the former CEO in the chairman role.

Calling for a separation between these two positions not only introduces much needed accountability to our executives, but also produces better returns. According to GovernanceMetrics International, five-year shareholders returns are as much as 28% higher for those companies that separate the two.

You can start positively impacting your companies by voting to separate the roles whenever you can, and casting "no" votes for failing management. Wal-Mart shareholders recently made waves and voiced their largest opposition ever against the current board members. Unfortunately, since nearly half of Wal-Mart shares are owned by the founding Walton family, no changes were made, but a powerful message was sent nonetheless.

We’ve also got to stop impatient and irreverent ownership. Hopping in and out of positions just dilutes the responsibility, and makes it easier to absolve blame. Investing should be a mutually beneficial relationship between companies and shareholders, where investors both commit and oversee their capital for the long-run, and are rewarded with healthy returns.

So, investors, let’s take an active role in managing our companies. Let’s read our crucial reports and cast our tiny votes. If you’re a Green Mountain Coffee Roasters or Netflix shareholder, you can read up on your management team in our newest premium report for each company. We’ve dedicated a special section in each to inform you about who, exactly, is driving your ship. Click here for the Green Mountain report, or click here for the Netflix report.

If you’re a Chesapeake, JC Penney, or JP Morgan shareholder, you can head over to your company’s investor relations page and access important information both from, and about, your executives using the links below.

Austin Smith owns no shares of the companies mentioned here. The Motley Fool owns shares of Netflix, Green Mountain Coffee Roasters, Chesapeake Energy, and JPMorgan Chase. Motley Fool newsletter services have recommended buying shares of Netflix and Green Mountain Coffee Roasters. Motley Fool newsletter services have recommended creating a lurking gator position in Green Mountain Coffee Roasters. Motley Fool newsletter services have recommended creating a bull call spread position in Wal-Mart Stores. Motley Fool newsletter services formerly recommended JPMorgan Chase. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (11) | Recommend This Article (30)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 06, 2012, at 6:39 PM, MVPanther wrote:

    Would be interested in reading the Netflix report on "who is driving", but all the links go to the GMC report.

  • Report this Comment On August 06, 2012, at 7:04 PM, Loktors wrote:

    Hello.

    On the subject of Aubrey mcClendon, can u explain what u meant when u wrote ' he borrowed 1.1 b against his stake in chkp wells?

    Thank u Loktors

  • Report this Comment On August 06, 2012, at 7:31 PM, cruzn59 wrote:

    I must confess the web sites we read are equally the problem. Yes, we bought some financial products at too high a price and often have buyer's remorse. But these sites are the only place to find information unless we subscribe to every high priced web tool that comes to our email box. You can help us the investor by keeping the reports short. One line per point. No, editorial, rosy or gloom and doom. Just the facts and short. Keep us up to date but don't recycle. You are among the best out there for us to read and I am trying to be kind.

  • Report this Comment On August 06, 2012, at 8:25 PM, SuntanIronMan wrote:

    (With the exception of JPM):

    For each and every stock you mentioned, shareholders have done a ton. They have voted with their dollars. All of those stocks are down a massive amount form their highs. Selling sends a bigger message than anything else. If you don't like a company, sell it. It is easy and it is effective way to get your point across.

    Why deal with managerial decisions you don't like when can just sell the stock? Sell the company you don't like and buy stock in a company you do like. We don't have incredibly large positions in companies that are difficult to get out of. That is the benefit of being a little-guy investor. If we want out, it is fairly simple to get out. It is pretty much the only real power us little investors have.

    Obviously make yourself heard though shareholder votes. But when all else fails, there is nothing wrong with selling a bad company you at one point mistakenly thought was good.

  • Report this Comment On August 06, 2012, at 8:27 PM, SuntanIronMan wrote:

    "All of those stocks are down a massive amount FROM their highs."

    Darn it. Wish there was a 5-minute window to edit replies, haha.

  • Report this Comment On August 07, 2012, at 1:08 PM, Mega wrote:

    "In 2010, Businessweek reported that only 37% of S&P 500 companies had split roles, and the ones that did typically had the former CEO in the chairman role."

    So what? In general, I think the largest non-passive investor should be chairman (whether that is CEO, ex-CEO or otherwise). CEO/chairman works pretty well for Berkshire Hathaway.

  • Report this Comment On August 07, 2012, at 6:09 PM, Sunny7039 wrote:

    Good god. How many times are we going to hear THIS tired old saw repeated?

    I'll do something about misbehavior right now -- Motley Fool, do you PAY people to write drivel?

    Since when does one shareholder=one vote? It's one share=one vote. Now just take that basic fact and make a few valid inferences. It's not hard.

    Of course there's more to it -- if you do vote your measly shares, are you actually doing anything more than making sure the dominant view gets its needed quorum to proceed? I mean, of course, no matter how you vote. Whom are you really helping? Do you know for sure?

    As WhichStocksWork said, shareholders have done a lot. Most people care about where they invest, and are loathe to invest with bad actors. (This is old news. Where have you been?) The loudest message you can send is to sell. People do, all the time. Yet this article bemoans short holding periods, and claims they breed apathy. (The last time I checked, the psychological research showed unequivocally that an objective inability to alter the course of events breeds apathy -- in all higher animals, not just people.)

    Apart from all that, some of the more "socially responsible" mutual funds were precisely the ones which remained the most stable in 2008. So, investigating what your mutual fund invests in and how it is really managed is valuable in more ways than one.

    Find someone else to pin blame on for a change, rather than the small investor. What's most laughably hypocritical about this article is that the disclosure statement tells us The Motley Fool recommends these companies! So, is this the Fool's idea of telling us "both sides?" One side is "Buy! Buy!!", and the other is "If you own any of these stocks, you may be a Bad Person." Pfft.

  • Report this Comment On August 07, 2012, at 6:45 PM, toneill69 wrote:

    Great article-my biggest concern.

    its very easy vote at voteproxy.com, but I doubt shareholders are aware of the importance of voting. I do vote at first I was would scrutinize issues but now I vote no to almost everything where I see that the directors are tools of management. I vote no to any restrictions on what I would consider shareholders right vote yes also to companies I trust who put shareholders first. Merrill lynch had me on over 100 stocks before they kicked me out when I questioned trades that showed some self interests. I guess they voted on my behalf and in their own interest. Not sure about that. The best policy is to vote No unless you are sure what is being presented is in your interest. if you don't understand, the policy is likely not in your interest. so JUST SAY NO.. There should be somewhere one can go when one has great concerns such as Larry Elision and his fat compensation such as shareholder activists . Jamie Diamond, I voted no to, because his compensation- the least the ass could do is take a cut in compensation. I am always mystified as the composition of the board, usually people with no special industry skills, many times politically correct as if the board was reaching out to the general public rather than shareholders. Shareholders votes should carry more weight and should not be considered advisory only.

  • Report this Comment On August 07, 2012, at 11:41 PM, anuvaka wrote:

    It appears to me you are anti-Libertarian and suggesting there be a grass roots movement to change corporate policies in a positive direction.

    I think there is more to be condidered. The current laws and regulations allow little rights to the small investor (<1000 shares) and favor the Huge investor, (>10,000 shares)

    And the existing laws allow a complete disregard to shareholder interests.

    May I suggest a book?

    "betrayal of the american dream " by don bartlet & Jim steele

    http://www.amazon.com/Betrayal-American-Dream-Donald-Barlett...

    There is more going on here than your post reveals.

    jC

  • Report this Comment On August 08, 2012, at 12:06 AM, billjam wrote:

    I've been to stockholders meetings. I've voted against management on proxies. I don't believe the small shareholder is apathetic. He just understands he has no power. We hire directors to watch management but management picks the slate of directors from a list of their friends. Even Warren Buffet has commented on how hard it is for an outside director to influence management even when he owns a big block of stock. Corporate governance suffers from many of the same ills as government. Too many insiders taking care of their own interests. A few institutional holders are finally standing up to management but we need a lot more. The guy with a 1000 shares is still powerless.

  • Report this Comment On August 08, 2012, at 8:16 AM, SureSceptic wrote:

    The best message is to sell and hit their options. It is what it is and we must vote with our money.

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