These are anxious times. In the midst of the crescendo of political jibber jabber leading to the presidential elections, we may be on the brink of a recession as the housing bubble continues its painful deflation. Many of us saw that inevitability coming (and probably make a heck of a lot less money than the people who were supposed to see it coming), but now that it's here, it's tempting to say, "Wake me up in five years; hopefully, things will be better."
A recent ruling from the Securities and Exchange Commission makes things look even more depressing for individual investors. Thanks a lot, Chairman Cox.
A big old load of lame
Rachel Beck of the Associated Press wrote an eye-opening article on the SEC's controversial ruling, which will allow companies to block shareholders' attempts to put their own director nominees on proxy ballots. Chairman Christopher Cox claims to have wanted to provide "clarity" on the issue and rushed the vote even though one of the SEC's commissioners -- a Democrat -- resigned from the agency in September and hasn't been replaced. Three Republican commissioners (including Cox) voted for the rule, and the lone Democratic commissioner provided the only dissenting vote.
Even more provoking, the SEC received 34,000 letters after opening the issue up to public comment. (Read my Foolish colleague Selena Maranjian's excellent commentary from September on this issue.) The comments seem to have fallen on deaf ears, so the SEC sounds a lot as if it's saying, "Well, sure, it's a free country, and you're free to say your piece, but we're going to do what we want anyway."
It's no surprise that corporate interests lobbied for the ruling, arguing that special-interest shareholder groups can hold too much sway over corporate elections and that this costs companies a lot of money. Well, boo-freakin'-hoo. It can cost shareholders a lot of money when corporations fall short because of inadequate governance, too, and speaking of political special interests, it's not as if corporations don't play that game. Puh-leeze.
Shut up and let the smart guys do their thing
This smacks of elitism, and it also sounds incredibly stupid right now. Apparently, shareholders should shut up and let the geniuses do their thing, right? After all, theoretically, the pact is this: Investors put up the capital, and management, well, manages, since it's supposed to be really good at that sort of thing. However, given that investors run a very real risk of losing their money if things go awry, I don't think we can applaud a system that tries to silence their concerns and block them from proposing the ouster of board members who don't do their duty (which is supposed to be looking after shareholder interests).
Right now, though, there's ample evidence that the smart guys in management and on boards aren't always so smart. You've probably noticed how the big-money firms have been joining the ugliest conga line ever, revealing massive mistakes and misjudgments feeding into the housing bubble's greed extravaganza that has burst into a big, fat, economic mess. Citigroup (NYSE:C), Morgan Stanley (NYSE:MS), Merrill Lynch (NYSE:MER), Wachovia (NYSE:WB), Fannie Mae (NYSE:FNM), Countrywide Financial (NYSE:CFC), Freddie Mac (NYSE:FRE), and so forth, have all participated (and of course, the public will be punished). (Former Merrill CEO Stanley O'Neal's nine rounds of golf in September, the same month his firm disclosed a $5 billion writedown, seems to speak volumes about the level of commitment some of these guys have.) Given this climate, it seems like an outlandish time to argue that corporate managements need greater freedom from shareholder action.
And given the glaring reminder that corporate managements obviously can and do make some ridiculously short-sighted, short-term moves, the travesty of allowing shareholders to be pushed aside when it comes to having a voice -- not to mention pressing for accountability -- is put into sharp relief.
The de-evolution of the SEC?
If I recall correctly, the SEC was formed after the Great Depression to advocate for shareholders, not for corporations. I'm not sure any of us could be blamed for feeling that the agency has forgotten its roots.
Regulatory agencies are often created with the best intentions, but we all know how easily political interests and short-term thinking that only benefits the few can corrupt that. This underlines why shareholders should be more involved than ever, pressuring their companies -- and board members -- to run their businesses responsibly.
It's funny. Earlier this year, I noted that shareholder activism looked stronger than ever, gaining momentum as companies were pressed to become more shareholder-friendly. Could it be a coincidence that this ruling came about in such an urgent fashion? It sure appears that some people didn't like the idea of increasingly successful shareholder activism. It appears that politics won out this time.
Yes, there's plenty to be outraged about these days. Cox insists that the issue will be revisited in 2008 -- that means we should all keep our eyes peeled for developments, keep our letter-writing skills well-honed, and get ready to press for that second pass. Even though I fear that long-term-minded investors got a really raw deal, we don't have to pretend we like it.
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