By Bartlett Naylor and Carl Wilhjelm
One troubling mystery of the financial crash of 2008–the one that’s mired our economy in 9 percent-plus unemployment, etc.–is why shareholders let it happen.
After all, we’re supposed to enjoy an “efficient” market, all wise to current and future events, and since the shareholders own the companies, why didn’t they see the wreck coming? After all, we now know that many of the managers did see it coming. They cashed out, as in the case of Countrywide’s Angelo Mozilo and the top brass at Lehman Brothers, or golden-parachuted out, as in the case of Merrill Lynch CEO Stanley O’Neil, who was punished with $160 million for failing to deal with the crisis.
To the policy rescue comes . . . wait for it . . . Sen. Richard Shelby, ranking Republican on the Senate Banking Committee, and otherwise ranking complainer about the new Dodd-Frank Wall Street Reform Act.
“Who owns a corporation,” Sen. Shelby asked rhetorically at the close of a hearing July 12 before the Senate committee. “The shareholders,” he answered himself. “We need to create conditions where a corporation cannot be hijacked by management or special interests,” the Alabama former Democrat implored.
With Shelby’s injunction, the other senators and seven esteemed witnesses generally agreed. As do we. And several witnesses even offered specific ideas on how to implement Sen. Shelby’s principle. Barbara Roper, Director of Investor Protection of the Consumer Federation of America, testified that we need stricter oversight of the ratings agencies, so that their ratings will actually mean something to investors.
Anne Simpson, Senior Portfolio Manager at Global Equity, California Public Employees’ Retirement System, lauded the new Dodd-Frank provision allowing shareholders that control at least 3 percent of shares to nominate a director to be voted on by shareholders at the annual meeting. This will help to solve “one of the most significant roadblocks” that prevented long-term shareholders from arresting the practices leading to the explosion of the housing bubble in 2008.
Lynn Turner, a former chief financial officer of a public company, and former SEC official, testified that companies can easily comply with the new Dodd-Frank provision that informs shareholders how well paid the CEO is as a multiple of the median paid employee of that firm. Turner dismissed industry complaints that such figures would be burdensome to generate. If CFOs can’t figure out that number, Turner observed in response to a question from Sen. Robert Menendez, D-NJ, they have bigger management problems.
Despite Sen. Shelby’s laudable endorsement of the principle of shareholder rights, strangely he’s fought all these specific means by which shareholders might actually enjoy those rights.
Public Citizen thanks Sen. Shelby for stating the importance of empowering shareholders. We hope to use his words as the basis for other important reforms.