Corporate democratic reforms in their infancy

The Insider

Your Money

April 03, 2005|By BILL BARNHART

The annual meeting season for public corporations, unfolding in the next two months, reminds me of politics in Iraq.

With great fanfare, the notion of democracy has been imposed in hostile territory. But the significance of the effort remains in doubt.

As in Iraq, the incubation of democratic reforms in corporate America seems rudimentary, even quaint, after the shocking abuses at Enron, WorldCom and elsewhere. Nasty political realities challenge textbook theories of majority rule.

Corporate democracy advocates, gearing up for this year's annual meeting season, will seek a rule requiring individuals running for corporate boards to receive a majority of votes cast.

Who could oppose that?

Yet most directors run unopposed. In recent years, abstentions by disgruntled shareholders from director elections have resulted in the management director slate being elected with far less than a majority of shares voting for less controversial matters, such as the selection of the auditor.

"Right now, all you need to do is get one share and you get on," said Greg Kinczewski, general counsel for the Marco Consulting Group, an adviser to union pension plans.

There is no consequence to company boards or management, other than brief negative publicity, when annoyed shareholders, spontaneously or through organized campaigns, withhold their votes for a director.

Similarly, there is no requirement that a company respond when a shareholder resolution opposed by management wins a majority of shareholder votes.

Shareholder advocates at several meetings will offer resolutions that companies establish a so-called majority vote committee to implement successful shareholder resolutions.

On a less procedural matter, shareholder activists want stock-related executive compensation bonuses to be linked to company performance, not merely the passage of time.

Stock options awarded as incentives at least expire worthless if the stock price declines. But restricted awards or outright shares often represent a substantial bonus, no matter how poorly the stock performs.

Similarly, activists want rules to force executives to repay bonuses they reaped through phony financial results that were later restated downward, a common occurrence.

With mutual funds required to disclose how they cast proxy votes at shareholder meetings, reformers hope their ideas - and their organizations - will receive serious attention in executive suites. Maybe not.

"Corporations are not a democracy. That's the simple way of saying it," said management consultant Peter Cohan. "You have to look at who owns the shares. There's so much going on that you don't know about, in terms of who's coordinating with whom to decide which way to vote the proxies."

Cohan proposes a different reform, awarding seats on corporate boards to major shareholders, who would be required to retain their stock while serving.

In addition, he favors creating a pool of professional directors, who would be chosen, evaluated and paid by shareholders, not by the company.

Corporations are ruled by people as well as by laws. Reforming the rules gets you only so far.

Bill Barnhart is a columnist for the Chicago Tribune, a Tribune Publishing newspaper. E-mail him at yourmoney@tribune.com.

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