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aaronsw.com

57 pointswglb27 comments

This is an incredibly sneaky move by an administration that railed CEOs for receiving large bonuses and salaries when they are running companies that are failing and need to be bailed out. Seems very two faced to me.

If you're cynical you could argue that it's because it's harder to rail against large bonuses if there's real shareholder democracy.. A baptists/bootlegger alliance if you will.

Obama is probably doing it because it could open the door for shareholders to engage in asset stripping (selling off corporate assets and shut dow the company). Asset stripping, while good for shareholders and the economy at large, tends to be bad for unions.

(A hypothetical example: consider a company with 1 billion in salable assets, but no hope for future profits based on existing business due to union costs. The best way to create shareholder value is to shut down the company and sell the corporate assets. The current CEO probably likes his job and doesn't want to be "the guy who killed BigCo". )

I am thinking of workarounds. What if shareholders get together and form a "holding company" with > 5% shares? The company would become the shareholder wouldn't it?

What are the tax consequences?

You may not agree with it, but you've got to admit that's a nice lightweight hack.

Perhaps someone more knowledgeable can enlighten me... if the provision has already been approved, how can the White House change the wording? I thought the President wasn't able to make modifications to legislation.

Line-item veto: http://en.wikipedia.org/wiki/Line-item_veto

>The line-item vetoes are usually subject to the possibility of legislative override as are traditional vetoes

I did remember that the '96 act was axed by the court, but I wasn't aware of the more recent versions. I suppose this story is a perfect demonstration of why this kind of thing is a bad idea

It's not a line-item veto. That wiki page mentions it has not become law. As far as I can tell, the bill is in committee. Both the House and Senate have to vote on the exact same bill. But both houses like to make their own changes. So each pass their own version of the bill, then meet in committee to come up with a version they both agree on, this new one goes back to both houses and they pass it. What I suspect is being claimed is that it says "shareholders" in both the House and Senate versions that already passed, and the White House is asking the committee to change that to "shareholder", otherwise Obama will veto it.

Edit: This article contains a barely legible image describing the process: http://www.mcclatchydc.com/2010/03/03/89797/heres-how-reconc...

That's just plain wrong. There is no federal line item veto and even if there were you couldn't use it to veto one letter.

I realized that after the fact. I guess when I heard about it in history class, it existed, then I inquired further.

Yeah, it's weird they left that detail out, but I assume they mean the administration will have someone take it out during conference committee. There is also a time after a bill has been passed by both houses (but before the president signs it) where corrections can be made to the bill. These are only supposed to be typographical corrections that don't change the meaning, but...

The bill is in conference committee because they passed two different bills. They have to try to craft a bill that synthesizes the two and (crucially given the filibuster) that can pass both houses.

Could this lead to a move by big investor to gain 5% of stock just so they can nominate alternative board members? Is this realistic?

I understand almost no one owns those kind of proportions today, but what would be the incentive today if everyone seeks diversification. This would create an incentive, would it not?

I don't understand why this is anyone's concern aside from the company's.

If they squander money on the CEO's salary and fail because of it, that is their onus. If they succeed, then why should we intervene?

We all (OK, maybe just me) agree that the free market is the way to go, competition, prosperity, etc.

But the free market is an ideal which is easy to game. CEOs hand picking the board, and the board then turning around and deciding on the CEOs compensation is an example of the free market being gamed.

It's a bit more complicated then that, it requires the government enforced and defined legal entity that is a corporation, but it's still market inefficiency, mostly agency risk.

So in a way, it is the public's concern to remove market inefficiencies.

But it's not.

If the company can succeed with the inefficiency, then it's not that big an inefficiency.

It's a much more difficult argument to say that it is the public's concern to eliminate every inefficiency. God, imagine the employment opportunities for fixing poorly designed enterprise software... But no one is arguing that we do that. It is so easy to agree to not let an individual get rich from an inefficiency.

This is not to say I don't agree that it's a terrible, idiotic practice. But it's not my decision to step in.

The point is you're already stepping in. There are tons of laws just like this one on the books, and the whole concept of a corporation falls apart without these laws. Throwing up your arms and saying "it's not my decision to step in" is silly. The public is already stepping in through hundreds of regulators, and it seems pretty self-evident that these regulators need a better framework.

(Or we could get rid of them, but we can't really do that without getting rid of the corporations, and even then we're looking at something that probably is not really as good an idea as it might sound.)

> But the free market is an ideal which is easy to game. CEOs hand picking the board, and the board then turning around and deciding on the CEOs compensation is an example of the free market being gamed.

I want to own stock in such corporations. (Seriously. None of the "good governance" stuff has ever correlated with the thing that I want out of a stock, namely, return on my investment. I've no objection to you investing in companies to feel good about yourself, but I'm in it for the money.)

If you think that a given company's CEO compensation is wrong, don't own the stock.

If you think that a given company's CEO compensation is wrong, don't own the stock.

This assumes good competition among CEO compensations. But when I say "game", I mean that there's essentially a cartel of CEO compensation among all publicly traded companies, so that you can not just invest in a company which does not overpay the CEO.

> I mean that there's essentially a cartel of CEO compensation among all publicly traded companies, so that you can not just invest in a company which does not overpay the CEO.

Oh really? Google and Apple's CEOs make $1.

Forbes regularly profiles companies whose CEOs make significantly less (and more) than what you claim is the only game in town.

And if you think that other countries do it better, you can buy stock in many of their companies via ADRs. (IIRC, Japan's CEO pay works somewhat like you'd like.)

I note that you didn't acknowledge that CEO pay practices don't have investor benefits, so why do you care? More to the point, since you can easily choose companies that work the way that you'd like, why should my choices be limited?

Compensation is more a side effect of the issue discussed in the link. Shareholders are unable to even make a nomination for the board of directors, so the very people who own the company are unable to make decisions regarding how the company is run.

There's more info in this Motley Fool article: http://www.fool.com/investing/general/2010/06/18/dont-let-wa...

Even huge pension funds typically hold no more than 0.3% to 0.5% of large and medium-sized companies, so it's impossible to picture that happening very often.

Isn't there a risk to expose a company to a "white revolution" by shareholders ?

What's a "white revolution"? Wikipedia only tells me about a group of idiots, and a program to give india a milk distribution platform.

A revolution without spilling blood. A revolution is where the table of control gets turned.

That's the whole point of proxy access - to make shareholder revolutions easier.

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