NCPA - National Center for Policy Analysis


September 28, 2006

In a recent Wall Street Journal article, Ira M. Millstein and Harvey J. Goldschmid urge the Securities and Exchange Commission to continue its efforts to provide shareholders a voice in the director election process.  It is worth clarifying that it is the director nomination part of the voting process that has been the focus of recent SEC attention, not voting itself, says Donald Margotta, Associate Professor of Finance, Northeastern University.

The authors argue that shareholders are still the providers of capital in our economy, however, according to Margotta:

  • While that is true for some companies, especially startups and IPOs, Adolf Berle recognized as early as 1932 that the primary sources of capital for the mature corporation come from retained earnings and debt, not from direct shareholder input.
  • Shareholders in mature corporations provide liquidity in secondary markets, which is a very important function, but it isn't providing capital to the company.
  • There may well be good arguments for greater shareholder involvement in director nominations, but their being providers of capital should not be one of them.

Finally, the authors recognize potential abuses of providing greater access to the director nomination process and suggest safeguards such as minimum holding periods.  Margotta agrees with the authors on this point, but the potential abuses of greater access outweigh the benefits. 

If the SEC goes forward with this, he says, it must consider another safeguard, one that would limit nomination authority to shareholders who do not own significant quantities of a competing corporation's stock in order to avoid, for example, major owners of Ford stock nominating directors to General Motors with all the potential conflicts of interest that would entail.

Source: Donald Margotta, "Letter to the Editor: Should Shareholders Nominate Directors?" Wall Street Journal, September 28, 2006.

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