NCPA - National Center for Policy Analysis

Empowering Institutional Investors

April 24, 2002

Corporate managers may take advantage of disconnected owners by rewarding themselves excessively and operating businesses inefficiently; that is, not maximizing profits. Shareholders depend on a corporation's board of directors to look out for their interests.

Unfortunately, corporate boards are not doing their job. Many board members are also part of management. So-called independent members are usually named to the board by management; they often serve on the boards of several corporations simultaneously; and they seldom take time to seriously oversee operations.

In recent testimony, Sarah Teslik of the Council of Institutional Investors noted some of the ways managers avoid accounting to shareholders:

  • Annual meetings can be held in hard-to-reach places at inconvenient times -- such as small towns in Alabama with no airport on Friday afternoons before major holidays.
  • Managers can call off shareholder votes, even on the day of the vote, if they think they might lose.
  • Managers can simply ignore the results of a vote even if they do lose.

Securities and Exchange Commission rules make shareholder challenges to management extremely difficult, and New York Stock Exchange rules rig shareholder votes in favor of management.

Teslik puts much of the blame on big institutional investors, who control some $2 trillion in corporate equities, but have failed to adequately exercise their oversight responsibility.

The responsiveness of boards to shareholders can be increased, Teslik believes, by easing government rules that make it hard for large shareholders, such as mutual funds and pension funds, to gain seats on corporate boards. Large institutional investors, which now own more than 50 percent of all stock, can look out for small investors far better than the SEC because their interests are the same.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, April 24, 2002.


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