Tuesday, June 2, 2009

Why stockholder elections are as effective as regular elections

Somewhere or another, you figure that people would figure out the disconnect. In national elections in the United States (and probably in other countries), people complain to no end about the poor politicians that serve us. Yet it's a rare instance in which an incumbent politician does not get re-elected. Because of our willingness to continue to re-elect the same people time and time again, we've set up artificial ways to kick them out such as term limits. Yet despite all of the things we can dream up, we end up with the same crowd running the show.

Compare this to the corporate situation, in which we complain about how corporations are run and how boards of directors rubber-stamp what the officers want to do and give the officers huge bonuses. You have Congressmen and Senators who deride those who run corporations, and the reason that they do it is because the public agrees. In essence, people think that the people who run the corporations are as bad as the politicians who run our country.

But guess what? Even though the stockholders have the power to turn the rascals out, they rarely if ever do.

Last week, both BusinessWeek and the New York Times reported on William Ackman's unsuccessful attempt to install an alternate slate of directors at Target's annual meeting. Ackman, who owns over 7% of Target's stock, stated that Target's current board was unrepresentative of the shareholders at large, since board members own less than 0.3% of the stock. And Ackman argued that in today's environment, a fresh perspective was needed on the board. The New York Times:

Since beginning the proxy fight in March, Mr. Ackman has argued that Target’s current board lacked relevant experience in the real estate, retail and credit card business.

Regarding real estate, it should be noted that Ackman previously proposed that Target place its land into a real estate investment trust.


Despite his pleadings, shareholders disagreed with Ackman's contention that the board was insular and required fresh perspectives that could be supplied only by his slate of five candidates, which included former Starbucks (SBUX) Chief Executive Jim Donald, who helped build Wal-Mart's (WMT) grocery business, and Richard Vague, former CEO of credit-card firm First USA.

And for his efforts to offer a fresh perspective, Ackman has been directly or indirectly criticized as a troublemaker. Just as an unsuccessful politician urges people to rally around the flag and stay the course, Damien J. Park (quoted by the Times) indirectly criticized Ackman by noting that his activities were disruptive:

“I guarantee you that every single Target board discussion over the last six months has been about this proxy fight and not about setting the business strategy of the company.”

So don't cause any trouble; we know what we're doing.

Even if we don't.
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