Thursday, September 7, 2017

Ruminations On Corporate Governance

Just noticed that FactSet sells a database about “takeover defenses”: is a corporate governance research tool focused on takeover defense, corporate activism, and proxy related issues. Defense profiles are available for U.S. public companies which we compile from a company’s articles of incorporation, bylaws, state takeover law and shareholder rights plan, illustrating how a company has chosen to defend itself from potential unsolicited takeovers and proxy contests.
This database looks like it would be worth exploring. Sad, however, that its marketing uses the word “shark” to describe company owners who have decided to attempt to work with fellow owners to convince managements (their employees!) to take actions that they feel would be beneficial.

Also, the term "takeover defense" is euphemistic and misleading. How about calling it “management entrenchment”? Or “principal-agent accountability disruption”?

Good corporate governance is, to a large degree, the inverse of the “takeover defense” and anti-“activist” devices that have been created over the past decades to entrench management agents at the expense of their owner principals.

Here’s a piece called “Structural Defenses to Shareholder Activism” [pdf] that contains quite a few of these devices. We would posit, then, that good governance would consist of the absence of these devices from the company’s bylaws and practices. Notice this horrifying statistic from the piece:
“In 2014, there have been only two hostile takeover bids for U.S. companies to date and there were only five hostile takeover bids in 2013. This is compared to 160 in 1988, when every board lived in fear of a hostile takeover fight."
How can it be beneficial to shareholders to have such a drastic curtailment of interest from third parties who can imagine a more productive use for their property?

From a press release put out by Marcato Capital that contains their letter to Buffalo Wild Wings, Inc.:
It has now been more than seven weeks since Marcato—a 5.2% stakeholder in BWW—requested a limited amount of information for the purpose of communicating with fellow shareholders. As I’m sure you know, Marcato has an unassailable right under Minn. Stat. § 302A.461 to receive this information. Other public companies routinely provide such information to shareholders without question or delay when presented with similar requests. This is in fact the very same information that BWW is already using itself—we are merely seeking to have a “level playing field” with the Company. It should not take nearly two months to produce.

The Company initially refused to acknowledge that Marcato owned any BWW shares. Specifically, Company counsel stated that the Schedule 13D which we filed with the U.S. Securities and Exchange Commission on August 17, 2016, a copy of which was enclosed with our request, was “insufficient to demonstrate that any particular entity was a shareholder of BWW as of [August 22, 2016].” 

Company counsel insisted that we provide a brokerage account statement evidencing Marcato’s ownership. When asked to explain, our attorneys were told by your counsel that Marcato “could have sold all of its shares” since the 13D filing. To put it another way: management appears to have envisioned a scenario in which Marcato submitted a shareholder list request after it sold all of its BWW holdings, without disclosing the sale in a subsequent 13D amendment.
The Minnesota statute governing shareholder information requests is here.

This is an excerpt from a book about Exxon, mentioned on Phil Greenspun’s blog:
Clinton introduced Diane Sawyer. She summoned to the stage members of a panel to talk about women’s issues; the panel included Tillerson and Lloyd Blankfein, the chief executive of Goldman Sachs, the investment bank with a public reputation as much in need of repair as ExxonMobil’s. The ballroom atmosphere suggested the laying on of liberal, globalized hands to cleanse sinful multinational corporations. “These are some of the power hitters,” Sawyer said of Tillerson and Blankfein. Tillerson talked about ExxonMobil’s charitable initiatives to support girls and women in some of the poor countries where the corporation extracted oil. “Technology comes very natural to ExxonMobil,” he said. “What are the technologies that will provide them [girls and women] capabilities to undertake their daily activities in a more effective and efficient way?” Sawyer later asked him: What is the responsibility of a multinational corporation to make the world better through charitable activity? Is it a tithe of 10 percent? How much? “Ultimately,” Tillerson said, “this is our shareholders’ money we’re spending. It’s not my money to tithe. It’s not the corporation’s. It’s our shareholders’.”
A New York Times piece pointing out that index fund managers may be violating current antitrust laws.
Such ownership patterns are already illegal. Section 7 of the Clayton Antitrust Act makes firms that buy stock in other firms liable if “the effect of such an acquisition may be substantially to lessen competition, or to tend to create a monopoly.” In 1957 the Supreme Court noted that such prohibitions hold “even when the purchase is solely for investment.” Unfortunately, because the antitrust implications of institutional investment were not recognized until recently, legal action has not yet been taken.

However, indiscriminate application of these laws would disrupt an industry that many Americans rely on for (often) low-fee, diversified savings. To avoid such disruption, the government should enforce the Clayton Act against institutional investors while recognizing a safe harbor for those that either take a small stake in an oligopolistic industry (less than 1 percent of each company) or invest in no more than one company per industry. BlackRock could own a large stake in United or Delta or American or Southwest, but not all of them.
Horizon Kinetics has done very good work on unintended consequences of the index investing boom. We note that the regulations that govern mutual funds may have adverse effects on corporate governance. For example, the Investment Company Act of 1940 requires that investments made by a diversified fund be “limited in respect of any one issuer to an amount not greater in value than 5% of the value of the total assets of the fund and to not more than 10% of the outstanding voting securities of the issuer”. This is probably the real reason why these institutions have invested in multiple companies per industry. And the result is actually that the big fund managers have invested an amount in each company that is too small to care about and too small to exert much influence.

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