Shareholder Lawsuits Won’t Rebalance the Boardroom


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expert perspective telescopeExpert Perspective from Grahall’s OmniMedia Editorial Board

An article by Sara Hansard published in Investment News June 2, 2009 discusses House subcommittee chairman Democrat Paul Kanjorski’s recommendation that “Shareholders should have more power to bring lawsuits against companies for paying excessive compensation to executives.”

While we agree that shareholder lawsuits might “get attention of boards and managers,” we do not believe that lawsuits will help restore individual shareholders to the “power coalition” in corporate America. 
Over the past few decades the ownership structure of public companies has changed dramatically. Where individual shareholders once had substantial ownership – and therefore a voice in the boardrooms of public companies – that ownership position has become highly diluted.  Today the tilt in the power coalition greatly favors management because management selects board candidates  and determines the issues put before the boards. 

Individual shareholders today have dwindling influence, and we don’t think that will change with more latitude to bring lawsuits, with “non-binding” say on pay, or with building “better democratic principles into corporations” (whatever Rep Kanjorski meant by that). Ok, maybe Warren Buffett or Carl Ichan can buy sufficient shares (sometimes all of them) to demand a place on the board – or for that matter become management – and penetrate the corporate power coalition.  Most individuals can’t. 

Some might hope that institutional shareholders – pension funds, mutual finds, endowments and the like – who own substantial shares will help to influence management decisions. But research shows that institutional shareholders vote with management more often than not, in fact as much as 90% of the time.    

Legislating additional leverage for shareholders by giving them “more power to bring lawsuits” is a principled idea assuming it is an attempt to level the playing field. But it does not go to the core of the problem, which is the current corporate compensation paradigm: imperial CEOs, with chartered boards and compensation advisors whose independence may be compromised. 

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