Channeling one of the dynamics involved in the increasing cost of public equity, Henry G. Manne provides this excellent Wall Street Journal ($) op-ed (available free here for the next 7 days) in which he systematically disassembles the myth of corporate democracy and the current media fascination with the supposed panacea of shareholder activism. The following are just a few of Professor Manne’s insights:
“They’re back! Every 20 or 30 years shareholder democracy ideas come back in vogue, and their time seems to have arrived again — with a vengeance.”
“The SEC is huddling on whether to facilitate direct shareholder nomination of directors through a new interpretation of its shareholder proposal rule. A prominent professor at Harvard Law School, Lucian Bebchuk, proposes, among other democratizing moves, amending state corporation laws to encourage contested elections for board members. . . . There is absolutely nothing new in any of this discussion. The real world has not changed in any significant way, and our knowledge of corporate governance has not been revolutionized by some intellectual breakthrough. Furthermore, the provenance of the “corporate democracy” oxymoron has long been understood. The idea results from the inappropriate conflation of political ideals with market institutions. Its persistence can only be attributed to the intelligentsia’s far greater comfort and familiarity with political models and events than with knowledge and appreciation of how markets function.”
“It ill behooves corporate democrats like Professor Bebchuk to deride this system as not satisfactorily monitoring managers when he knows full well that regulatory interferences are mainly responsible for poor performance in the market for corporate control and, for that matter, for much of the steep escalation in executive compensation in recent years. That they would then propose intricate regulatory provisions for more shareholder democracy is evidence of the mindset that causes the problems.”
“Perhaps many of the advocates of shareholder democracy actually have a hidden agenda, most usually either a greater degree of government control over private enterprises, or more power to unions via their control of pension funds. Neither has proved beneficial to the investing public or is consistent with a vigorous and innovative public economy.”
“We need corporate activists today more than ever, but we need them to lobby and argue for repeal of our many costly and ill-serving bits of corporate regulation.”
And I’ll leave it to the always-insightful Larry Ribstein to connect the myth to the process involved in the proposed EGL private equity buyout:
Shareholder democracy is just one of the burdens that public corporations have to bear these days (e.g., SOX). All of this is pushing more firms into the hands of private equity. Of course the shareholder democrats donít like that, any more than they liked Mike Milken and the LBO boom of a previous generation.
Finally, in this timely NY Times Select ($) op-ed, William A. Niskanen, chairman of the Cato Institute, makes the following cogent observations regarding the impact of the most well-known regulatory reaction to the Enron scandal:
Sarbanes-Oxley has seriously harmed American corporations and financial markets without increasing investor confidence. The section of the law requiring companies to perform internal audits has turned out to be far more costly than proponents projected, especially for smaller firms. These costs have led some small companies to go private, hardly a victory for public oversight, and some foreign firms to withdraw their stocks from American exchanges.
In addition, the average ìlisting premiumî ó the benefit that companies receive by listing their stocks on American exchanges ó has declined by 19 percentage points since 2002. This explains why the percentage of worldwide initial public offerings on our exchanges dropped to 5 percent last year, from 50 percent in 2000.
Other costs associated with the act may turn out to be more important. For example, more stringent financial regulations and increased penalties for accounting errors may make senior managers too risk-averse. Most chief executives are not accountants, so the requirement that they personally affirm tax reports ó at the risk of jail time should anything be amiss ó may make them reluctant to partake in perfectly legitimate activities.
Paradoxically, Sarbanes-Oxleyís strict rules on oversight by boards of directors would have been insufficient to prevent the collapse of Enron. By the actís standards, Enron had a model board; most members were distinguished professionals. The chairman of the audit committee was a former accounting professor and dean of the Stanford Business School.
Nor would the actís provisions to create a stronger Securities and Exchange Commission have made a difference. The commission had been aware of Enronís accounting techniques since 1992 and had never thought to question them. [. . .]
The negative repercussions of the act on businesses might have been worth it if the act had achieved its primary goal: substantially increasing the confidence of investors in the accuracy of the accounts of firms listed on the exchanges. But that does not seem to have happened.
The best measure of investor confidence is the price-earnings ratio ó the price that investors are willing to pay for each dollar of a companyís reported earnings. The overall price-earnings ratio for the Standard & Poorís 500-stock index, however, has declined continuously since the Sarbanes-Oxley Act was being drafted in the spring of 2002. [. . .]
Tinkering is not enough. Sarbanes-Oxley continues to discourage smaller companies from trading publicly and foreign companies from listing their stocks on American exchanges. In the eyes of investors, it hasnít cleaned up any corruption, it has only forced companies to jump through hoops. As Senator Sarbanes and Representative Oxley drift into retirement, their act should retire with them.
Any surprise that Crane is willing to assume the risk of taking EGL private?