“Whiny” Shareholders and Access to Management’s Proxy Statement

Editor’s Note: This post is by J. Robert Brown, Jr. of the University of Denver Sturm College of Law.

Lynn Stout (Paul Hastings Professor of Corporate and Securities Law at UCLA School of Law) today in the Wall Street Journal argues against allowing shareholder access to management’s proxy statement to elect directors, something under consideration by the Securities and Exchange Commission.  

There are plenty of pros and cons to this approach (the pros far outweighing the cons) but Professor Stout comes up with a new one: Reacting to “whiny” and “shrill” investors, more companies will eliminate public shareholders altogether and sell out to private equity firms.

There are many many problems with the editorial, but mostly Professor Stout is wrong to attribute private equity buyouts to fatigue over shareholder demands.  In fact, management engages in these transactions for the same reason as anyone else: financial gain.  As Professor Stout herself notes, managers typically get a piece of the company and annual returns averaging 20-25% a year.  That these transactions are more common is attributable to the extraordinarily high degree of liquidity and the large number of private equity firms chasing deals.

Moreover, if they were truly worried about the demands of “whiny” shareholders, why would managers sell to private equity firms?  These firms typically replace directors and exercise very close oversight over the actions of management (requiring things like daily cash flow statements).  The demands of private equity owners are far greater than anything “whiny” shareholders could ever hope to exert.

Finally, the editorial reveals that when a public board is replaced and greater oversight is exercised by those representing the interests of shareholders (in this case private equity firms), the companies yield a much higher rate of return.  Isn’t this a condemnation of the current board structure, one dominated by a management selection process?  If this type of return is so readily available, why aren’t the public boards achieving it? 

The focus should be on helping the SEC craft a proposal that will result in a better board structure.  Simply opposing a proposal that would mildly facilitate the election of shareholder nominees will not do that.  These types of issues will be addressed at my website here.  For an analysis of empirical arguments used to oppose Sarbanes Oxley, go here.  

Professor Stout’s editorial demonstrates a serious problem with the boards of public companies.  Parsing through the arguments, she actually makes a case for, rather than against, shareholder access. 

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