A few weeks ago, Senator Schumer announced his intention to introduce the Shareholder Bill of Rights Act of 2009. The central stated goal of the Act — “to prioritize the long-term health of firms and their shareholders” and create “more long-term stability and profitability within the corporations that are so vital to the health, well-being, and prosperity of the American people and our economy”— is commendable. That goal represents a significant break from the agendas of many self-proclaimed governance experts who, in actuality, have sometimes hijacked the banner of “good governance” to amp up stockholder power in a campaign to press Corporate America away from attention to and investment in the long term.

Short-termism is a disease that infects American business and distorts management and boardroom judgment. But it does not originate in the boardroom. In is bred in the trading rooms of the hedge funds and professional institutional investment managers who control more than 75% of the shares of most major companies. Short-termist pressure bred by stockholder power demanded unsustainable ever-increasing (quarterly) earnings growth, possible only via the shortcut of over-leverage and reduced investment, and the dangerous route of excessive risk. Stability and financial strength to weather economic cycles were sacrificed for immediate satisfaction. That short-termist pressure, in the view of many observers, contributed significantly to the financial and economic crises we face today.

Thus, the legislation’s purpose— to restore the long-term stability of the firm as the ultimate goal of corporate governance— is a salutary and important guidepost.

But the suggested provisions of the Act threaten to encourage the opposite of its stated goal. The Act proposes to enhance stockholder power and thereby would fuel the very stockholder-generated short-termist pressure that, in the view of many observers, contributed significantly to the financial and economic crises we face today. The Act would implement, by federal mandate, a series of yet further empowerments of stockholders: it would require annual stockholder advisory votes on executive compensation, facilitate a federal requirement that stockholders be granted access to every corporation’s proxy to nominate their own candidates to boards of directors, end staggered boards at all companies, require that all directors receive a majority of votes cast to be elected, and order that all public companies split the CEO and board chair positions.

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