Financial Times: Rotten boroughs, poison pills, odd proxies
By John Plender
Apr 26, 2004
The revised Principles of Corporate Governance put out last week by the Organisation for Economic Co-operation and Development provide a new global benchmark in governance. And a rather embarrassing one for some: including, believe it or not, the US.
The OECD now regards the ability to remove members of the board as one of the most basic rights of shareholders. Yet in the US, where the Business Round Table is coincidentally waging a fierce battle against the Securities and Exchange Commission's modest proposal for shareholders to nominate directors to the board, shareholders are notoriously handicapped when it comes to removing directors. In this, US practice falls short not only of the UK but even of France, where despite a rickety governance system - think Vivendi Universal - small shareholders in Eurotunnel were able to fire the whole board this month.
The US board election process is curiously undemocratic. For a start, the system of withholding votes from directors at the annual meeting has no more than symbolic significance. Only one vote has to be cast in favour for a director to be re-elected even when there is a big protest vote, which is farcical. As John Wilcox, vice-chairman of Georgeson Shareholder Communications, the proxy services group, has been telling the SEC, the proxy system is too complex, lacks transparency and cries out for reform.
Then there is the appalling New York Stock Exchange listing rule whereby brokers are free to vote the shares of clients who have issued no voting instructions. This, says Stephen Davis, editor of Global Proxy Watch, can account for between 15 and 30 per cent of the votes of a typical meeting. The brokers are, of course, conflicted since they hope to win business from companies. The arrangement smacks of a 19th century rotten borough.
And while corporate Europe is mesmerised by Sanofi-Synthélabo's hostile bid for Aventis, the US remains wedded to staggered boards and poison pills. This hampers an efficient market in corporate control. Note that the revised OECD principles roundly state that anti-takeover devices should not be used to shield management and board from accountability.
None of this means US governance is comprehensively flawed. It still ranks among the best. But with such weird voting rules, boards are not properly accountable and the system lacks legitimacy. Whatever the outcome of big business's battle against the SEC on nominating directors, I suspect reform of this bizarre voting process will soon be on the cards.
Stuff the Greens
Returning from holiday to find Royal Dutch/Shell still on the rack, it occurs to me that part of its problem is one of expectations. As a pioneer of social and environmental reporting, with a reputation for ethical integrity, it shocks people disproportionately when it mismanages the Brent Spar episode, hits human rights problems in Nigeria or misreports its energy reserves.
Compare and contrast with ExxonMobil. Few realise that Exxon owned 50 per cent of Brent Spar. Rather than take issue with Greenpeace over its flawed science on the rig's disposal, the US company shut up. If it had piped up aggressively, many would have shrugged and thought it par for the course. Few, I imagine, are surprised that the oil giant's handling of compensation for victims of the Exxon Valdez spill is dogged by controversy or that it successfully lobbied George W.Bush to shun the Kyoto treaty on global warming. It makes no bones about putting efficient energy production before greenery. So the gap between rhetoric and performance is less than at Shell.
Lee Raymond, ExxonMobil's chief executive, is often seen as an unmatched example of unaccountable, over-concentrated power. Shell, as we now know, stands for more collegiate unaccountable power.
While environmentalists may still prefer Shell, the markets' preference is clearly for the non-collegiate variety of non-accountability.
Eureka!
Many worthy words have been bandied about at spring meetings in Washington this weekend on the need for an orderly rebalancing of the global economy. Yet no one has addressed the most expeditious means of bringing this about. All that is required is to dismantle nationalistic rigidities in the labour market for central bankers.
In plain language, I propose a job swap. If the US were to export the arch-reflationist Alan Greenspan to the European Central Bank, the problem of weak demand in the big eurozone economies would quickly disappear as consumers started to borrow as if there were no tomorrow. Sending the financially orthodox Jean-Claude Trichet to the US, meantime, would sort out the imbalances in the US economy and put an end to the Federal Reserve's tendency to impart bubbles to markets around the world.
The odd snag, do I hear you say? Well, maybe. But you have to admit that as policy nostrums go, it has an awesome simplicity.