10.27.05
The Futility of “Just Voting ‘No’” – October 27, 2005
Yesterday I received a breakdown of the votes cast in the News Corp. AGM. Of the 1,029,579,988 shares eligible to be voted, more than 816 million were voted, but more than 552 million of these were cast on behalf of the controlling group of Rupert Murdoch with his ally the Saudi prince Al Walid, and sometime rival John Malone adding his support. Of the minority shareholders, 264 million shares were voted, with from 43% to 51% voting to ‘Withhold’ from the four directors and 62% voting against the motion to increase outside directors’ remuneration. This was reported by Mr. Murdoch as a vote of ‘no more than 15% against any director,’ and was considered a victory for the incumbent management.
No one covering the meeting for the press bothered to break the vote down, and to consider that a majority of the 70% of shareholders who had voted had demonstrated their lack of support for the board. (Presumably this was due to issues arising from the implementation of News Corp.’s poison pill, because there were no other issues.) I don’t know whether the distinguished board members bothered to do the arithmetic, and realize how much credibility they have lost with shareholders. Certainly, no one has yet compelled them to do so. Aside from the fact that even had an absolute majority of votes been to withhold, the four directors would still have been re-elected, the inadequacy of such protest votes would still have been manifest. Given the way shareholders’ meetings are run today, merely voting one’s shares against management is an ineffectual tool in attempting to bring an erring management to account.
This is not to say that shareholders should not bother to vote their shares: of course they should. This is the device by which the shareholder will must ultimately be ratified. But along the way and by itself, it is rarely sufficient. Among other things, a ‘No’ vote on an agenda item which has been prepared to further someone else’s interests, concerning some other issue entirely is a blunt tool at best with which to get one’s point across. And it is a deeper level of shareholder action on the part of the institutional owners who control so much of America’s assets which one must hope for, if one is to avoid the spectacle of a powerful media magnate and his board airily dismissing a covenant underscored in their company’s previous proxy statements as “a self-imposed guideline” revocable at will.
Investors who care about how their companies are run need to engage the companies, actively and regularly, speaking with the chairman or his representatives, and if a problem persists, with any board members they can persuade to listen. This should be an ongoing process, even before the company turns up on a proxy advisor’s bad list. If consultations fail, shareholders who care about the governance of their portfolio companies need to be prepared to sponsor or support shareholder resolutions to press further to solve the issue. Often, the threat of a vote is sufficient, and the discussions resume with a more fruitful outcome. But if they do not, concerned shareholders must be prepared to go forward with their motion. They also need to ally with other shareholders sharing the same concern, and sound out regulators and other authorities on their views. At some point they also have to consider whether the glare of publicity from the press may further their aims. And ultimately, there has to be the willingness, even if it is seldom exercised, to go to the courts for redress if the law is on their side. In short, governance activity is a process, and not merely an occasional action, after which the investor can rationalize that he did what he could by voting, and that is the end of the matter.
Expensive? Probably. (Although not so much as one or two star investors’ salaries.) Time-consuming? Unquestionably. But not nearly as expensive as a corporate catastrophe, a share-price crash, a bankruptcy work-out, or the steady decline of an under-performing company following years of misgovernance by entrenched management. Not all governance problems lead inevitably to disaster, of course. But the correlation is too strong to be ignored, the risk is there, and it should be incumbent upon all prudent investors who are too large to simply run away from trouble to meet that risk head-on, and to fight to minimize it.