The following post was sent to me from IntelligentSpeculator.net, an upcoming blog that mainly talks about the markets, its impressions and also comes up with a few stocks picks!
Do you sometimes go through your mail and see a big envelope from one of the companies you have invested in? Ever opened one of those? Often, they are to invite shareholders to vote for board members, or perhaps even make their way to a shareholders meeting. But how many of you have actually attended?
It used to be that shareholders would hold a lot of power in corporations by their vote but over the past few decades, that power has been diminishing mainly because a smaller and smaller percentage of shareholders actually take the time to vote on these decisions. And before you actually blame them, think for a second. How many ETF’s or mutual funds do you own? Over the past decade or so, the importance of such investments has grown and most individual investors now rely on such funds, and thus own hundreds of stocks instead of just a few. That will of course cause them to look less into how specific companies run things leaving most investors with not much of an opinion about who ends up on a board or other such actions.
This has generally caused corporate governance to become a bigger problem as no one has the power to change how things are done. Executive compensation has been publicly despised in recent months but the truth is that in theory, the shareholders did not object to this compensation and thus the company is not wrong. Of course, it’s a lot more complicated than we could think and there are no clear answers to this problem but the problem seems to be getting more serious with time and with indexing (investing in indexes rather than selecting a few stocks) becoming more popular, the danger is even more present.
So what could be done? It is not clear who should be acting and I do not think that the individual investors can be faulted that much. In my opinion, the fault is mainly on the index trackers as well as on legislators.
Index trackers will say that their objective is only to track indexes and they do not have or want to spend the time on going through annual reports to determine if a CEO has done a good job or not. But as shareholders, it is their responsibility to have an opinion on such matters and to express themselves.
And I also think the government should have laws that require boards and executives to act “within reason” in the best interests of their shareholders. Of course, it will never be black and white. But having an executive buy a private jet for personal reasons while it is not required for his functions should be something that the state or shareholders can go after. Of course, judgment would be necessary; things can always be a bit more complex if you look at them thoroughly.
