It is always interesting to track the unofficial pronouncements of SEC commissioners; it gives you a sense of their fundamental thought drivers. So a couple of weeks ago Commissioner Kara Stein gave a speech at Stanford billed as “reimagining” the role of the shareholder in today’s corporation. Her analysis, in summary:
Corporations should have a relationship with shareholders she describes as “mutualism;” each is benefited, the corporation getting funded and the shareholder getting rewarded. This mutualism is reflected, by way of example, as follows:
*shareholders have been out front in advocating cybersecurity, although corporations do not recognize that cyber risk is fundamental and not just a technical IT issue;
*diverse boards perform better and there is a need for more gender diversity;
*shareholder activism is sometimes resisted by boards and, when embraced, the outreach generally is to significant institutional investors controlling about 70% of share ownership; further, a trend is growing to disenfranchise shareholders by vesting super-voting rights with insider-founders which is “inherently democratic;”
*we can benefit shareholders and corporations, mutually, through shareholder engagement and communication.
Although one might well agree with some of these separate sentiments, the totality of the commissioner’s remarks falls very far short of reimagining anything.
The battle to define the relationship between shareholder and entity is one of who directs corporate power. Modern large corporations separated ownership from control. Some theorists, today notably the present Harvard Corporate Governance Project led by Julian Bebchuk, contend that management must be globally more responsive to shareholders. Of course, one must figure out which shareholders; Stein is correct that the majority of the action is held by professional investors and funds — indeed, today’s news headlines speculate that selling stock to cover margin was a major cause of the scope of the recent market sell-off, and it wasn’t the retired retail investor from Kansas City that had to sell millions of shares to get back into formula.
The reimagining of the modern corporation is much more than admonitions to add women to boards and to protect IT assets from hacking. The reimagining requires first that you figure out who the “shareholder” is, because what is good for the retired retail investor is not decided by the same metric applied by institutions selling by algorithms. The reimagining requires making sure that the shareholders you care about dominate the board.
The best societal solution may be the maintenance of the current lack of clarity, without drawing battle lines between different kinds of investors, or between capital and management. But suggesting that shareholders and management need to bond over cybersecurity and electing women to boards is far less than a proposal to reimagine corporate goverance.