More rights for shareholders

The real capitalists need more say to prevent excess risk-taking.

A third faltering industry – insurance – is now eligible for federal bailouts, joining automakers and banks. With the US Treasury effectively running these large corporations – even to the point of firing General Motors' CEO – perhaps Washington can better understand what everyday investors have felt for a long time: Shareholders have very little say in the companies they own.

That may change soon.

Proposals to empower investors over their corporate boards and management are being weighed in Congress, key states such as Delaware, and the Securities and Exchange Commission (SEC).

Congress has already ordered public firms receiving bailout money – which now number nearly 400 – to give shareholders a say on executive compensation, notably to prevent AIG-style bonuses.

The new "say on pay" rules will make for some lively shareholder meetings this spring. One company, Amgen, has even posted its proposed pay structure on a website, inviting shareholders to comment. That's a first in US corporate transparency, although Britain and Australia have had "say on pay" rules for years.

It's difficult to look back and say whether giving investors enhanced influence over corporate boards might have curbed the risky investments that brought many financial companies to their knees, along with the economy. Perhaps they might have reduced the pay incentives that encouraged too much risk-taking.

But looking forward, a greater degree of pure capitalism – where those putting up the capital can better direct a company's future – might help rescue this great wealth-creating system.

The main problem in granting more shareholder rights lies with states. They have a perverse incentive to keep a corporation in the state and earn tax revenues by shielding their boards and management from meddling shareholders.

Delaware is the worst. Its rules protecting boards have resulted in more than half of the nation's public companies being incorporated there. Even so, with anger rising over the company rescues and lost investments, the state is moving to force corporations to include the names of a shareholder's nominees for board membership on proxy statements.

One compelling reform: States should make it easier for shareholders to decide where to incorporate their firms. This would prevent boards from shopping for states with the least shareholder rights.

The SEC, too, plans to rule next month on proposals to make it easier for shareholders to pick board members. And Congress may decide to apply the "say on pay" rule for all corporations.

As welcome as such steps may appear, they can sometimes go too far. Such reforms must not impinge too much on the flexibility that boards and management often need to adjust a company based on expert knowledge and quick timing. Just as direct democracy doesn't work for government, giving shareholders a wide range of powers might be unwieldy. Shareholders don't always possess the necessary business judgment on every issue. And US corporations must keep their international competitiveness.

For now, though, providing more influence over pay and greater ability to nominate board members is a good start to expanding shareholder rights carefully – and perhaps right the wrongs of corporations that played too fast with their investors' money.

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