The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

Important . . . theoretically

07/23/2020

I live in a perfect world, don’t you?  Whenever you look out the window, don’t you see rainbows and lovely unicorns?  In fact, at ground-level, little girls throw pretty flowers from their little baskets and sing pleasant little songs.  It is a perfect world, indeed!

One characteristic of this perfect little world is that shareholders actually control big corporations.  Technically, yes – but actually,  no.  With hundreds of millions of shares entitled to vote, why should big business care about little old YOU?  The information given to shareholders to make their theoretical decision is written by lawyers to protect the company from other lawyers.  If you think you’re smart to understand proxy materials, you’re wrong!

As a result, actual voting gradually shifted to investment advisors, who out-sourced that tedious and important – theoretically – duty to professional proxy voting firms, who study the unreadable proxy materials and vote what they assume is in the best interests of investors.  The Securities and Exchange Commission (SEC) is now recommending greater disclosure by the professional proxy voting firms, which is fine.  After all, those firms could vote the shares for their own benefit, instead of the investors benefit.

Certainly, “sunlight is the best disinfectant” and disclosure of conflicts of interest is mandatory.  However, wouldn’t it be better for small investors to become relevant to the process?  They could double the votes for investors holding less than a thousand shares, for example.  They could make majority approval by small investors a requirement for important Board decisions, as another example.  Of course, there are many other examples.

If the SEC is not helping small investors become relevant to the proxy voting process, why are they wasting our time?

All the SEC is doing . . . is creating more billable hours for securities lawyers!

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