July 21, 2010
Dodd-Frank Forum: Populism as double-edged sword
Posted by Usha Rodrigues

Erik asked me to answer my own question: Are shareholders the problem or the solution?  Here's my stab at it.   I enjoyed Renee's question, What's the big idea behind Dodd-Frank?  Christine's makes a good case for Bernie Madoff as the animating principle behind some sections of the Act.  I'd argue "Shareholders to the rescue" is the big idea behind kitchen-sink Subtitle E of Title IX: Accountability and Executive Compensation.  Proxy access, say-on-pay, and even disclosure requirements are about keeping the feds from telling corporations what to do substantively and just giving shareholders a chance--a chance to vote, a chance to know more about what corporations are doing.  Brandeis' spirit is alive and well, at least in this subtitle.

But, as I've been thinking about in response to thoughtful and persistent questions from Vice Chancellor Strine, if the immediate shareholders of a corporation (mutual funds, hedge funds) are in it for the short-term, why expect them to care about the long-term health of corporations or act in their long-term interests?  The "corporations are bad because they serve greedy shareholders" story (see BP) resonates deeply with the same populist sentiment behind Section 953's mandated disclosure of the ratio of CEO's pay to median employee pay. But the stories are fundamentally contradictory: one allies manager and shareholder together against the rest of us, and the other pits manager against investor. 

Which is right?  A greedy, myopic shareholder might well want a greedy, short-termist CEO at the helm of her corporation, as long as their interests are aligned via pay for performance.  On the other hand, I'm mindful that proxy-access opponents, in particular, have often wrapped themselves in a mantle of virtuous long-termism that by another name smells like management entrenchment ("oh, those myopic shareholders, no understanding of delayed gratification, always in it for the quick buck!  Why can't they leave me alone?  Will I miss my 3:00 tee-time?"). 

Are shareholders the problem or the solution?  I'm still mulling.  But it's hard to see how they can be both,and that's what the populism behind financial reform seems to want them to be.

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