Private-sector investors are so ineffective at overseeing companies that state-run funds feel the need to step in
There may have been a time when shareholders actually participated in corporate governance: they bought a percentage of the company and felt, well, “invested” in having the company perform well financially as well as (perhaps) ethically.
Those days are in the rear view mirror:
Money floods into shares based on memes, is shifted around by algorithms based on past patterns, or goes into vast passive index trackers sold on the basis of being virtually free. None have an incentive to devote resources to keeping the corporate bureaucracy in check, since day traders and hedge funds will be gone before the next CEO meeting, while passive funds can’t sell even if the CEO is thrown in prison.
Now shareholders, and by that term I mean “long term buy and hold” owners (even if only for a few years) are vastly outweighed by the casino players, jumping in and out with bets that may only last hours, days, and in the case of rapid-fire traders, minutes or even seconds.
In shorter form, there is no check or balance on today’s management, absent grotesque performance or high moral turpitude - and it shows.
Suggestions on how to correct this issue? I leave it to you:
I have been barking about that for years. I always vote against any officer of the company being on the Board, due to the obvious conflict of interest. I have reported on the many shareholder proposals to require the company to disclose who it bribes, why, and how big the bribe was, and management says that information is none of the shareholder’s business. I have posted items from the news wire of the many cases where management has gone to the SEC, to be allowed to suppress shareholder proposals, before anyone even has a chance to vote on them.
Clearly, management sees itself as God, and unaccountable to anyone. So they go on with hollowing out the companies they run, to line their own pocket.
Recently, they have gone even farther, making enforcing good governance standards a crime.
A long time ago I though a lot about “Invest like an owner.” Having been a real owner of my own companies I realized that when you buy a few hundred shares you are NOT an owner, just a shareholder. Management, Insiders, and institutional investors are the effective decision making owners. Seen in that light, our only real alternative is to sell the crap when we realize it’s crap. Of course, we could get some lawyers to sue in Delaware. What do you call it when ambulance chasing lawyers don’t charge fees unless they win the case?
Again going back to the Science of Complexity, Stock Markets are an emergent property of joint stock ownership. Stockholders are not the same as partners in a partnership who have real say in how the business is run.
It’s rather ironic to see this topic being raised in the Wall Street Journal. There was a stretch of time almost twenty years ago when the WSJ had an in-house columnist who continually beat the drum in support of the types of financial manipulations commonly used to bolster outcomes for executives at the expense of shareholders, even when the company had failed to meet stated goals.
The markets haven’t learned a thing in twenty years. (I also need to update the template of my blog to supply the meta data for the preview function used here…)
It’s pretty simple and been talked about before. Charge a quarter of penny a share to both buyer and seller. Or half a penny. Or a penny or even 5. Whatever it takes to hobble program trading. For options trades, multiply the per share fee by the number of shares in the options contract.
Send the money to the SEC for enforcement.
That fee is meaningless to anyone investing for more than a day, but it should be a death knell for the high speed traders running arbitrage and similar schemes (yes, I chose that word deliberately) based on the ability to act on information faster than anyone in the market.
That will remove a huge number of speculators and encourage a return to longer term investors who have a reason to care about good corporate governance.
You’d still have the opportunity to engage in arbitrage between markets when the price differences are sufficiently large - larger than that penny-ish a share - which will still help keep various different markets in line with each other. But there’s no good reason to need them to stay aligned down to small fractions of a cent. Within a cent or two is certainly close enough to keep the markets fair for those who are buying or selling for the actual investment.
of a small trading charge to both blow off a lot of short term speculation and algorithmic gaming, and to seriously fund SEC policing against frauds, insider trading, hacking, etc…
Is there really a problem? I only skimmed the article but I don’t recall any specific examples of a company currently being run into the ground because of inadequate corporate governance. Yeah, Elon was given a ton of stock options, but then the Model Y is the best-selling car in the world and the supercharger is now the de facto charging standard.
GameStop aside, I think the increase in market volatility is primarily because so much market wealth is tied up in Big Tech, most notably the Magnificent Seven. This is a tech driven market and tech is developing at an increasingly rapid pace. There is so much competition now for venture capital that startups can’t afford to waste money even with a deaf, dumb, and blind board. Theranos was much more the exception than the rule.
Speculators are the ones providing liquidity, the market lubricant par excellence!
Speculators play a crucial role in financial markets as they absorb extra risk and provide much-needed liquidity by buying and selling when other investors are holding. Speculation can involve any tradeable good or asset – a key difference from investing, where decisions are generally based on research and fundamental analysis, such as business performance metrics.
Without speculators the bid/ask spreads would be much larger.
Illiquid assets tend to have wider bid-ask spreads, greater volatility and, as a result, higher risk for investors.
Or go back to share pricing on the 1/8th’s of dollars. (who remembers that? I do).
Related: Jensen is not allowed to be on the Nvidia board of directors on purpose. It is written into our by-laws by him, on purpose. Yes, a corporate office should never be allowed to be on the board. It really seems simple, doesn’t it?
I expect one could find a fee schedule that is low enough to NOT choke off too much liquidity. As we all know, any free good will get abused.
d fb
(I want my phone to carry a penny or so charge for a call or msg from anyone not already on my list of entities I communicate with. I HATE that my phone is constantly jammed by scammers and salesidiots, and a little fee would solve the problem).
Enron. Lehman Brothers. Volkswagen (diesel-gate). Countrywide. AIG. You’ve heard of all those “corporate fines where nobody goes to jail”? You know, Pfizer, Purdu Pharma, Theranos, FTX. And those with the “superstar CEO” who the board couldn’t refuse, like Sears or GE. Of course there are hundreds of less well known examples if you care to look. Facebook & privacy, and, well, “security” and any number of tech titans who have been running fast and loose with user data: Equifax, T-Mobile, Home Depot, Capital One, Twitter, etc. Then there’s the bond-ratings firms that signed off on all that junk 15 years ago because “if we don’t rate it they’ll just go to one of the other ratings firms”, remember? Standard & Poors, Fitch, etc. Nobody thought “Hey, maybe we should be honest about this stuff.”?
And don’t get me started about “celebrity board members” who do nothing, have no understanding of business or the company, yet pull down big checks so the CEO can play golf with them., Pfft!
“For whatever reasons, markets now exhibit far more casino-like behavior than they did when I was young,” Buffett wrote, adding that “though the stock market is massively larger than it was in our early years, today’s active participants are neither more emotionally stable nor better taught than when I was in school.”
The Berkshire CEO noted that when the scene then “turns ugly,” and speculators lose money during a market meltdown, they shouldn’t expect a helping hand—or justice—either.
“The politicians then become enraged; the most flagrant perpetrators of misdeeds slip away, rich and unpunished; and your friend next door becomes bewildered, poorer and sometimes vengeful,” he wrote. “Money, he learns, has trumped morality.”
As pointed out here, from time to time, the USian tax code has been “reformed” to encourage financial speculation, and discourage productive endeavor. So, of course, we get more speculation, and less productive endeavor.
Sounds like you think the Board of Directors oversee the day-to-day operations of the company. That’s adorable.
My impression is that boards deal with stuff that broadly protect shareholder value, like profit margins, production costs, senior management compensation, size of dividends, and long term business strategy. I doubt most Boards deal with minutiae like how VW passes emissions tests or who Countrywide is making loans to.
Lots of companies fail or make mistakes.You seem to think inadequate supervision by the Board of Directors is the primary reason for these. Is that valid?
Want to add in edit that once malfeasance by a management is alleged, the Board does have a responsibility to act. I do agree with Goofy in his examples that the various Boards of Directors did fail their duties once the problems were uncovered.
The Board hires the CEO. Did Boeing’s Board complain about the company being hollowed out to fatten it’s short term bottom line? Nope. When they tossed the CEO that replaced McNerney, they appointed one of their own, another Welchist, as CEO…and Boeing’s build quality issues continue.
I’m not sure there ever was such a time - at least, a time when small shareholders in large, publicly traded companies with a diverse shareholder base had any meaningful role in corporate governance. Econ 101 dealt with “Theory of the Firm” problems of collective action and agency costs and aligning shareholder/management interests back when I took Econ 101…which was a very long time ago, long predating high-speed trading and ETF’s eating the shareholder ecosystem.
Plus…I’m not sure that the problems discussed in this thread are all the same problem, or at all related to to each other. High-speed traders make up a huge amount of the trades in equity markets these days, but they don’t have that big a share of the ownership of the market. Big index funds and ETF’s and other passive investment vehicles do have a big share - but even though the investors and managers are passive in their holdings, those shares still get voted. BlackRock and Fidelity - and the duopoly of ISS and Glass Lewis - very much do pay attention to issues of corporate governance and very much make themselves known to the BOD and C-suite folks (which is why Elon complains about ISS and Glass Lewis from time to time).
I mean, these things can have an effect on corporate management. If a huge portion of each company in a sector is owned by “universal investors,” who all own huge portions in every company in the sector, then the investors (and then possibly the managers) don’t care that much about whether individual firms in the sector perform well or poorly relatively to each other. Or in collecting information about which firm is likely to succeed or not. Or in having those firms compete against each other. If 90% of each company in a sector was owned by a single index fund, you end up with an effective monopoly - not by firms, but by the ownership of each firm.
But I’m not sure it’s true that less attention is being paid to the companies by the investors collectively - it’s just that the attention is being paid by the large fund asset managers and the proxy advisors on behalf of the beneficial owners, rather than individual investors.
I have commented before on the outsized pay package Jamie Dimon received a couple years ago, while JPM’s shareholder return was below industry average. The next year, Dimon’s pay was rolled back to a piddling $30M, but he kept the extra loot, regardless what shareholders thought of it.
As offered before, CEOs think they are royalty, unaccountable to anyone.
NEW YORK, May 17 (Reuters) - In an unusual rebuke for Jamie Dimon, CEO of JPMorgan Chase & Co shareholders on Tuesday clearly disapproved of the special $52.6 million stock option award directors gave him last year to stay on the job for at least five more years.
In an advisory say-on-pay referendum, only 31% of votes cast endorsed JPMorgan executive payments for 2021, according to a preliminary count announced at the company’s annual meeting.
Institutional Shareholder Services Inc and Glass Lewis & Co criticized Dimon’s options as lacking performance criteria for vesting.
I agree with you that a Board should hire good people. I am certainly not saying Boards have no responsibility. But a Board of Directors making a mistake in the performance of its duties is not the same thing as alleging it did not exercise proper oversight or was derelict in its duty.
My point is that at least some of the companies we are dealing with are started by visionary entrepreneurs pushing potentially disruptive technologies. These are typically very high risk ventures that are more likely to fail than succeed. Such companies cannot be run by committee. An investor in such companies, even a small investor like me, wants the company to be run entirely by Steve Jobs, Jeff Bezos, or Elon Musk because in these cases one is betting (and it is a gamble) on both the idea and the genius pushing that idea into the market.
If I were on the Board in the early days of Amazon I would have given Bezos a very long leash if I thought he was the only one who had the vision and will to make that company a success.
This is what happens when you open institutions up to “the masses” (which includes me). We made the presidential primary system more democratic and we end up with demagogues as candidates. We made mass media more democratic with social media and we end up with conspiracy theories and misinformation that make a mockery of free speech. We have made investing in the stock market affordable to most anyone so why should we be surprised that the market has become less rational and more volatile?
We may not like the idea of pandering to the lowest common denominator but it is a real phenomenon that inevitably occurs when you open up a system to everyone regardless of qualifications.
