Honest Enemy: April 2012

Giving Shareholders a Voice By LUCIAN BEBCHUK Staggered boards have long been a key mechanism for insulating boards of publicly traded firms from shareholders. This year, several institutional investors and a program working on their behalf have used shareholder proposals to move a large number of publicly traded firms away from such structures. Despite strong and expected criticism from the usual suspects, shareholders should welcome and support this work. The Shareholder Rights Project, a clinical program that I run at Harvard Law School, assists public pension funds and charitable organizations in improving corporate governance at publicly traded companies. During this proxy season, we represented and advised five such clients – the Illinois State Board of Investment, the Los Angeles County Employees Retirement Association, the Nathan Cummings Foundation, the North Carolina State Treasurer, and the Ohio Public Employees Retirement System – in connection with their submission of proposals for a vote at the annual meetings of more than 80 companies on the Standard & Poor’s 500-stock index. The proposals urge companies with a staggered board, which allow shareholders to replace only a few directors each year, to place all board members up for election every year. Such a move to annual elections is viewed by investors as a best practice of corporate governance. By enabling shareholders to register their views on all directors each year, annual elections make boards more accountable to shareholders. Staggered boards, also known as classified boards, certainly have their staunch supporters. As DealBook reported, the law firm Wachtell, Lipton, Rosen & Katz recently denounced the work undertaken on behalf of institutional investors by our program. Wachtell’s sharply worded memo, titled “Harvard’s Shareholder Rights Project Is Wrong,” was signed by four of the firm’s senior partners, including the founding partner and inventor of the poison pill, Martin Lipton. What particularly drew Wachtell’s ire were the results of the proposals, which Steven Davidoff called “stunning” in a recent Deal Professor column. Following active engagement, many of the companies receiving shareholder proposals entered into agreements to bring management declassification proposals that would require all directors to stand for election each year. As of today, 44 Standard & Poor’s 500 companies – over one-third of the S.&P. 500 companies that had staggered boards at the beginning of this proxy season – have entered into such agreements, and 35 companies have already disclosed management declassification proposals made in accordance with such agreements. Wachtell, the go-to legal counsel for incumbent directors and managers seeking to insulate themselves from removal, has been a strong advocate for rules and practices that facilitate such entrenchment. It is thus unsurprising that Wachtell and some of its clients may have a negative view of the large-scale move away from staggered boards taking place in corporate America. This change, however, serves the best interests of shareholders. Investors’ support for annual elections is consistent with a significant body of empirical evidence. A study by Alma Cohen and myself documented that staggered boards are associated with lower firm valuation, and this finding was subsequently confirmed in a study by Prof. Olubunmi Faleye of Northeastern University and another study by Michael Frakes of Cornell. Incumbents opposing declassification proposals often cite a study reporting that targets with staggered boards capture a larger slice of the surplus created by acquisitions, but even this study confirms that, over all, staggered boards are associated with lower firm value. Furthermore, studies find that firms with staggered boards are associated with lower returns to shareholders in the event of an unsolicited offer, are more likely to make acquisitions that decrease shareholder value, tend to provide executives with pay that is less correlated with performance, and exhibit lower association between chief executive replacement and performance. Indeed, having a staggered board is a significant element of two “poor governance” indexes that have been used in hundreds of studies by financial economists: the G-Index and the E-Index. Despite such studies, Wachtell claims that “there is no persuasive evidence” on the value of annual elections. Wachtell does not back up its claim with any empirical evidence or analysis, but merely asserts that “it is our experience that the absence of a staggered board… is harmful to companies that focus on long-term value creation.” Investors, however, have formed a decidedly different view of the value of moving away from staggered boards: during the last two proxy seasons, shareholder proposals to declassify at S.&P. 500 companies received an average level of support exceeding 75 percent of votes cast. In criticizing the Shareholder Rights Project’s work, Wachtell quotes the statement of Chancellor Leo Strine of the Delaware Chancery Court that “stockholders who propose long-lasting corporate governance changes should have a substantial, long-term interest that gives them a motive to want the corporation to prosper.” However, Wachtell overlooks that the five institutional investors represented by our program are exactly the type of long-term shareholders that Chancellor Strine views as desirable proponents. Although Wachtell professes general support for a “robust debate” on staggered boards, the firm would prefer to have fewer shareholder proposals on the subject. Yet shareholder proposals are the very mechanisms that the securities laws (and, in particular, S.E.C. Rule 14a-8, known as the “town hall meeting” rule) provide for conducting debate at publicly traded firms. Both a shareholder who puts forth a proposal to eliminate a staggered board and the board members themselves make their case in the proxy materials sent to voting shareholders, who then cast votes to indicate which position they support. In recent years, supporters of staggered boards have been on the losing side at an overwhelming majority of votes on shareholder proposals urging board declassification. Two proposals submitted by our program’s clients recently passed with large majorities. Additional such proposals are expected to go to a vote this spring at more than 30 other companies, and defenders of staggered boards are expected to continue losing such votes. Preferring therefore to discourage such proposals, Wachtell also claims that it is “inappropriate” for a law school’s clinical program to assist clients that are not “impoverished or underprivileged.” However, as the Columbia law professor Jeffrey Gordon explained in a response to this claim, clinics that advance the contested agendas of clients who are neither impoverished nor underprivileged are (for good educational reasons) are standard at law schools nationwide. These clinics do not represent the views of the law schools in which they operate but only those of the clients and, in some cases, of faculty and students who choose to work in a particular clinic. Rather than seeking to discourage our program from representing institutional investors submitting shareholder proposals, Wachtell should focus on engaging in a substantive debate about the merits of staggered boards. I welcome such a debate. In the meantime, shareholders should continue to be given the chance to vote on whether to eliminate staggered boards at companies – and boards should take those preferences into account. Doing so would serve the long-term interests of shareholders and the economy. Lucian Bebchuk, a professor of law, economics, and finance at Harvard Law School, serves as the director of the Harvard Law School Shareholder Rights Project. Any views expressed by the project or its representatives should be attributed solely to it and not to Harvard Law School or Harvard University. Can There Be “Good” Corporations? By Marjorie Kelly Our economic system is profoundly broken. To anyone paying attention, that much is clear. But what’s less clear is this: Our approach to fixing the economy is broken as well. The whole notion of “fighting corporate power” arises from an underlying belief that there is no alternative to capitalism as we know it. Starting from the insight that capitalism has become virtually a universal economy, we conclude that our best hope is to regulate corporations and work for countervailing powers like unions. But then we’ve lost before we begin. We’ve defined ourselves as marginal and powerless. There is another approach. It’s bubbling up all around us in the form of economic alternatives like cooperatives, employee-owned firms, social enterprises, and community land trusts. We don’t recognize that these represent a coherent, workable alternative to capitalism, for two reasons. First, we haven’t acknowledged what unites them. Second, we don’t have a name for this seemingly disparate batch of alternatives. Ownership unites them. That’s the reason that these different models represent change that goes deep. It’s the reason this change is fundamental, enduring, and real. This transformation doesn’t depend on the legislative or presidential whims of a particular hour, but is instead a permanent shift in the underlying architecture of economic power. The alternatives emerging in our time represent an unsung ownership revolution. This revolution is about broadening economic power from the few to the many and redefining the purpose of economic activity. The aim isn’t to endlessly grow gross domestic product or to create wealth for a financial elite, but to generate the conditions for the flourishing of life. Here we confront the second consideration—the need for a name. We can call this new economy the generative economy. The word generative is from the Greek ge; it’s the same root form found in the word Gaia and means “the carrying on of life.” The generative economy is one whose fundamental architecture tends to create beneficial rather than harmful outcomes. It has a built-in tendency to be socially fair and ecologically sustainable. Options like worker ownership and cooperatives not only spread wealth but ensure that owners are local, hence more likely to care about local ecological impacts. And they allow enterprises to reject the growth imperative endangering the biosphere. Generative enterprise does not answer to the demands of the finance system, which locks publicly traded companies into a growth path in order to keep stock prices inflated. In writing the book, Owning Our Future: The Emerging Ownership Revolution, I’ve been traveling around and visiting places where this new economy is bubbling up. Here’s some of the good news I have to share: Generative ownership isn’t just about small, local, founder-run companies. It’s possible to keep the soul of these companies alive even at large scale, and long after the founder is gone. Founded on Fairness Consider, for example, the John Lewis Partnership (JLP) in England. It’s the largest department store chain in the country, with 35 department stores and 272 Waitrose grocery stores. Revenues of this company are more than $11.5 billion. If placed into the Fortune 500 list of the largest U.S. corporations, JLP would settle in around 212—a little higher than Starbucks. It’s 100 percent owned by its employees. The John Lewis Partnership is built around the value of fairness. The founder, John Spedan Lewis, who created its democratic structure about a century ago, believed that traditional ownership was unfair because dividends paid to shareholders for doing nothing were obscene when workers barely earned subsistence wages. The stated purpose of the company he created is to serve the happiness of its employees, or, as the company calls them, partners. To see if this firm was real, I flew to London and visited a few of its stores—including a Waitrose grocery store. I met a butcher at the meat counter wearing a white linen fedora, a crisp white shirt beneath a green-striped apron, and a bow tie. The hats were required, he explained. But wearing a tie every day was his choice. “I just feel more dressed,” he told me. People notice touches like that at Waitrose, where pay raises are given for performance, including such things as “being a tidy person,” John said. He told me about his sister, Carol, who also worked at Waitrose and had just been diagnosed with cancer. “They’ve been really good,” he said, referring to the company. “There’s a budget set aside for people like this. She’s been off for three months, and they’re holding her job.” When employees at Waitrose and other JLP stores face a family emergency, they can seek a grant or loan from the Committee for Financial Assistance. That committee, composed of and elected by employees, controls the special budget John referred to and makes decisions outside the chain of management. Help from that fund—plus the commitment to hold Carol’s job—took “the money side of worries away,” John said. I also visited the company’s Peter Jones department store, entering through an arched doorway with the legend inscribed in stone, “Here is Partnership on the scale of modern industry.” There I encountered a mid-level manager named Harry Goonewardene, who served on the Partnership Council, an elected body of employees that works alongside the board of directors. “How did you get on the council?” I asked him. “Did you campaign?” “Very much so,” he said. “I stood at the door and grabbed people, told them, ‘Hi, this is who I am.’” He carried himself as a city councilmember might, calmly, with an air of dignity that was almost arresting. He was impeccably dressed in a dark suit and had dark olive skin—he is from Sri Lanka, I was later told. He lacked that harried, pinched sense one often sees among floor managers at other retailers. A meeting of the Partnership Council would be held soon, he told me, during which an adjustment to the pension scheme would be discussed. Each year, the company contributes to pension accounts a sum not far below employees’ annual pay; employees aren’t required to contribute anything. However, they are not eligible until they have completed three years of work, and people were concerned about that. “A committee has been looking at this, and we’ll take it back to constituents and present a plan,” he said. By “constituents,” he meant the workers. John and Harry are among the 76,500 employee-owners of the John Lewis Partnership. If the ultimate perquisite of being an owner is the right to pocket some of the profit left after the bills are paid, then these employees are genuine owners. Each year, after the firm sets aside a portion of profits for reinvestment in the business, the remainder—generally between 40 and 60 percent of profit—is distributed to employees. One clerk named Emma told me her recent bonus was 2,000 pounds [U.S. $3,264]. “I spent some on a holiday in the Canary Islands,” she told me. “It was my first holiday in four years.” Every employee at JLP, from shop clerk to the chairman, gets a bonus representing the same percentage of individual pay. As one manager told me, “In the worst year, it’s 8 percent, in the best year, 24 percent” of salary. Last year, the annual figure was announced with fanfare on the floor of the company’s store on Oxford Street, where a partner held up a poster reading “18%,” and employees clapped and cheered. That bonus amounted to about nine weeks pay. Here we begin to see what is revolutionary about the John Lewis Partnership. Employees in this firm are not a countervailing power. They’re not legally outside the firm, negotiating with it. They are the firm. From shareholders to stakeholders This concept represents a kind of revolution akin to the shift from monarchy to democracy. In the American Revolution, the founding generation didn’t attempt to regulate or restrain monarchy. They created a new source of political power and sovereignty that they controlled themselves. The revolution they began is one that we are in a position to finish today. That previous generation democratized the political aspect of sovereignty. But our politics and economy are so intertwined that imbalances in wealth and ownership have eroded our political democracy. To fix this, we need to democratize the economic aspect of sovereignty. Today the ruling oligarch in our economy is capital. Only capital has the right to vote inside most companies, and only capital has a claim on profits. Serving capital—maximizing returns for absentee shareholders—is the goal of publicly traded companies. In the generative economy, ownership is rooted instead in the hands of stakeholders connected to the life of the enterprise. In some cases, these are employees. They can also be community members, as with municipally owned electric plants and wind installations. In the case of credit unions, the depositors are the owners. With a farmer-owned cooperative like Organic Valley—a Wisconsin firm with more than $700 million in revenue—the owners are the suppliers, the people who produce the organic milk, cheese, and eggs that the company distributes. While the purpose of JLP is to serve employee happiness, the purpose of Organic Valley is to save the family farm. Both JLP and Organic Valley share certain ownership design patterns: a combination of rooted ownership and a mission that is not about maximizing profits but serving the needs of life. Protecting and enhancing the biosphere is integral to Organic Valley’s operations, since it deals only in organic products. The company helps its new farmers through the rigorous process of going organic, which means company growth translates into wider restoration of soils and watersheds. There are many other benefits the company produces. Farmers benefit from healthy income. Employees benefit from stable jobs and rewarding work. Customers benefit from chemical-free food. Investors in the firm’s preferred stock benefit from dependable rates of return. Farming communities benefit from the return of vitality that flows from farmers’ prosperity. Through enterprises like these, we can begin to grasp the principles that we could use to create a generative economy: § 1. There is an alternative to capitalism. This is the heresy that the keepers of the temple do not wish us to utter. It is possible to organize a large, sophisticated, modern economy that tends toward fair and just outcomes, benefits the many rather than the few, and enables an enduring human presence on a flourishing Earth. § 2. Getting there is not only about regulation but about emergence. As organizational change theorist Margaret Wheatley writes, “emergence” refers to what happens when local actions spring up and connect through networks. Without warning, emergent phenomena can occur, such as the rise of the organic food movement. Such movements rely not on central leadership but on shared vision. § 3. The generative economy is not a legal exercise but the embodiment of an emerging value system. Companies in the generative economy are built around values; the John Lewis Partnership’s core value is fairness, while Organic Valley’s core values are sustainability and community. § 4. Generative values become enduring through the social architecture of ownership. The generative economy is built on a foundation of stakeholder ownership designed to generate and preserve real wealth—resources held and shared by our communities and the ecosystems we live in. These enterprises don’t have absentee ownership shares trading in a casino economy, but ownership held in human hands. Today’s major corporations may seem eternal. But as economist Joseph Schumpeter observed, creative destruction is ever present in capitalism. In industrialized nations, an estimated 15 percent of jobs are destroyed every year, and new jobs replace them. It’s the same with companies. Hypothetically, a new economy comes into existence every seven years. In the long run, battling the dinosaurs of today may be less important than getting the next economy into the right kinds of ownership. We can’t get where we need to go by starting with corporations and asking how to restrain them, regulate them, or rein them in. We need to start with life, with human life and the life of the planet, and ask: How do we generate the conditions for life’s flourishing? Will we continue to rely on ownership architectures organized around growth and maximum income for the few? Or can we shift to new ownership models organized around keeping this planet and all its inhabitants thriving? Our greatest challenge lies in the realm of imagination and ideas. Imagine, for example, if the energy aroused by Occupy Wall Street were channeled into achievable strategies that supported ownership alternatives. Such strategies could include the Move Your Money campaign to shift bank deposits to cooperative and community banks or a push for major legislation to advance employee ownership (an alternative favored by both left and right). Imagine if campaigns like these were unified as a single movement for a generative economy. We might create an unstoppable force—a movement less about regulating corporations as they are and more about building living enterprises as we want them to be. The European Stabilization Mechanism, Or How Goldman Sachs Captured Europe By Ellen Brown Global Research, April 19, 2012 Web of Debt The Goldman Sachs coup that failed in America has nearly succeeded in Europe—a permanent, irrevocable, unchallengeable bailout for the banks underwritten by the taxpayers. In September 2008, Henry Paulson, former CEO of Goldman Sachs, managed to extort a $700 billion bank bailout from Congress. But to pull it off, he had to fall on his knees and threaten the collapse of the entire global financial system and the imposition of martial law; and the bailout was a one-time affair. Paulson’s plea for a permanent bailout fund—the Troubled Asset Relief Program or TARP—was opposed by Congress and ultimately rejected. By December 2011, European Central Bank president Mario Draghi, former vice president of Goldman Sachs Europe, was able to approve a 500 billion Euro bailout for European banks without asking anyone’s permission. And in January 2012, a permanent rescue funding program called the European Stability Mechanism (ESM) was passed in the dead of night with barely even a mention in the press. The ESM imposes an open-ended debt on EU member governments, putting taxpayers on the hook for whatever the ESM’s Eurocrat overseers demand. The bankers’ coup has triumphed in Europe seemingly without a fight. The ESM is cheered by Eurozone governments, their creditors, and “the market” alike, because it means investors will keep buying sovereign debt. All is sacrificed to the demands of the creditors, because where else can the money be had to float the crippling debts of the Eurozone governments? There is another alternative to debt slavery to the banks. But first, a closer look at the nefarious underbelly of the ESM and Goldman’s silent takeover of the ECB . . . . The Dark Side of the ESM The ESM is a permanent rescue facility slated to replace the temporary European Financial Stability Facility and European Financial Stabilization Mechanism as soon as Member States representing 90% of the capital commitments have ratified it, something that is expected to happen in July 2012. A December 2011 youtube video titled “The shocking truth of the pending EU collapse!”, originally posted in German, gives such a revealing look at the ESM that it is worth quoting here at length. It states: The EU is planning a new treaty called the European Stability Mechanism, or ESM: a treaty of debt. . . . The authorized capital stock shall be 700 billion euros. Question: why 700 billion? [Probable answer: it simply mimicked the $700 billion the U.S. Congress bought into in 2008.] . . . . [Article 9]: “. . . ESM Members hereby irrevocably and unconditionally undertake to pay on demand any capital call made on them . . . within seven days of receipt of such demand.” . . . If the ESM needs money, we have seven days to pay. . . . But what does “irrevocably and unconditionally” mean? What if we have a new parliament, one that does not want to transfer money to the ESM? . . . . [Article 10]: “The Board of Governors may decide to change the authorized capital and amend Article 8 ... accordingly.” Question: . . . 700 billion is just the beginning? The ESM can stock up the fund as much as it wants to, any time it wants to? And we would then be required under Article 9 to irrevocably and unconditionally pay up? [Article 27, lines 2-3]: “The ESM, its property, funding, and assets . . . shall enjoy immunity from every form of judicial process . . . .” Question: So the ESM program can sue us, but we can’t challenge it in court? [Article 27, line 4]: “The property, funding and assets of the ESM shall . . . be immune from search, requisition, confiscation, expropriation, or any other form of seizure, taking or foreclosure by executive, judicial, administrative or legislative action.” Question: . . . [T]his means that neither our governments, nor our legislatures, nor any of our democratic laws have any effect on the ESM organization? That’s a pretty powerful treaty! [Article 30]: “Governors, alternate Governors, Directors, alternate Directors, the Managing Director and staff members shall be immune from legal process with respect to acts performed by them . . . and shall enjoy inviolability in respect of their official papers and documents.” Question: So anyone involved in the ESM is off the hook? They can’t be held accountable for anything? . . . The treaty establishes a new intergovernmental organization to which we are required to transfer unlimited assets within seven days if it so requests, an organization that can sue us but is immune from all forms of prosecution and whose managers enjoy the same immunity. There are no independent reviewers and no existing laws apply? Governments cannot take action against it? Europe’s national budgets in the hands of one single unelected intergovernmental organization? Is that the future of Europe? Is that the new EU – a Europe devoid of sovereign democracies? The Goldman Squid Captures the ECB Last November, without fanfare and barely noticed in the press, former Goldman exec Mario Draghi replaced Jean-Claude Trichet as head of the ECB. Draghi wasted no time doing for the banks what the ECB has refused to do for its member governments—lavish money on them at very cheap rates. French blogger Simon Thorpe reports: On the 21st of December, the ECB “lent” 489 billion euros to European Banks at the extremely generous rate of just 1% over 3 years. I say “lent”, but in reality, they just ran the printing presses. The ECB doesn’t have the money to lend. It’s Quantitative Easing again. The money was gobbled up virtually instantaneously by a total of 523 banks. It’s complete madness. The ECB hopes that the banks will do something useful with it – like lending the money to the Greeks, who are currently paying 18% to the bond markets to get money. But there are absolutely no strings attached. If the banks decide to pay bonuses with the money, that’s fine. Or they might just shift all the money to tax havens. At 18% interest, debt doubles in just four years. It is this onerous interest burden, not the debt itself, that is crippling Greece and other debtor nations. Thorpe proposes the obvious solution: Why not lend the money to the Greek government directly? Or to the Portuguese government, currently having to borrow money at 11.9%? Or the Hungarian government, currently paying 8.53%. Or the Irish government, currently paying 8.51%? Or the Italian government, who are having to pay 7.06%? The stock objection to that alternative is that Article 123 of the Lisbon Treaty prevents the ECB from lending to governments. But Thorpe reasons: My understanding is that Article 123 is there to prevent elected governments from abusing Central Banks by ordering them to print money to finance excessive spending. That, we are told, is why the ECB has to be independent from governments. OK. But what we have now is a million times worse. The ECB is now completely in the hands of the banking sector. “We want half a billion of really cheap money!!” they say. OK, no problem. Mario is here to fix that. And no need to consult anyone. By the time the ECB makes the announcement, the money has already disappeared. At least if the ECB was working under the supervision of elected governments, we would have some influence when we elect those governments. But the bunch that now has their grubby hands on the instruments of power are now totally out of control. Goldman Sachs and the financial technocrats have taken over the European ship. Democracy has gone out the window, all in the name of keeping the central bank independent from the “abuses” of government. Yet the government is the people—or it should be. A democratically elected government represents the people. Europeans are being hoodwinked into relinquishing their cherished democracy to a rogue band of financial pirates, and the rest of the world is not far behind. Rather than ratifying the draconian ESM treaty, Europeans would be better advised to reverse article 123 of the Lisbon treaty. Then the ECB could issue credit directly to its member governments. Alternatively, Eurozone governments could re-establish their economic sovereignty by reviving their publicly-owned central banks and using them to issue the credit of the nation for the benefit of the nation, effectively interest-free. This is not a new idea but has been used historically to very good effect, e.g. in Australia through the Commonwealth Bank of Australia and in Canada through the Bank of Canada. Today the issuance of money and credit has become the private right of vampire rentiers, who are using it to squeeze the lifeblood out of economies. This right needs to be returned to sovereign governments. Credit should be a public utility, dispensed and managed for the benefit of the people. To add your signature to a letter to parliamentarians blocking ratification of the ESM, click here. Ellen Brown is an attorney and president of the Public Banking Institute, http://PublicBankingInstitute.org. In Web of Debt, her latest of eleven books, she shows how a private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Her websites arehttp://WebofDebt.com and http://EllenBrown.com.