Thursday, September 24, 2009

An interview with Michael Moore

His new documentary about the financial crisis is called Capitalism: A Love Story. It comes out October 2nd.

As a free market capitalist, I don't agree with the views he expresses in this interview (and probably the movie), but I'm generally a fan of his works. He's got a good sense of humor.

Note: Despite Poppy Harlow's claim in the interview, in practice shareholders have very little say in hiring and firing boards of directors and CEOs.

When shareholders don't vote, those votes are not discarded. Instead, usually those votes are automatically cast in favor of re-electing directors. Furthermore, many companies have plurality voting rules, which means that even if a director gets less than 50% of shareholder votes, they still win if they get more votes than their nearest competitor. Since they have no competitor, they automatically win re-election under plurality voting rules.

As for CEOs, they usually have one seat on the board of directors. Since the board of directors fires the CEO, the CEO already has one vote cast in his favor. Therefore, it usually takes a supermajority of the other directors to fire a CEO.

Shareholder rights is an area that definitely needs reform, but most congressmen are clueless. They'd rather spend time dictating executive pay.

Update: At least one reader appears not to have understood the paragraph I have now highlighted in red above. Shareholder elections do not work the way most people think they do. The way votes of apathetic, nonvoting shareholders are counted makes the math daunting for those shareholders who actually do care. See the comments for my second attempt at explaining it.

Update #2: It appears that the shareholder voting system I was complaining about will end on January 1, 2010. Hurray! See the comments for details.


  1. "Note: Despite Poppy Harlow's claim in the interview, in practice shareholders have very little say in hiring and firing boards of directors and CEOs."

    Thats a little dubious James. Ive served as parlimentarian at about 3 dozen shareholder meetings over the years. There is no other mechanism by which directors are chosen - none...

    Now, it is true that in very large companies, with millions of shareholders, a small minority controls - but thats because the overwhelming majority of shareholders choose not to learn anything about the board of directors or other candidates for the board.

    Think about it - how many times have you gotten a shareholder prospectus and proxy by mail and simply pitched it out? How many times have you actually gone to a shareholder meeting to dissent or approve of the conduct of a company?

    I assume the answer is, you havent ever. You like all of us (myself included) choose not to get informed. You, like all of us, simply "vote with our feet", meaning that if you dont like what the directors (or company) is doing, you sell the stock!

    By contrast, if you were one of the small minority that had a few million invested in this company, my gut tells me you would do what they do. My gut is you would actually attend meetings, nominate new directors and so forth.

    In the end, thats really what it comes down to. We have the power to get involved, but for a few hundred bucks interest, we choose not to. Instead we vote by selling or buying via the mechanism of publicly traded shares. Larger investors do choose to get involved simply because they have so much money at stake.

    Sorry, but this issue makes me bristle. There is this image of companies that they are this large, souless mechanistic being, out to screw mom and pop public. I had it to before I started drafting bills on corporate reform. Yet once I saw how the safeguards were in place but simply not used by everyday shareholders who simply dont care enough to get involved. There is no reform mechanism I know of which can compel people to care.

  2. Shorter Anon 9:10:

    I agree with James "in practice".


  3. Anon 9:10,

    You don't seem to understand what I said in the later paragraphs. Voting for boards of directors is not at all like voting for President of the U.S. or Congress.

    Here are the differences, which I already stated in the blog post:

    1) In a presidential election, the are two candidates, and you vote for the candidate you prefer. In a shareholder election, there is ONE candidate for each board seat. You vote yes or no.

    2) In a presidential election, people who don't vote don't have their vote counted. In a shareholder election, people who don't vote DO have their vote counted... IN FAVOR of the candidate. (This means that a supermajority of "no" votes cast is required just to get a simple majority of total "no" votes. For example, if one third of shares are not voted, that entire one third gets cast IN FAVOR of the candidate. Of the remaining shares, at least 75% would have to be "no" votes in order to defeat a candidate. The math is 2/3 x 3/4 = 1/2)

    3) If the company has a plurality voting system, getting 51% of "no" votes is still not enough to defeat a candidate. As long as that candidate has more "yes" votes than his non-existent competition, then he wins the shareholder election.

    Of course, since you've served as parliamentarian at about three dozen shareholder meetings over the years, you know all this, right?

  4. James far be it from me to get in the way of a fight between you and anon 9:10, but your contention that a non vote is not discarded but automatically in favor of a board of directors seems a bit unusual.

    Do you have any source of authority you can show us on the subject?

  5. Do you have any source of authority you can show us on the subject?

    Yes James - I am curious about this too. Me thinks you are making a major mistake of not distinguishing between discarded votes (not subject to proxy) and votes submitted to constitute a quorum, but abstaining at the actual meeting.

    Still, I will refrain from judgment until I know what is the basis for you saying what you did about votes not being discared and automatically in favor of re-election.

  6. Jeremy,

    Thank you for prompting me to look this up. I have just learned that, thanks to the SEC, the practice I was complaining about is set to end on January 1, 2010.

    This practice is derived from the fact that most stock is held by brokers, for their clients, in "street name". That's just a shorthand way of saying that company XYZ does not know that you are a shareholder. Instead, they view your broker as the shareholder. When you get your proxy voting ballot from your broker, you have the opportunity to tell your broker how to vote your shares. If you don't tell your broker how to vote, your broker can decide for you. Brokers almost always vote in accordance with the board of directors' recommendations.

    An easy way to tell if your shares are held in street name is whether you possess the actual share certificates. People who don't possess the share certificates have their shares held in street name. (People who do possess the share certificates are known by the company to be shareholders, but they have the hassle and expense of storing their shares in a safe deposit box or some other safe place.)

    I should point out that my example of 1/3 of shares being automatically cast according to board of directors' recommendations overestimated the actual numbers. According to Forbes, 16.5% of shares end up being automatically cast by brokers. Assuming that all brokers vote in accordance with the board of directors' recommendations, that means that a 60% supermajority of active shareholder votes would be required to get an overall 50% vote in opposition to the board. (The math is 83.5% x 60% = 50.1%)

    Here's an article from Forbes magazine about the existing rule and the upcoming rule change:

    Whether you were aware of it or not, that proxy card you got in the mail from the company you held stock wasn't just something to toss away. In fact, if you threw it out because you had no interest in voting for a board or an issue you knew nothing about, a broker voted for you. (Read the fine print; the broker could do that). In January, that will no longer be the case and you will have the power to change a board of directors if you so choose to exercise that right, or you can throw away the proxy card and know that no one was able to vote with that card.

    On July 1, the Securities and Exchange Commission approved an amendment to a New York Stock Exchange rule that will prohibit brokers who hold shares for their clients to vote in uncontested elections without getting instructions from their client. How did this practice ever come to be? Well, 85% of all stocks in U.S. companies are housed electronically and brokerages hold onto stocks for their clients in "street name," explains Bill Singer, shareholder at Stark & Stark law firm. The stockholder could instruct the broker about how to vote but if they didn't do so, the broker can vote however he or she chooses, which is usually along the lines of the brokerage firm's management, therefore continuing the Wall Street "if you scratch my back, I'll scratch yours" mentality. With the SEC's amendment, brokers will no longer be able to do this starting Jan. 1.

    Broker votes made up 16.5% of all votes at shareholder meetings last year, according to Broadridge Financial Solutions. These brokers are part of the same firms that take these companies public with initial public offerings, help with their mergers and acquisitions and perform secondary offerings, Singer says. Though brokers are supposed to act in the best interest of their customers, there is an inherent conflict of interest. "The broker is in the pocket of the management of the public company," Singer says.

  7. Here's a publication called "Corporate Board Member" discussing broker discretionary voting, and the upcoming rule change:

    The election of directors, once pretty much a breeze for anyone the nominating committee chose to put on the ballot, has become a lot less certain. Not only has plurality voting given way to majority voting at more than two-thirds of the Standard & Poor’s 500 companies, but management has lost its ace in the hole, the uninstructed broker vote. Until now, brokerage firms holding shares on behalf of their retail clients were able to vote those shares as they liked if the investors didn’t instruct them otherwise on which nominees to support, which many didn’t.

    In July the Securities and Exchange Commission approved the New York Stock Exchange’s proposed amendment to its Rule 452, which would declare uncontested director elections nonroutine events at both NYSE and NASDAQ companies. And that, notes Larry Sonsini of Wilson Sonsini Goodrich & Rosati in Palo Alto, California, chairman of the NYSE’s Proxy Working Group, which has been reviewing the entire proxy-voting process, would effectively exclude broker votes from the election tally because “the election of directors is not a routine matter.”

    As long as directors were elected by plurality, the broker vote hardly mattered. But “in the light of majority voting, not every election is a foregone conclusion,” says attorney Claudia Allen, a partner at Neal Gerber & Eisenberg in Chicago and chair of the firm’s corporate practice group. That’s because the volume of votes cast by brokers customarily accounts for nearly 20% of the total, according to Broadridge Financial Solutions, a proxy-processing firm. In fact, the percentage of individual shareholders who don’t vote their shares after receiving proxy materials from their brokers is even higher, about 66%. And brokers holding those shares almost always vote heavily in support of management, the board, and their board nominees.

    Some board elections would have had dramatically different outcomes if the new rule had been in effect during the 2009 proxy season. Consider Citigroup, which elects its directors by majority. The American Federation of State, County and Municipal Employees urged shareholders to vote against two members of the audit and risk-management committee who were up for reelection— C. Michael Armstrong, 70, former chairman and CEO of AT&T, and MIT professor John Deutch, 71—arguing that they had failed to understand the risks the bank was taking in its subprime-mortgages and derivatives businesses. The two were handily reelected, but only with the help of the 1,732,444,835 broker votes each received. Take away those votes and neither got a majority: Armstrong was opposed by 54.8% of the shareholders who voted, and Deutch by 51.2%. In other words, neither would have been elected. ...

    The change in Rule 452 means that shareholder activists will have much more influence on director elections.