Today's guest post comes from Odysseas Papadimitriou, founder of Evolution Finance, which publishes the Wallet Blog:
After American Idol, you have two hours to cast your vote for your favorite contestant. It’s up to you to decide who stays and who goes. The board of homeowners in your community doesn’t like the tree you’ve planted in your front yard? When it’s put on the table, you can vote to keep your tree. You don’t like the way your county’s being run, get down to the polls and pick a name. Vote. It’s a democracy. As the old saying goes, if you don’t vote, you can’t complain.
Corporations are democracies, too. If you own stock, you get to vote. Only, the thing is, corporate democracy operates a little differently than you’re probably used to. In a corporate world, those stock holders who don’t vote, which is the majority, are basically handing their votes over to their brokers who almost always vote along with the board. This means that if you don’t vote, you’re not just failing to participate, you’re actually giving your vote over to someone who may not agree with you.
Let’s imagine this voting system in terms of the real world. Imagine if all the people in America who didn’t vote for their favorite American idol automatically voted for whoever Simon liked that night. Imagine if every homeowner who didn’t show up to the meeting was counted as being in support of cutting down your tree? Imagine a world where all the people who don’t vote in the Presidential elections count as voting for whichever political party is currently in office. In 2008, around 38% of Americans didn't vote. Imagine if those 38 percent of the votes had just gone automatically to whomever George W. Bush thought should be the next President. That’s how votes are counted in publicly traded companies!
Since last November, I think we’ve all been a little dumbfounded as to how corporate greed has been allowed to flourish unchecked, how our country’s businesses have become so poorly run, and why even after the fallout of these large institutions, we are still hearing signs that the leadership of these companies have no idea how to operate above board in a straight forward, ethical, manner. But given this form of “democracy,” doesn’t the answer seem obvious?
Whatever decision the board of directors makes is automatically backed by a silent majority of non-voters. The board wants to give themselves raises? No problem. The board wants to back shaky deals? No problem. Bonuses for those who ran the company into the ground? No problem. Everybody wants a golden parachute? Well, why not. Eighteen karat rip cords all around. Perhaps if former SEC Chairman Christopher Cox way back in 2007 had allowed the amendment of the brokerage voting rule, there wouldn’t be this desperate need for government bailout that daily haunts the news. That reminds me: How many shares of AIG do I get with for my taxes, and who’s voting on those shares?
The good news is that this ridiculous manner of doing business is coming to an end. According to the Wall Street Journal, the SEC seems to finally be siding with activist investors who want some control over the companies they’ve invested in. Boards of directors are now going to have to pay heed to their shareholders suggestions (and complaints). And the people that don’t vote? Well, they don’t vote…which is fine. “If you don’t vote, you can’t complain,” and all that. But at least, now, if you do vote, you don’t have to complain about all those people who don’t.
And the directors? They may have to start making their voters happy again. Here’s a tip: If you’re in danger of filing for bankruptcy, don’t give out any bonuses. Something about that just doesn’t seem to sit well with the American public.