Do you own that company- or not?

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I have a good friend who shares dinner with me often. And, we often argue. (No, we don’t fight; there’s a vast difference.  We have different politics- and can still learn from one another.)  One of the recurring arguments is his belief that when he buys stock in a company, he actually owns a part of it.

You see, that’s the fiction. It’s one that should be truth, but, in reality (the way things work, not the way we say things work), the corporate managers have stacked the system to insure they get YOUR money with little obligation to you.  And, certainly don’t cede ownership to you one iota.

1903 stock certificate of the Baltimore and Oh...
1903 stock certificate of the Baltimore and Ohio Railroad (Photo credit: Wikipedia)

Let’s start with simple things. You “vote” your stock. You think if you decide that someone should not be on the board or that the executives are insanely overpaid, that you can change that policy. But, you see, that is totally negated by what has been termed the “business judgment rule”.

This is not a single law per se, but derives from various court decisions made over years. The rule states that corporate directors (which typically include the executives of the firm) are provided the presumption by law that they are motivated with a bona fide regard for the interests of the corporation.

Yup. You can sue them, but being the plaintiff, the burden of proof is on you to demonstate that the executives and/or board breached their fiduciary duty- which means it is good faith, loyalty, or due care.

And, since most public companies have compensation boards that poll other companies to see what they pay their executives- which sets the floor for the pay at their firm (after all, their executives have to be better), you can see the endless do-loop. (If you’ve never seen how this works, check out this post or this one.)  It feeds higher and higher pay, regardless of corporate performance.

This situation did not arise easily. No, it was after years of lobbying, effected in various state legislatures, that rendered the corporate boards and CEO impregnable- leaving those who think they own the firm with a “take it or leave it” process.

Moreover, let’s say I want to change the way a company is operating.  Imagine that I had enough money (SB- please, deliver this to my bank account soon!) to buy 10, 12, or 15% of a company’s stock. The first thing that usually happens is the company issues more stock- reducing my ownership powers dramatically. They also make it impossible for me to nominate folks to run this firm that would make the changes necessary. Ones that couple corporate performance (on a rolling four year basis) to executive pay. (I don’t believe the coupling of pay to stock price has any merit- and neither do the executives, unless the stock prices are rising.  You do notice they never take cuts when the stock price is decimated,, right? Consider James Balsillie, who recently resigned as Blackberry CEO- where his compensation never decreased as his company was going down the tubes. He is but one example.)

I could pick on Apple, too. After all, they’ve been misleading (we can’t say lying) their investors by telling them how much income tax they will have to pay- which means there are fewer dollars for dividends. Yet, those income tax “set-asides” end up accruing in their stash of overseas cash.

Yes, I know the Securities and Exchange Commission (SEC, the federal agency that oversees public corporation activity), after several years of wrangling, has finally committed to the rule that the executive pay must now be reported as a multiple of the company’s average pay. But, the SEC gave the companies a plethora of ways to compute this number, which means comparing one company to another will be tough- but it is a step in the right direction.

Unless and until we make changes in corporate governance, executive pay will keep skyrocketing and employees will be jettisoned at will. After all, you know it’s only the employees fault the company is not doing well- never the executives

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4 thoughts on “Do you own that company- or not?”

    1. Oh, Amy- it’s no fun if everyone agrees. Moreover, it is critical to be able to defend AND listen to other points of view- to insure that one’s position really has merit. I could give a slew of “for examples” on that.
      And, I wish it worked the way the fictional concept provides…It would make a big difference for corporate performance.

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