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Democracy gone wild

1 Apr 2014 By Rob Cox

General Electric should sell itself. If that sounds like an April Fools’ Day joke, think again. It’s a real proposal on the ballot at the industrial group’s annual meeting. Setting aside the absence of any obvious buyer for the $260 billion company, the proposition illustrates the kind of shareholder democracy gone wild that many boards, and even some regulators, would like to squelch. They have half a point.

The proposal is one of about six that investors put forward and will be up for a vote at GE’s April 23 annual meeting in Chicago. Not all are quite so extreme. One calls for senior executives to hold options for life. Another would end stock awards and bonuses. Naturally, management is opposed to each of them.

But stockholder Robert Fredrich’s proposal that GE “hire an investment bank to explore the sale of the company” is the most financially illogical. For starters, there is no buyer capable of taking such a big gulp, unless Apple, Google or Exxon Mobil suddenly decides to change strategic course.

Moreover, Fredrich offers no evidence for his view that a sale would “release significantly more value.” A breakup of the finance-engines-turbines-refrigerators conglomerate might be worth considering, but not when the market cap of the company is greater than the sum of its parts, as GE contends is the case today.

GE shareholders probably know all this and will overwhelmingly reject the measure, so no harm no foul, right? Not quite. Many public companies spend an inordinate amount of time and money battling to keep proposals like this off their ballots. GE, for instance, hired pricey law firm Gibson, Dunn & Crutcher, trying unsuccessfully to make Fredrich’s suggestion go away.

Any investor who owns at least $2,000 or 1 percent of a company’s stock for a year or more can bring a shareholder proposal, so long as it meets certain requirements. The U.S. Securities and Exchange Commission approved Fredrich’s pitch because it was designed to financially benefit all GE owners and not just him.

That, at least, distinguishes it from resolutions involving environmental, political or social issues that may not serve the interests of shareholders generally. SEC Commissioner Daniel Gallagher, speaking to the annual confab of M&A practitioners last week at Tulane University in New Orleans, argues that “it’s time we asked whether the shareholder proposal system as currently designed is a net negative for the average investor.”

Gallagher, one of two Republicans on the five-member SEC, claims it’s too easy for investors to get resolutions on company ballots. As a result, activists and corporate gadflies “hijack” elections, he says. The commissioner cited statistics showing that a third of proposals come from organized labor and a quarter from social or policy investors and religious institutions.

The upshot is a system that encourages “taking money out of the pocket of someone investing for retirement or their child’s education and using it instead to subsidize activist agendas,” according to Gallagher. The SEC’s rules, he says, should ensure that these activists do not “crowd out every-day and long-term investors” or advance causes “inconsistent with the promotion of shareholder value.”

He’s right, to a point. It is a waste of time for investors to vet proposals that have nothing to do with the stewardship of their capital. But stifling shareholder speech has consequences. Stricter limits may allow, say, GE to keep a silly measure calling for its sale off the ballot, but they could also prevent owners from voting on more intelligent notions, like splitting the chairman and chief executive roles.

The Supreme Court ruled four years ago that free speech rights apply to corporations under the Constitution, including the right to make campaign contributions to politicians that favor profit-making causes. Shareholders also deserve protection under the First Amendment – no matter how wacky they may sometimes sound.


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