Dodd-Frank’s stealth takeover of corporate America

Hidden in the 2,300 plus pages of the Dodd-Frank financial regulation bill is a provision that could give special interests increasing control of the management of our nation’s publicly traded corporations.  Under the false pretense of increasing shareholder input, via the proxy mechanism, Section 971 of the bill gives the Securities and Exchange Commission the power to require publicly traded companies to fund the campaign of outside nominees for the board of directors.  While that nominee would have to be proposed by a shareholder, the intent of “proxy access” is to allow unions, via their pension funds, to place their own picks on a company’s board.

While the Dodd-Frank bill claims to address the causes of the financial crisis, the proxy access provisions are not limited to financial firms, but would include any publicly traded firm.  Nowhere in the legislation or its debates do its authors explain how meddling in the corporate governance of say clothing manufacturers, pet food producers, grocery stores, or any other non-financial firm, would have prevented the financial crisis.  This provision is yet another example of where the subterfuge of “reform” is used to pursue ideological ends, along with rewarding special interests.

Historically the directors of U.S. corporations have a single duty:  to represent all shareholders.  While of course many corporate directors have failed at fulfilling that responsibility, such failures only help to illustrate the importance American Capitalism places upon said responsibility.  Most other countries do not follow our example.  For instance in much of Europe there are designated board seats reserved for such “stakeholders” as labor groups.  These outside directors have no duty to represent all shareholders, instead placing the special interests of narrow groups before the interests of shareholders, who provide the capital which makes a company’s very existence possible.  The Dodd-Frank bill is an attempt to bring U.S. companies closer to the European model, where labor and management divide the pie, often at the expense of both the shareholders and the consumers.

Although proxy access is presented as an avenue for increasing “shareholder democracy” that claim is undercut elsewhere in Dodd-Frank, where other shareholders see their representation diminished.  Section 957 increases the voting requirements for shares that are held in custody by stock brokers.  Rather than allowing shareholder to simply delegate their vote to their stock broker, Dodd-Frank requires specific voting instructions.  The intent is clearly to reduce the voting power of certain shareholders.  Proponents of this restriction will claim that brokers are simply custodians and not the actual owners of the shares.  I would ask these proponents to explain what exactly are pension funds, if not custodians?  There is no reason to treat broker-held and pension fund-held shares any differently, other than the fact that those on the Left do not like how brokers generally vote and they do like how pension funds vote.
 

Defenders of proxy access purposely ignore the governance failings at many of our country’s pension funds.  Perhaps the best example is CalPERS, California’s largest employee pension fund.  In 2004 CalPERS attempted to leverage its small holdings in Safeway to force Safeway to concede to union demands, despite the fact that such demands would likely have lowered the value of Safeway’s shares, hurting the very pensions that CalPERS is supposed to be protecting.  But then none of this should be surprising given that CalPERS board chair at the time, Sean Harrigan, was also an official with the union striking against Safeway.  Good corporate government would have required Harrigan to recuse himself from CalPERS decisions regarding Safeway.  Given the repeated willingness of pension fund boards to place their own interests before that of pensioners, it is no surprise that most union-run pension funds are grossly under-funded.

Like so much else in the Dodd-Frank bill, proxy access, being painted as having the public’s interests at heart, is really little more than an attempt to redistribute wealth from one group to another.  In this instance, that theft will be achieved by increasing the power of organized and concentrated interests over that of less concentrated and more numerous interests.  Whenever a politician talks about increasing corporate accountability, the first thing to ask is “accountability to whom?”  Dodd-Frank answers that question by increasing the influence of unions, via their control of pension stockholdings. 

Mark A. Calabria, is director of financial regulation studies at the Cato Institute. Before joining Cato in 2009, he spent seven years as a member of the senior professional staff of the U.S. Senate Committee on Banking, Housing and Urban Affairs. In that position, Calabria handled issues related to housing, mortgage finance, economics, banking and insurance for Ranking Member Richard Shelby (R-AL). Prior to his service on Capitol Hill, Calabria served as Deputy Assistant Secretary for Regulatory Affairs at the U.S. Department of Housing and Urban Development, and also held a variety of positions at Harvard University's Joint Center for Housing Studies, the National Association of Home Builders and the National Association of Realtors. Calabria has also been a Research Associate with the U.S. Census Bureau's Center for Economic Studies.  He holds a doctorate in economics from George Mason University.