Crack open any financial textbook and you’ll find the objective of every finance department is to “maximize shareholder wealth.” That is their objective, concern, and responsibility. When individual investors buy into a company, they do so under the assumption that management is looking after the best interest of the company, and in turn, their money. However, as cases such as Enron and Halliburton reveal, management is often tantalized and preoccupied by their own selfish interests, and stockholders suffer in result. Such agency problems not only raise agency costs, the money spent by companies to keep management honest, but can undervalue stock prices in the long run.
Yesterday, the SEC announced they are taking new steps at granting shareholders more power within publicly traded companies. They intend to do so by not only requiring companies to disclose more information regarding management hiring and compensation, but also by granting them more power during proxy voting. “Proxy,” in this sense, refers to when stockholders grant others the right to cast their votes when absent. As simple as it sounds, this arrangement often results in a “proxy fight” when an acquiring company convinces those voting that current management should be replaced with others better suited for the acquirer. This not only gives control to the acquiring company, but also usually allows them to do so without paying a premium. Obviously, this situation generates conflict within the business.
Yesterday’s proposal would no longer allow stockbrokers to vote on behalf of shareholders without their approval. Referring back to agency problems, these retail brokers have a tendency to vote only for candidates that are supported by the company, not necessarily in the best interest of the stockholders. In addition, these SEC proposals will require board members to disclose more information regarding their personal experience and compensation from the company. They will be required to explain to investors how their chosen compensation techniques could lead to higher risks. This would be an extraordinary feat, given that many executives are rewarded for profits made in the short-term, not necessarily for decisions that will benefit the company down the road. In relation, companies will have to disclose their stock and options awarded to management. This is a common method used in reducing agency costs. By offering management options, they are inadvertently motivated to keep the stock price up.
All proposals made by the SEC yesterday are great improvements made toward ensuring the safety and consideration of those who truly keep companies going: stockholders. After last year’s economic collapse, partly attributed to people’s ignorance about where their money goes and what it is used for, these new proposals will grant investors their lawful rights within the companies they invest in. By granting them more say during company voting, board members will be less inclined to act as puppeteers towards management, resulting in more honest and efficient business for all parties involved.