Facebook governance It is not always easy to think clearly about the mechanisms of corporate democracy. So for instance at lots of companies the chief executive officer is also the chairman of the board of directors. There are good abstract reasons for disliking this (the board is the CEO's boss and should not report to the CEO, etc.), and in some cases there may be even better specific reasons for disliking it (the CEO is feckless and needs adult supervision, etc.). So what often happens is that shareholders submit a proposal asking the board to have an independent chair. The way this works is that the shareholders send the proposal to the company, and the company includes it in its proxy statement, and the shareholders get to vote on it at the annual meeting. The proposal's wording will be something like "Resolved: Shareholders request the Board of Directors adopt as policy, and amend the bylaws as necessary, to require henceforth that the Chair of the Board of Directors, whenever possible, be an independent member of the Board." It is phrased as a request to the board, and it is non-binding. The board will generally ask shareholders to vote against the proposal, because, after all, the board is chaired by the CEO and he doesn't want to give up that seat. If the proposal gets 5% of the votes, then most people will take that as conclusive evidence that the board doesn't need an independent chair: The board is happy, the CEO/chairman is happy, the investors are happy, it's fine. If the proposal gets 51% of the votes, then that's a bad sign; that tells you that shareholders want an independent board chair. The same is true if the proposal gets 60%, or 90%, of the votes. So … then what? Like let's say that the proposal gets 60% of the votes. Then the board, which told shareholders that it opposed the proposal and doesn't want to do it, will meet to decide whether or not to do it. The board has new information now—that a majority of shareholders want an independent chair—but for the most part the reasons that led it to oppose the proposal are still true. So the board can just say "thanks for your input, we appreciate the request, we've looked into it, and we're not going to change anything." Then what? What can the shareholders do about it? There is not a straightforward answer, not a practical way to escalate from "propose and vote for a nonbinding request to the board for an independent chair" to "propose and vote for a binding rule change requiring an independent board chair."[1] The shareholders can't sue to force the board to implement the nonbinding proposal.[2] They can vote against the board on other things it asks them to approve—uncontested director elections, executive compensation—as punishment, but all of those things are also essentially advisory, so the board can ignore them too. There are basically three useful answers. One is: The shareholders can sell their stock in disgust, which will drive down the stock price and reduce the value of the directors' and executives' own holdings. This is an imperfect mechanism: It doesn't work for indexed investors, for one thing, and it might not work at all if the business is otherwise good. You might be dissatisfied with a company's governance even as it makes a lot of money; selling your stock in that case might be bad for you and not especially bad for the executives you are trying to punish. Another answer is: Ignoring a shareholder vote will be bad for directors' personal reputations, which will hurt their careers. Getting on other boards, or getting plum corporate-executive jobs, will be harder if they have a reputation for being unresponsive to shareholders. This sounds sort of fuzzy, but it is probably a real effect, and there is a literature. But it is not a particularly direct constraint; it can make things difficult for directors but can't force them to do anything they don't want to do. The last answer is: There are couple of kinds of binding shareholder vote. If someone makes a hostile takeover offer for the company, shareholders mostly get to decide whether to accept it.[3] And if someone runs a proxy fight and proposes to replace the directors with a new set of directors, shareholders get to hold a binding vote and, if they vote for the insurgent, the board gets kicked out. With rare exceptions, these are not things that big normal institutional shareholders do. BlackRock does not mount proxy fights; Vanguard does not launch hostile takeovers. If a company's board of directors ignores a nonbinding shareholder vote asking for an independent chairman, its mutual-fund investors do not respond by saying "well we'll just take over the company, fire the board, and install our own independent chairman." Perhaps they could, perhaps that is another possible rational way of organizing corporate governance, but it is not how our institutions mainly work. But there are people in the business of enforcing this stuff, people who actively look around for disgruntled shareholder bases and say "hmm, this company's shareholders are aggrieved, maybe I can take it over for cheap." Those people—activist hedge funds, corporate raiders—make a living scouting for companies whose boards and managers are not aligned with their shareholders, coming in and offering to replace those directors with others who are more aligned, and pocketing some sort of premium for their effort. This is how I mainly analyze Carl Icahn, who tends not to be especially interested in the actual businesses of the companies he buys, but who has a terrific nose for distasteful corporate governance. So when a company gets a shareholder proposal asking for an independent board chair, and a majority of shareholders vote yes, and the company ignores it, that sends up a signal to the Carl Icahns of the world that maybe they should be looking into the situation. They don't always do anything about it, but the possibility that they might is the ultimate constraint on directors: If the directors ignore enough nonbinding proposals, they might find themselves facing a hostile takeover offer, and when they say to shareholders "don't take this offer, we will treat you much better than this corporate raider," the shareholders will not believe them. This is all standard theory. But people rarely talk about it explicitly; it is all sort of elided and shorthanded. There is just an assumption that it is bad for a board to lose a nonbinding shareholder vote, that shareholder support matters in some direct but unexplained way. But this, I think, is wrong. If you are immune to those mechanisms of binding shareholder control, then it actually doesn't matter if your shareholders are disgruntled, or if you lose nonbinding shareholder votes. For instance, if you are a half-trillion-dollar company, no one is going to do a hostile takeover, so that concern is right out. If your CEO is already a multi-billionaire, he probably won't care very much about the stock dropping. If your directors are very wealthy and owe their wealth mainly to the company, they won't care too much about missing out on other board opportunities. Etc. And then there is Facebook Inc. As we discussed last week, Facebook's shareholders submitted nonbinding proposals to establish an independent board chair to supervise CEO Mark Zuckerberg, and also to get rid of the company's dual-class stock structure that gives Zuckerberg a majority of the voting power even though he owns just 13% of the stock. How'd that go? A proposal to restructure Facebook's voting process and eliminate a class of super-voting shares that give Zuckerberg his control was supported by roughly 82% of the votes cast by shareholders other than Zuckerberg himself. That's around the same support a similar proposal received last year at Facebook's meeting. A proposal to replace Zuckerberg as Facebook's chairman garnered 67% of the votes cast -- excluding those from Zuckerberg. Ultimately, shareholders knew going into the meeting that their efforts to limit Zuckerberg's control would fail. The company recommended voting down these proposals, and Zuckerberg's majority voting power ensured they wouldn't pass. But the numbers are a symbol of just how frustrated shareholders have become with Facebook and the man who runs the company. Technically these shareholder proposals lost—they were voted down by Zuckerberg himself—but they scored some sort of vague moral victory by getting a majority of the outside votes. Sure. But structurally, the right amount of concern that Facebook should have for frustrated shareholders is zero. There is no realistic drop in the stock price that would impair Mark Zuckerberg's ability to buy anything he wants to for the rest of his and his children's children's children's lives. There is no realistic scenario in which being on Facebook's board will limit the outside careers of its directors, or in which they'd care much if it did. As long as Zuckerberg controls a majority of the votes—he's currently at 57%—Facebook can never lose a binding shareholder vote. Even if he sold down enough shares to lose that majority, the company is far too big for a hostile takeover, and probably too big to be attractive to activists. Facebook went public with a corporate structure that was quite explicitly designed to ignore shareholders' desires. And now it is following through on that promise. Long-termism All shareholder activist fights are exactly the same.[4] An activist investor wants a company to do a thing, a merger or a spinoff or a restructuring or a new business strategy or a capital return or whatever. The company's managers say that the activist has a short-term perspective and is only looking for a quick profit at the expense of long-term value for all shareholders. The activist says that the managers are trying to entrench and enrich themselves and are not being responsive to shareholders. There is no general way to evaluate those claims: Sometimes the activist happens to be right, and sometimes the managers happen to be right, and often both sides are partially right, and sometimes you just have to wait five years to see what happens before you can know which side was right. But the arguments always sound tediously the same. Managers know that "short-term" is a good thing to say to make activists sound bad, and activists know that "entrench" is a good thing to say to make managers sound bad, and so they both always, immediately, go to the old standbys. Here is the story of a hedge-fund activist fighting with a company's managers, and the arguments are exactly the same as they always are. The company has blocked the activist from nominating his candidates to its board of directors, claiming that he failed to meet some procedural requirements; it has also changed its bylaws to make it harder for activists to elect directors in contested proxy fights by requiring those directors to be elected by a majority of the shares outstanding rather than just a majority of the shares that vote. The activist is suing. The company says that the activist "is trying to disrupt" the company's strategy and wants to "enrich themselves through a short-term trade at the expense of … longer-term shareholders." The activist says that the company's actions are "intended solely to entrench the incumbents and preclude shareholders from" electing new directors, and that they "are designed to interfere with the shareholder franchise." It is all very standard stuff. Except that the company is BlackRock Inc. Well, actually, the companies here are a couple of closed-end investment funds managed by BlackRock; the activist is Boaz Weinstein's Saba Capital Master Fund, which has invested in a few BlackRock closed-end funds that trade at a discount to their net asset value, and which hopes to reduce that discount. "Strategies include agitating for governance changes among the funds such as converting them to open-ended portfolios or selling the underlying assets and returning money to shareholders." I guess, if you want, you can interpret that as "short-termism," though to be fair these funds are just pools of publicly traded investments; they're not making long-term investments in curing cancer or whatever. Most of the time, BlackRock is on the other side of this conflict: Mostly one thinks of BlackRock as a shareholder in other companies, and in that role it sets itself up as a champion of good governance and shareholder responsiveness. Saba is well aware of that, so its complaint is full of stuff like this: Contrary to BlackRock's public statements about the responsibilities of a corporate board, the importance of board accountability to shareholders and the shareholders' right to nominate and elect directors and trustees, the Individual Defendants, who serve on the Board of at least 88 BlackRock investment entities, are improperly seeking to impose a discriminatory vote requirement … There is even (page 12) a handy chart comparing "BlackRock Governance Principles When It Invests in Companies Managed by Others" (annual election of all directors, majority-of-the-shares-voting standards in contested elections, shareholders can call special meetings, no amendments to governance bylaws without shareholder consent, directors who don't serve on too many boards) with "BlackRock's Governance Principles for BlackRock Managed Trusts" (staggered boards, majority-of-the-outstanding voting, limited special meetings, unilateral bylaw amendments, directors who serve on the boards of 88 BlackRock trusts that have simultaneous meetings). Oops! I don't know. Part of the dispute here is about whether Saba filled out some forms correctly; I have no expertise in evaluating that, and also it is very boring. But another part of the dispute—the part that Saba's complaint emphasizes—is whether the BlackRock funds were allowed to make changes to the bylaws that will make it harder for Saba to elect its candidates even if they did fill out the forms correctly; this is also boring, but it has a clear answer, which is that of course BlackRock was allowed to make those changes to the bylaws. Saba is emphasizing the hypocrisy here because it doesn't have a particularly good legal argument; it's not going to get a court to reverse BlackRock's bylaws, but it can try to embarrass BlackRock out of them. FX fines I wrote last month: I must say, part of why everyone thinks that banks are scandalous is that they keep doing scandals, but surely also a part of it is that, due to overlapping regulatory jurisdictions, every scandal gets punished 10 different times with 10 different press releases. Back in 2015 I did a little scorecard tracking the fines that banks had paid for the FX scandal to the U.S. Commodity Futures Trading Commission, Department of Justice, Office of the Comptroller of the Currency and Federal Reserve, and to the New York State Department of Financial Services, U.K. Financial Conduct Authority and Swiss FINMA. Here are some more. Here are some more! The Swiss competition regulators fined some banks some money for the foreign-exchange fixing scandal, a month after European Union competition regulators fined some banks for the same conduct, and several years after Swiss financial regulators fined some banks for the same conduct. The overlapping jurisdiction stuff is basically good, I think. We have talked a few times recently about scandals in which banks did bad securities things that were also, arguably, in the short term, at least a little bit, good bank-stability things, and bank-stability regulators seem to have been rather pleased. Like if you are a bank without much capital, and you raise capital by lying to investors, then a securities regulator would say that that is bad and you shouldn't do that, but a bank-capital regulator might quietly breathe a sigh of relief: At least now you have enough capital and won't bring the banking system crashing down. It is good to have different regulators who focus on different things, so that bad conduct doesn't slip through the cracks. Similarly with the FX stuff, you could imagine some of the banks' actions being antitrust violations, and others being the sort of customer-fraud violations that concern financial-market regulators, and others being the sort of safety-and-soundness violations that concern bank regulators, etc. In practice, though, everything is usually everything. Conspiring with your competitors to share customer orders is an antitrust violation, and financial-markets misconduct, and a bank-stability problem, and whatever else any other interested regulator regulates. Serious enough bank misconduct gets sort of universalized; it becomes Universal Bank Badness, and then it gets fined over and over again. People are worried about bond market liquidity One well-known problem with bond market liquidity is that there are so many bonds. If I have a bond that I want to sell, and you have a bond that you want to buy, the odds that they are the same bond are very low, so we probably won't trade with each other. It's relatively easy to set up an exchange where anyone who wants to buy or sell Microsoft stock or Swiss francs can congregate and trade with each other; it is relatively hard to set up thousands of little kiosks where everyone who wants to buy or sell every bond of every company at every maturity can meet with each other. One solution is to have bond dealers—big banks—intermediate the trades, to buy the bonds people want to sell and sell the ones people want to buy and take a lot of inventory risk and work the phones to try to balance everything out. This is the traditional solution, but post-financial-crisis regulation and risk aversion has made people worry that it might have stopped working. Another solution is technology; communications technology and artificial intelligence make it easier than it used to be to set up all those little kiosks and help people who want to buy one weird bond find people who want to sell it. But another interesting solution is to say, meh, who cares about all those bonds? Who wants to buy one bond? It turns out that if you want to buy a lot of bonds all at once, that is sometimes easier than buying one bond: Exchange-traded funds are bolstering the corporate bond market, according to executives from Bank of America Corp. and Jane Street Group LLC. The growth of fixed-income ETFs is making it easier to determine bond prices and smoother to carry out large trades, said Sonali Theisen, head of fixed-income market structure at Bank of America. ETFs enable credit-portfolio trading, a tactic for trading large blocks of corporate bonds at once, used by banks such as Goldman Sachs Group Inc. … Banks are using the fixed-income ETF market to their advantage through portfolio trades. Several banks have the ability to create and redeem shares of ETFs, and can use that power to buy and sell big blocks of bonds at a lower cost than seeking out the securities individually in the marketplace. One way to think about portfolio trades is: There are lots of bonds, but there are fewer packages of bonds that lots of investors want to buy, for instance because they make up a popular index. If you can set up a few big kiosks to trade those packages, you might get more volume than if you set up all the individual bond kiosks. Another way to think about them is: There are lots of bonds, but not everyone has all that strong a predilection for a particular bond. Lots of people have general views on sectors or ratings or tenors or whatever, and would rather efficiently buy a package of bonds that more or less meets their general criteria than spend time and effort and money constructing exactly the package they want. A third way to think about them is: If you go to a broker and ask to buy a bond, the broker will assume that you have some information she doesn't (about the bond, or about your own intention to buy more of it), and will charge you a large bid-ask spread to account for the risk of adverse selection. If you are buying 50 different bonds, it is silly to pay all those bid-ask spreads, because you obviously don't have any special information about all those bonds. If you can go to a broker and be like "look, see this whole list of bonds I'm buying? Obviously I am not going to run you over with special information on any one of them," she can charge you a lower bid-ask spread on the package than she would on all the bonds individually. Things happen How a private equity boom fuelled the world's biggest law firm. New SEC Rule Heightens Broker Responsibilities to Investors. Woodford Mired Deeper in Crisis as Loyal Backers Turn Away. Fiat Chrysler Withdraws Merger Offer for Renault. Rahm Emanuel, Ex-Chicago Mayor, Is Going to Wall Street. 'Greed and Lies on Wall Street' Is Opening Argument in Bond-Marking Trial. Goldman Sachs sued over allegations of homophobia. "Another strategy, one we term 'manclusion,' involves including men in meetings simply to induce better behavior from the men on the other side of the table." More Universities Shut Down Traditional M.B.A. Programs as Popularity Wanes. Towing an Iceberg: One Captain's Plan to Bring Drinking Water to 4 Million People. A Four Day Workweek Could Be Coming To The U.K. Newlyweds, 4 wedding guests arrested for breaking into school after nuptials. If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! [1] Perhaps the shareholders, as a matter of corporate law, can call a special meeting to amend the bylaws to require an independent chair, but as a matter of voting procedure that will be virtually impossible, and in any case the board can generally just amend them right back. The board can meet much more frequently than the shareholders can. [2] I mean, anyone can sue about anything, but this doesn't seem like a winner. [3] The poison pill makes this not entirely true, but true enough. [4] Well. "Activism" has two pretty different meanings: There is hedge-fund activism, in which a big institutional investor pushes for structural, financial or governance changes under threat of a proxy fight, and there is social activism, in which an individual or, like, nuns' pension plan pushes for environmental, social or (sometimes) governance changes by way of nonbinding shareholder proposals. When I say things like "shareholder activist fight" I mean exclusively the former, not the latter, which is different. | 
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