A little known fact regarding the recent government bailout of financial institutions is that this resulted in non-voting shares being held by the U.S. government.
While this bailout theoretically came with Treasury oversight of corporate governance, a long list of abuses have occurred, from high priced junkets to expensive office renovations, and the continued practice of exorbitant bonuses being rewarded in some cases.
Non-voting shares typically do not result in the sort of direct pressure that can result in companies having to reflect on the views of those shareholders in a serious way. This receipt of non-voting shares is completely different from the U.K. bailout of banks, where the government gained direct voting shares.
A somewhat recent global phenomenon involves so-called Sovereign Wealth Funds, which involves a government investment fund taking significant stakes in companies they deem to be good investments that will earn them future profit. In such cases, these funds do not cede control of their shares, but they also know enough to stay at arms length, allowing the companies to operate freely within acceptable parameters towards achieving their goals. These funds retain the ability to gain seats on boards and insist on minimum standards if desired. Once a global government steps in and takes positions in companies, they become investors, just the same as any other, and if an investor has voting shares, they can review practices and insist on standards of behavior, and best represent the interest of the beneficial owners behind these stakes. In this case, these beneficial owners are the American people.
So by taking non-voting shares, the government has positioned the American people in a less competitive position than is optimal, as financial institutions have demonstrated a complete lack of ability to think long term, and these non-voting share positions may well be long term in nature, like it or not.
Over the past generation, U.S. & U.K. fund managers have garnered an increasing percentage of equity assets under management, now reflecting well over 50 percent. This makes those managing mutual funds, pension funds, endowments, foundations, private portfolios and 401(k) plans unwitting owners and decision makers if they so choose, in American companies, and can exert enormous influence if and when they come to a consensus view. Shareholder resolutions on things like climate change, social concerns including human rights abuses and much more, have been garnering increasing percentages. A government with voting shares, friendly to such resolutions, could put these resolutions over top.
Would this be a good thing? This writer argues in the affirmative. All any one can ask any investor or company is to be as well informed and efficient as possible in the course of its business. This is true as well of environmental issues, social concerns and corporate governance. If companies can be held to being most informed and attempting to innovate and stay competitive in these areas, this would be good for these businesses and their shareholders alike. The same is true of these financial institutions. If through a combination of shareholder pressure and government positions, where government saw the need for institutions to factor in issues such as the environment into their investment strategies, both as is involved with these institutions own equity investing and financing, this would further create a positive dynamic which would result in companies having to be on their best environmental and social behavior accordingly. A generation of leading shareholder resolution types such as Steve Viederman, Robert AG Monks and Tim Smith have led the way on such issues, especially on the shareholder resolution side of things.
The government now has the chance to step in and tip the balance to the American people on these currently non-voting shares. If, in any next bailout required, further equity stakes are to be considered, the government must insist that the entirety of their stakes, from the first bailout as well, become voting shares. This would put the balance of power in the hands of the American people. Governments are voted in and out, and it would be up to the voter to decide if this influence was being used wisely or not. Such would result in an additional check and balance to the free market system that was badly missed in recent times.
We are in a period of great change. Decision makers in companies and financial institutions still think short term, as they may not be around tomorrow, and are too often required by shareholders to perform now, and as a result, long-term investors need to ensure a long-term view is at least considered, or we may well run into the same shorter-term rooted problems as before. New regulation can only go so far -- where there's a will, there is too often a way.
I have always felt that the ideal system of company ownership would involve some hybrid of founders stakes, say a third of the company, outside investors another third and employee ownership the remainder. Modern times suggest that a fourth element -- the people at large -- become shareholders as well, especially as the output of companies often influences local stakeholders. Ask the folks in Tennessee where the recent coal sludge spill occurred about that.
The unfettered free market system failed recently, and badly. The United States has achieved best when a proper system of checks and balances is in place. It's time for that to be true of our financial institutions as well -- for the sake of investors as well as us all.
Cary Krosinsky is vice president for Trucost, which has built the world's most extensive time series database of more than 700 emissions and pollutants as are generated by more than 4,500 public companies around the world. Cary is also co-editor of the
recently released book "Sustainable Investing: The Art of Long Term Performance," with Nick Robins, HSBC's head of Climate Change.