Business Law Prof Blog

Exxon Shareholder Meeting: Resolutions Lose

Everyone is claiming victory after three notable shareholder resolutions failed at the spring Exxon annual shareholder meeting.  The shareholder's, supported by Rockefeller heirs, attracted close to 40 percent of the votes cast.  One of the resolutions was structural -- to separate the positions of Chair of the Board and Chief Executive Officer.  Two of the resolutions were, in essence, on business strategy.  Shareholder want the company to invest in alternative energy sources and research.  As a shareholder I cast my vote with the board;  I was part of the "losing side", the 60 percent majority.  Exxon is an oil and gas company. If shareholder want to invest in other sources of energy, sell their Exxon stock or use their Exxon dividends to invest in alternative energy companies.  Why push Exxon into areas, wind or solar power, in which it has a competitive disadvantage? 

Say on Pay: A Bust?

The Wall Street Journal todays has a nice piece by Tom McGinty on shareholders resolutions that ratify executive pay.  Investors in struggling banks do not seem to want to vote for the resolutions.  I am not surprised. I suspect that what shareholders want is different than what the resolutions offer.  Shareholders do not mind paying executives when they perform well; they do want to penalize executives once the market has discovered that the firm has been very poorly managed.  I suspect a right to trigger "claw-back" provisions are closer to what shareholders really want -- the right to exact vengeance for economic pain.  A resolution that would fit closer to what investors would support would set up a shareholder vote, triggered by a 20 percent stock price drop compared to under a relevant index for the year, that would allow shareholders to reclaim otherwise paid salary and benefits for the year.

GE Starts its Bust Up

GE, a company that should go through a classic series of spin-offs to focus on its core business, has started the process of divesting some of its units.  The problem? It is divesting its appliance unit, its best known consumer brand.  Many, many shareholders associate GE with appliances, even though the unit is a small part of its overall business.  This could get interesting folks.

Exxon Not Well Managed?

Exxon, a company that had over 12 billion dollars in profits last year (perhaps the highest in real dollars in modern history for any private company), raising howls of protest from Congress and the left, is apparently not well managed.  By the way, Exxon paid 30 billion in federal taxes, more that the aggregate paid by close to forty percent of the country's entire population.  Shareholders are sponsoring resolutions to separate the positions of chairman and chief executive officer (CEO) and to give them a vote on executive compensation.  Apparently the company is --- not making enough in profits?? Who'd a thought it.

Shell and BP "Retention Bonuses"

Shell and BP roiled their investors by announcing plans to pay huge, one-time ("one-off") "retention bonuses" to senior executives.  They make no sense.  A "one-off" retention bonus, once made, will not retain anybody once the bonus is paid.  The bonus, to work, has to be paid over time and conditioned on someone staying over time.  The Shell bonus is conditioned on staying until 2011, for example, but needs to be paid over time not "up-front."  Even in a proper form (in pieces over time), the bonuses should be tied to performance and not unconditional once time in office is clocked in.  They are an invitation to grant boondoggles.     

"Say on Pay" a Bust?

Pundits have spent years, years, trying to get a shareholder vote on executive pay packages.  Be careful what you wish for.  First, shareholders have voted for some time on parts of executive pay packages (most option programs) and overwhelmingly supported them.  Second, a no vote on a complex pay package carries much noise -- it is on performance, the details of the package?  Third, as is in evidence in the Aflac vote on Monday in which 93 percent of the shareholders voted to ratify a $12 million pay package, shareholder routinely will vote yes.  Yes votes make shareholder derivative suits harder to win.

The Fed

New evidence suggests that the substantial drops in interest rates by the Federal Reserve have 1) not aided substantially the stock or debt markets and 2) have enhanced fears of inflation.  The Fed can have four interrelated goals:  help the securities markets, control inflation, keep unemployment rates low, or boast gross domestic product.  The first, third and fourth have substantial political overtones, the second-- controlling inflation, does not.  Our Fed, seemingly heavily influenced by savage criticism from the financial sector (who have called for Bernanke's head) and by a pending national election, appears too focused on the securities markets.  The European Central Bank, isolated from State political influences by top level of multiple state administration, has shown much less sensitivity to political trade winds and is focused more on controlling inflation.  Have we taught the financial markets that over-the-top criticism of the Fed will have an impact on Fed actions?  If so, we are in for some tough times. 

Stoneridge v Scientific Atlanta Decided

The Supreme Court, very predictably to anyone who read the arguments, decided 5-3 in favor of the defendants in Stoneridge.  Justice Kennedy, the author of the earlier Central Bank of Denver opinion, wrote the majority opinion affirming the logical extension of the earlier opinion.  Pity.  The big winners are lawyers and investment bankers.  The largest of our financial frauds are now so complex that they must involve lawyers who write and file the paper and investment bankers who fund and underwrite the deals.  These professionals, if they participate with intent but do not attach their names to any of the fraudulent statements known to the public markets are free from liability in private suits.  The SEC can still sue them and seek substantial civil penalties but the SEC has traditionally focused on the CEOs and CFOs who are the primary violators.  There is an unimportant sense in which lawyers are losers however.  It is less likely that they will have a BarChris style opinion to hand out to young associates and clients as a defense to the pressures from clients to go along with clients' questionable activities.  The pressure to generate billable hours plus the strategy of documented plausible denial ("I only filed X based on assurances and did not know of the fraud") and the full plate of the SEC enforcement office may mean that lawyers will continue to be too willing to not ask questions when a lucrative fee is available. The claim that such an action would generate more "strike suits" has some merit but it is limited given the need to pled specifically and prove scienter, which would be signficantly harder in aiding and abetting cases than it is now in primary violator cases.

Smart People Seeking Dumb Money

There was a great headline in the NYT "Smart People Seeking Dumb Money" referring to the IPO's of private equity groups in the past year (all have lost money since their initial day price run-ups).  The headline is broader than the story.  This is an old, old Wall Street game.  It has some very familiar and repeatable themes; only the names of the securities sold change.  First, smart people sell something novel, new trendy -- with a promise of high returns-- and take fees [Goldman underwriting SIVs].  The fees go into solid investments (treasuries).  The recent new, new thing was CDOs and/or ABSs.  Second, some smart people get caught in the returns and themselves take equity, hoping to sell to greater fools (the greater fool theory) [Merrill Lynch; not Goldman].  If they get out fast enough they win; if they get in too late or hold too long they lose.  And third, the really smart people sell short the very thing they are pushing [Goldman].  The whole thing explodes and those who still hold the equity in the security lose big.  Government investigates, castigates and over-regulates.  It is a very old game. For our government, perched on a capitalist economy,  the issue has always been how much to protect the dumb money.  Too much protection and we get too little financial risk-taking and innovation.  Too little protection and we get too little investment capital.  The tendency of government is to overprotect -- with each crisis comes more federalism, more promises to protect, more efforts to appear concerned and empathetic.  Only the threat of new competitive economies elsewhere keeps government honest and even then we often get unhelpful subsidies and other forms of protection rather than structural reform than makes us more competitive.  What always amazes me is that we find enough common sense in this repetitive process to stay competitive at all.

Blankfein Pockets $69 Million for the Year

The CEO of Goldman Sachs made $69 million in salary for the year.  His base salary was $600,000 (plus a charitable gift of 200,000) and the rest was in bonuses tied to the performance of Goldman this year.  Cayne, the CEO of Bear Stearns, had a base of $250,000; the disastrous year for Bear Stearns meant he had few bonuses.   At least for investment banks, the incentive system put in by the tax code (limiting base salary deductions to $1m thereby encouraging salary in excess of the base to be incentive driven) seems to have worked.