Monday, July 11, 2011
Sorry for the paucity of posts...it's the summer and I'm working under editor deadlines. That said, I thought I'd point out an article in today's WSJ about a pending change in the Oklahoma corporate law. Oklahoma is amending its corporate law to require publicly-traded OK firms have classified boards. At first glance, that's a little bit surprising. The new law freezes in place a core component of the pill/staggered board defense. The recent trend in corporate governance has been to de-stagger boards not stagger them. The WSJ article reports ISS data noting that in 2005 53% of the S&P 500 had staggered boards, while only 31% of them presently have them.
What this amendment points out is the real nature of the current competition amongst the states for incorporations. And that is there isn't any. This isn't the early 20th century anymore. As Rob Daines pointed out in a paper (Incorporation Choices of IPO Firms) a few years ago, at IPO firms will incorporate in their home state or in Delaware. That's not much competition. For the most part, all the states have adopted basically the same corporate statute. What sets Delaware apart from most states is the massive legal infrastructure that has grown up around the corporate law in that state. Clearly, Delaware is interested in preserving that massive advantage in the incorporation business and will be aggressive in defending its position - though it's real competition is the Feds and not any state.
To be fair to Delaware, they have so many firms incorporated there - and few with any real contacts to the state - that they can more or less disspationately decide cases and the content of the law without regard to particular corporations. If GE has an opinion on a provision of the Delaware corporate law, unless it's also an opinion widely held by other firms, it's not likely to generate a lot of traction. This is not necessarily so in other states - towit Oklahoma.
Turns out one of the biggest publicly-traded firms incorporated in Oklahoma is Chesapeake Energy Corp. Chesapeake has been a target of corporate governance types and those who are outraged over CEO pay for some time now. How about this Motley Fool report from their most recent shareholder meeting:
[Shareholders] showed disdain for what they considered to be excessive compensation approved by the company's board for its Chairman and CEO Aubrey McClendon. As a result, with the well-known proxy advisor International Shareholder Services urging that he be removed from the board, McClendon garnered about 78% of the votes, compared to the 96% he captured when he last ran in 2008. Separately, about 58% of the shareholders cast a nonbinding vote for Chesapeake's pay plan.
Of course, Chesapeake already has a staggered board. But, if the voices of corporate governance types get too loud, it might face the prospect of having to destagger its board and that would be ... inconvenient. Now, the Oklahoma state legislature is in the process of taking away this threat. By adopting an amendment to the corporate law that will require firms like Chesapeake to maintain staggered boards, it will make it impossible for shareholders to push an amendment to remove the structure.
And that's the problem with the current state of competition amongst the states for incorporations. When states think about their corporate codes, more often than not, they are amending them in response to particular lobbying efforts by management - for example Michigan covered itself in glory last year when it adopted a defensive provision in its statute to help out a Michigan insurer. These aren't efforts to compete on policy, rather they are more like special interest legislation. Why else would the Oklahoma legislature take up this issue of staggered boards? I mean, is requiring staggered boards in your publicly-traded firms really front-and-center on anyone's agenda these days?
If that's the state of competition for incorporations, I'm happy staying in Delaware.