Sunday, April 11, 2004

Annals of corporate governance 

Institutional Shareholder Services is a service that has declared new standards for corporate governance, rates companies based on the extent to which they conform to those standards, and makes the ratings available to institutional investors, some of which pay close attention to the ratings. Professor Bainbridge links to a recent declaration of ISS calling for Coca Cola stockholders to vote against the re-election of Warren Buffett to Coke's board on the theory that Buffett controls too large a percentage of Coke's stock to be considered independent. Professor Bainbridge nails them:

Not to put too fine a point on it, but this is insane. Warren Buffett is probably the most respected investor of all time. Not only is he tremendously successful as an investor, but his integrity is remarkable for a businessman of his stature. Buffett owns almost 10% of Coke's stock, moreover, which means that his personal financial interests are closely aligned with those of other shareholders (albeit not perfectly). Finally, Buffett qualifies as an independent director under the NYSE's listing standards.

TigerHawk, who in his secret identity has reason to care about good corporate governance, agrees completely. In fact, I think that the good Professor did not go far enough. The problem, in my opinion, is this notion that the significant stock ownership ipso facto compromises "independence," at least as the self-styled corporate watch dogs define it. I have never understood why somebody who owns a large percentage of a company should not be considered "independent" in the absence of other transactions between the stockholder and the company. The reason, in theory, that we care about all this independence stuff is the concern that the management, which does not own the company, will in some regard hijack the company for its own gain. You need independent directors in various capacities to stand against that. Who is going to be more vigilent than an outside director that also happens to be a huge stockholder?

I would love to see somebody in the popular press or blogosphere examine this issue closely. I am sure that people have debated it in the law journals, but most of us in the real world don't have the time to excavate that kind of detail. Professor Bainbridge, back to you!


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