by Corey Feuer
Dr. Ewan McGaughey, Reader of Law at King’s College London and Research Associate at the University of Cambridge’s Centre for Business Research, spoke to students about corporate governance in the United States. His presentation, “Should Corporations Be Democratically Governed?”, addressed the lack of democracy in American corporate governance structures and the disenfranchisement such structures force upon individual investors and workers.
McGaughey is the first visiting scholar to take part in Vanderbilt’s Global Scholars in Residence program. The initiative allows for Vanderbilt professors to host foreign scholars on campus and is meant to expose students and faculty to global viewpoints.
In his lecture, McGaughey spoke about the unchecked power of boards of directors and the monopolization of shareholder voting by asset managers. He also talked about how consumers and workers are boxed out of corporate governance decisions.
Dominant Directors
McGaughey told audience members that contrary to popular belief, corporate board directors elect each other to their seats.
“People often talk about shareholder control of corporations,” he said, “but the reality is that despite all the rhetoric, the directors are appointing themselves.”
While regulations and laws exist to curtail directors’ appointment power, McGaughey noted that these rules are often easy to skirt. He pointed to the New York Stock Exchange listing requirements as an example.
“In the New York Stock Exchange listing rules, Section 303A requires the nominating committee of the board [of a listed company] be composed entirely of independent directors,” McGaughey noted. “But then we also know that this word ‘independent’ is not really what people might normally understand as being independent. Independence just means that you don’t have significant business relationships with a company for a few years. The so-called ‘independence criteria’ still allow for directors to be appointed by the incumbents on the board set by one another.”
McGaughey also pointed out that some Big Tech companies provide directors with multiple voting shares, making them impervious to replacement even under SEC regulations designed to empower shareholders to have a say in appointments.
“We have a lot of big companies, particularly in Silicon Valley, that have enabled directors to entrench themselves with multiple voting shares. Somebody like Mark Zuckerberg effectively cannot be removed. He’s the director for life. He’s like the king of Facebook.”
The Big Three
McGaughey identified three investment companies – BlackRock, State Street, and Vanguard – as the biggest asset managers on Wall Street. He noted that if the three companies were combined, they would be the biggest shareholder of 439 S&P 500 companies (as of 2019), demonstrating their outsized influence over corporate America.
“They set voting priorities in companies,” he said of the three investing groups.
McGaughey emphasized the dangers of such immense corporate power being held by such a small number of companies.
“The basic rule the ‘Big Three’ adopt is that they support management, and they have for decades consistently favored inflating the pay of CEOs in other companies. They also take very little action to make sure companies shift to clean, cheap, renewable energy, and they routinely support the declining trend in the pay of American workers.”
While the “Big Three” assert massive control over American corporations, McGaughey noted that the money they use to gain this control is not their own.
“It’s important to see that all of the money that they control comes from other people,” he told the audience. “It’s not their money going to buy the shares. It’s all other people’s money, and it’s usually coming from American workers saving for retirement, for instance, in 401k plans or other pension funds.”
(No) Power to the People
According to McGaughey, consumers do not have much power over corporate governance, even in ways the public might think they do.
“Most of us would think that if you’ve got effective private competition, then consumers can vote with their feet,” McGaughey posited. “However, we’ve got all these enterprises where competition fails, and consumers can’t vote with their feet. We see around the world that competition systematically fails.”
McGaughey also pointed out that workers are disenfranchised in contributing to corporate governance.
“Workers usually have no voice in corporate governance in the United States,” he said. “The Securities and Exchange Commission under Nixon did its very best to make sure that shareholder resolutions could not be performed for workers to be elected or to have power in electing people who are on the board of directors.”
People need to pay more attention to inequalities in corporate governance, according to McGaughey.
“I want to put it to you that we have to defend the right to vote in the economy just as much as in politics,” he told the audience. “As the great labor advocate and U.S. Supreme Court judge Louis Brandeis said, we can either have a democracy, or we can have wealth concentrated into the hands of a few – but we can’t have both.”