From the many problems now being experienced by the US in their economy and the way they conduct their businesses, legislators and other groups are turning to new ways to improve the old system and pull America’s economy out of its slump. The latest among these moves is the move by the legislative to give shareholders more power and control in placing and ousting members of the board of directors. This move has become an issue due to the shift in power in terms of whose interest is favored by the ruling. There are several different interests that exist in a company especially when individuals and groups within it make decisions.
There are shareholder interests, employee interests, management interests and stakeholder interests that conflict with each other. The current issue highlights the conflicts that arise between the interests of the management and the shareholders as well as the different interests of the shareholders themselves. This is where the clash begins. On the one hand, those who approve of the new ruling maintain that their interests are being upheld especially because they are the ones who invested in the business.
This forwards their main interest of the organization succeeding in the long term because of the investments they have put into the business. While the previous ruling handicaps small shareholders, this new rule gives them voice through the process of “proxy access” as long as they have at least 3% of the controlling stock. This will enable them to express their dissent and dissatisfaction in the board members and oust them especially if they think that the actions of the board are not appropriate.
On the other hand, the interests of the management, will be challenged by the new ruling and could result in problems in implementation and efficiency. While the constitutionality and the perceived negative effects of this ruling are contestable, one thing is clear: big business that angered their investors would go under pressure and could find themselves rethinking their strategies. A noticeable thing about this change is the apparent relativity on how democracy is perceived. Before the ruling, many directors served as the signing body for the chief executives and other high ranking officers they are tasked to oversee.
This brings into light the apparent control of CEOs and other executives regardless of how the owners of the company feel about their decisions. With owners finally having a measure of control to a fair and impartial opportunity to elect independent directors, many things are going to change in corporations starting with both the board and top management focusing, instead, on serving the interests of the shareholders as their priority. With the democratization of the shareholders as they are given more power, many in management will see such democratic procedures as a bane rather than the boon they have always perceived it to be.
Business roundtables, in order to veil their attempts at skewing the corporate election processes to favor the corporation over substantial shareholder interests, have tried to stop such democratization of power within their systems. However, their efforts have recently been trumped by the “proxy access” rule. The new ruling has made corporate directors directly accountable to the actions of the company. This will result in (at least speculatively) the improvement of performances of the directors unless they want to be voted out of office and replaced by independent candidates chosen by the shareholders who are against their performance.
This power is, however, a double-edged sword. Advancing the interests of shareholders who, among themselves, have different interests could prove to be an overly bureaucratic and cumbersome process where all sides would need to be appeased in order to incur no one’s wrath and be dismissed from the position they have been holding. With as little as 3%holding shares, corporate directors will have many parties to appease, which will require them to be very dynamic and charismatic, as well as having an overall good performance, if they want to stay on the board.
Courtney from Study Moose
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