Senator Rep Casten talks Shareholder Value

This is an excerpt from the House Financial Committee Meeting on 10th September, Proxy Power and Proposal Abuse: Reforming Rule 14a-8 to Protect Shareholder Value.

Rep Sean Casten:

Thank you Mr. Chairman. Thanks to our witnesses. And I want to just preface this by acknowledging that I'm going to be a little bit pedantic, but this conversation is, I'm trying to find a polite way to say this. It's really dumb. Let's just acknowledge some things that I should not be debated, but I can't believe we're suggesting they're not true. Shareholders are actually the people who own companies. The executives of a company serve at their pleasure. They are tasked to carry out the will of those shareholders. They are custodians of shareholders investment, but they are not actually the people in charge and shareholders are not monolithic in terms of their interests, in terms of how they define value. Hearing my colleagues say the only thing that matters is shareholder value. What the hell does that mean? Maybe I'm a shareholder who thinks that a company's free cashflow should go to paying dividends.

Maybe I'm a shareholder who think that value would be maximized if we reinvested that cashflow. Maybe I'm a shareholder in Kodak who thinks we should be pivoting to digital photography because you're committed to a technology that isn't going to survive. Maybe I'm a shareholder in a car company who thinks we should be pivoting to EVs. It doesn't matter whether you're right. You have different opinions about value. And the way that companies adjudicate those disputes is to have a high functioning board executives who are competent people who surface their opinions. We try to resolve them in some collaborative fashion. And if you can't resolve them in some collaborative fashion, ultimately you go to a majority vote. This is not freaking complicated right now, the idea that some voters are more worthy of having their opinions heard than others. Some voters, only the ones we agree with understand what value is.

I guess that's on brand for the party of January 6th, but that's not actually the way that you make good decisions, right? So I say this not as a member of Congress. I say this as someone who spent 16 years as a CEO who ran a company where I was a minority investor because I didn't have the couple hundred million dollars that we needed. So we had a bunch of other money that came in, and sometimes I disagreed with our investors. Sometimes I persuaded them of my opinion, sometimes they won, sometimes I won. I maintained I was probably right more often than I won, but it didn't matter. They didn't have the votes. And our board understood. And I understood that sometimes my economic interests were at odds with the shareholders. Right? Now, I could have come to Washington and said that as a activist for the interests of minorities, I will come here and represent our nation's poor, underappreciated CEOs. But I don't think that's actually the way economy works. So Mr. Mueller, I guess, do you agree that there are conflicts of, and that I don't know when Enron collapsed was a part of that because of board oversight failures and conflicts of interest with management, just yes or no? Yes. Okay. And do you agree that it's important for boards to have independent directors who are distinct from management?

Witness Ron Mueller:

Yes.

Rep Sean Casten:

Okay, good. So does the New York Stock Exchange, so does Nasdaq. That all makes a lot of sense. Ms. Keel, would you agree that transparency and executive compensation is a good thing to have in corporate structures?

Witness Ferrell Keel:

Yes.

Rep Sean Casten:

Would you agree that shareholders should have a say on board of directors compensation?

Witness Ferrell Keel:

Yes.

Rep Sean Casten:

Under the Dodd-Frank Act are companies legally required to act in response to a shareholder vote on executive compensation?

Witness Ferrell Keel:

No.

Rep Sean Casten:

No, they're not. They're non-binding advisory opinions. In general, are companies legally required to take action on shareholder proxies?

Witness Ferrell Keel:

Technically no. But effectively, yes.

Rep Sean Casten:

Well, according to your firm, shareholder proposals are typically advisory in nature and not binding in a corporation.

Witness Ferrll Keel:

Technically, yes.

Rep Sean Casten:

True. That is all my experience. That is the law. We're talking about the law. We're not talking about technically. We're talking about should we change the law and we are in agreement that the law does not actually say these proposals are binding. The law says they are advisory, they get factored in, and then we have a high functioning board. Mr. Copeland, you had said earlier that I think you had on public choice theory and that Congress proves that you shouldn't just decide things by majority vote. That's not how boards work. As we just established, the law says that these are advisory opinions. So we're sitting here having this whole conversation about a boogeyman who doesn't exist. This conversation is about do shareholders have rights, do shareholders own companies, and do they have any rights to express their opinions of value in corporate boardrooms? Mr. Lander, you want to add anything here? Am I missing anything as a fiduciary? That was very well said. I hope our next hearing is not dumb. Yield back.