Individuals do have some control over the selection of Presidents and CEOs. As I mentioned above, both processes are representative democracies, and both are affected by money; but in each case, the individuals indirectly decide who's in charge. But why not directly? While the intermediary in the Presidential election process (the electoral college) generally has no effect on the outcome, the same can't be said of the intermediary in the CEO selection process (the board of directors).

Shareholders have the right to elect members of the board of directors, who in turn choose the CEO. Most investors don't even send in the ballot (although some sites, like ProxyVote (6), are making the process extremely easy). Those who do send in the ballot usually just rubber-stamp the names that are listed on it. They don't know anything about these folks and are therefore not able to make an informed decision about their qualifications.

As I have described in previous Tomments, the internet is enabling individual investors to become more empowered: they have access to more information, both through independent sources and through corporations themselves (such as conference calls), enabling them to make better decisions (Tomments #2) and to actually affect, rather than just reflect, the value of companies (Tomments #5). Maybe the next logical step is for shareholders to be able to directly decide who their CEOs should be. Just as some have argued that the electoral college is an antiquated and unnecessary step in the voting process, perhaps it's time for shareholders and CEOs to be more closely linked.

Boards of directors at public companies are often extremely patient with CEOs; more so than, for example, venture capitalists, who often kick out the founders even before they have a chance to make any mistakes. One reason it makes sense to be patient with a CEO is that there's a longer learning curve than for a politician; all other things being equal, the incumbent CEO is more qualified than other potential candidates. But this can be taken to the extreme, as it is at some companies where the CEO stays long after it's clear that he/she isn't the best person for the job. Additional inertia comes from the CEOs themselves, who are happy with the current system, because it subjects them to less scrutiny from shareholders and lets them stay at the helm as long as they don't completely mess things up.

Until very recently it would have been logistically very difficult for shareholders to directly elect CEOs, but the internet makes it quite feasible. Candidates could publish their resumes and video clips of their qualifications online, and answer questions from shareholders, and then the shareholders could vote. (One issue with this approach is that not all shareholders have internet access, but the numbers that don't are rapidly dwindling.) Would you be more or less inclined to invest in a company that handed this power over to you and its other shareholders? Do you think that individual investors are smart enough and informed enough to collectively choose a qualified CEO? Or might the election be decided more by style than substance (borrowing the negative aspects of the democratic process without also borrowing the positive aspects)?

Your Say
How much say do individuals have in other decisions?

What's the last major decision about one of the companies in your portfolio that you've been involved in? I'm not talking about a decision to buy or sell the stock, but a decision about how the company's business should be run. Currently, virtually the only impact shareholders have on the long-term success or failure of a company is a result of their buying or selling of the company's stock. As I alluded to in the previous section, the next logical step in shareholder empowerment might be more direct control over CEO selection. But why stop there? Why not give shareholders some control over other decisions as well?

As a shareholder, wouldn't you like to have a real vote on takeover bid responses, merger decisions, takeover defense options, executive compensation, financial reporting, stock option plan details, and other decisions that affect the value of your holding? As I mentioned above, companies already have to let their shareholders vote on a few important decisions, but the list is very short.

Shareholders do have one additional option when they feel the company is on the wrong track: the shareholder proposal (sometimes called a shareholder resolution). This proposal is the corporate equivalent to a local ballot referendum. Generally, stockholders who have held a minimum of $2,000 of company stock for at least one year can file a shareholder proposal. But unfortunately the system is designed to discourage its use. Filing proposals takes a significant amount of time, expertise and resources. And even if the proposal makes it on the ballot, many shareholders don't take the time to vote, and these unmarked ballots are automatically cast in accordance with management's recommendation (which is virtually always to reject the proposal). Some shareholder proposals are now advisory rather than binding. These are easier to get on the proxy and get passed, but they're largely ignored by management.

A few entities are trying to help investors benefit from proposals, such as Allied Owners (7), a mutual fund that identifies underperforming small companies, buys enough shares to gain significant minority voting power, and then tries to fix those companies and their sagging stock prices, either with the current management or with new management. Lens Inc. (8) is taking a similar approach.

Unfortunately, corporations often view shareholder proposals antagonistically, whether they come from individual shareholders or groups like Allied Owners or Lens. And the corporations usually respond legalistically. Most companies view shareholder activism as a negative rather than a positive.

And just as CEOs resist interference from shareholders, so do boards. According to Nell Minow, editor of the Corporate Library (9), a web site that covers issues of corporate governance and performance, "Chairmen have stretched and shrunk their boards in an effort to keep off insurgent candidates. They have adopted staggered terms and eliminated cumulative voting. They have packed the boards with insiders, celebrities, and cronies. They have sought protection from state and federal governments. They have denied access to shareholder lists, claiming that the purpose was 'improper.' They have appropriated pension assets to protect themselves, they have rejected higher bids in favor of deals that benefit management, and they have paid greenmail to get rid of potential acquirers."

These methods of deterrence seem to be motivated more by a desire to avoid sharing power than a desire to do what's best for the corporation (which, except in rare circumstances, is also what's best for the shareholders).

If shareholders were given more control over corporate decisions, several advantages would result:

1. The elimination of conflicts of interest. Who is most likely to act in the best interest of the shareholders: the CEO, the board of directors, or the shareholders themselves?
2. Feedback. Shareholders by definition have confidence in the company. Maybe they see something that management doesn't (but should). Have you ever emailed a company you hold stock in to suggest an improvement in the way they do business? If you haven't, it's probably not because you didn't have anything useful to say, but because the company didn't make it easy for you to provide them with this feedback.
3. Longer-term investors. Currently, most shareholders who disagree with a company's management consider selling the stock their only recourse. If they had other options, they would be more inclined to hold the stock for the long haul.

1. Shareholders would need to be well-informed enough to make the right choices, but anything that the shareholders know, the company's competitors would be able to find out too.
2. Similarly, a company's competitors might be able to anonymously buy stock in the company and then deliberately vote for the worst option.
3. If shareholders had more power, CEOs might be more easily swayed by public opinion.
4. It could be argued that shareholders might be too short-term in their thinking, since they aren't locked in to a company to the same degree that a CEO is.

I'm certainly not suggesting that increased shareholder empowerment be legislated, nor am I saying that shareholders should be involved in day-to-day operational decisions, but I do think that companies that encourage some level of shareholder activism will be rewarded. As CalPERS, the largest public retirement system in the U.S., has said, "Good corporate governance leads to improved long-term performance. CalPERS' also strongly believes that 'good' governance requires the attention and dedication not only of a company's officers and directors, but also its owners. CalPERS is not simply a passive holder of stock. it is a 'shareowner,' and take seriously the responsibility that comes with company ownership." (10)

Just as the internet makes it feasible for shareholders to more actively participate in the CEO selection process, it also makes it feasible for them to participate in other corporate decisions as well. Shareholders can use the internet both for information (such as to find out when annual meetings are, see what proposals are on the ballots, and learn how institutional shareholders will vote) and for mobilization (such as to discuss what they think the company should do and to rally support for proposals).

While I'm hopeful that companies will embrace shareholder empowerment, I'm not certain that it will happen. For it to catch on, companies would need to derive value from empowering their shareholders. This value could come either from the shareholders making smart decisions (which companies presumably don't believe would happen) or from shareholders deciding to buy a stock based on the company's advocacy of shareholder empowerment. But the latter is unlikely to be compelling, because, for most investors, shareholder empowerment is unlikely to be a deciding factor in their decision of which stock to buy. On the other hand, it might work for a diversified holding company or a mutual fund (which is similar to the approach that MetaMarkets' OpenFund (11) is taking).

Voters often feel that they don't have enough of a voice in the political process. Voting in elections and in local ballot referenda do give them some power, but they still feel removed from the majority of the political process. Voters would probably care more about the political process if their roles in it were more direct and more meaningful. And investors are in the same boat. They feel strongly enough about a company to want to own part of it, but most don't think they have any voice at all in how the company is run. But shareholder activism is gradually awakening, and hopefully the internet will further accelerate the empowerment that many investors want and deserve.

If you believe in democracy, then you should also believe in shareholder empowerment. Some people say it's your duty as a citizen to vote. If you feel this way, shouldn't you also feel that it's your duty as a shareholder to participate in the decisions your companies make to the extent that you're able? In other words -- Ask not what your company can do for you, ask what you can do for your company.

Some final thoughts:

1. What would the country be like if the government were run like a corporation (cold and uncaring or efficient and profitable)?
2. If the United States was a stock, how would its value have changed during Bill Clinton's presidency?
3. Are there any CEOs in your portfolio who you think would make a good U.S. president?
4. Would you buy stock in a company that had George Bush or Al Gore as CEO?

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Companies and Sites Mentioned: Gallup Poll: Presidential Qualities Article about VoteAuction.com MAXfunds.com The Federal Election Commission (FEC) OpenSecrets.org

Companies and Sites Mentioned: ProxyVote.com eRaider / Allied Owners Action Fund Lens, Inc. Corporate Library CalPERS MetaMarkets.com Open Fund