What Shareholder Democracy Does NOT Mean

This week's news is replete with opportunities to discuss 'shareholder democracy.'

Dick Fuld's Lehman Brothers has mismanaged itself so badly for the past year that there are serious questions about its long-term viability. Fuld sacrificed his CFO and COO yesterday.

Where's the shame, Dick? How about your scalp, too?

Then we have Carl Icahn fighting for the average shareholder at Yahoo, seeking to replace its board with his own slate. Mr. Icahn, known as a corporate raider several decades ago, does pretty much the same thing now, but with a much better image.

Whereas he and his ilk were thought to be simply greedy in the 1980s, now they are more correctly viewed as threatening inept boards and corporate management teams.

Over at Citigroup, the current CEO's hedge fund, Old Lane, has finally been closed by the bank. Remember that it was Bob Rubin, Citi's Chairman, who pushed the bank to buy the untested, new fund in order to get Pandit. Now, the fund's mismanagement has caused outside investors to flee and the whole mess to be simply closed. At tremendous cost to Citigroup's shareholders.

Where's your shame, Bob?

Finally, we see InBev formally go after Annheuser-Busch, the American brewing giant headed, but not controlled by, a member of the company's founding family.

To a greater, or lesser extent, these corporate situations all involve an aspect of that now politically-correct, perennially-hot topic, shareholder democracy and its cousin, corporate governance.

As I understand the manner in which Congress, and many institutional investors, define shareholder democracy, they believe company owners, using their votes for slates of directors and various issues on proxy statements, should exert their will on a company's board of directors and management team.

Forgive me for being out of step, but I don't buy that. To me, that is not what shareholder democracy means.

In my view, shareholder democracy means one thing, and one thing only.

I can buy or sell any US equity for an inconsequential brokerage fee into a liquid market in which a price exists by reason of the competing forces of buyers and sellers for that, and other equities.

Look at the nearby Yahoo-sourced five-year price chart of the companies I mentioned above, and the S&P500 Index.

What do these companies have in common?

First, none have had a five-year run about which their CEOs should, or can be proud. Yahoo barely beat out the passive S&P Index.

As the next chart shows, also for the last five years, next to Google, Jerry Yang and Terry Semel did nothing for their shareholders.

So, what's my point?

This. Why would anyone own these turkeys, when there are many more, better-performing equities in the US markets?

A second thing all of those equities share is that we- my investment partner and I- don't own any of them, or options thereon, in our portfolios.

Sure, Carl Icahn, with billions to invest, representing his fund holders, has the experience, cachet and financial heft to take large positions and then create upward pressure on a stock because of what the market believes will probably occur once he gains influence over his target's board.

But the average investor- even an institutional one- is not Carl Icahn.

For the vast majority of them, the myth of voting their shares to change corporate behavior is just that- a myth.

The real genius of the US equity markets is the average, or even rather large investor's ability to simply sell what s/he no longer thinks is a good investment, and buy something else, at a very low transaction cost, and virtually no impact on market price.

Next to this simple, easy-to-understand capability and expectation, the long, expensive and typically futile process of buying sufficient shares to vote a board out or otherwise influence a company's management seems agonizingly difficult.

Finally, let's take a moment to consider the genesis of our modern publicly-held common stock corporations. I don't believe they exist because hundreds of colonial Americans came together down near Wall Street back in the early days of the country, near a buttonwood tree, to demand access to then-private investment vehicles.

No, I'm guessing our modern corporate form owes more to the Dutch and British trading companies which had common shareowners. These firms needed to raise capital, and issuing shares to investors was a good way to do that without the cumbersome need to have hundreds of equal 'partners.' Instead, a board was 'elected' by the shareowners, but the operating officers of the firm really ran the companies.

Even today, how many shareholders actually nominate directors who win board seats? Very few. Mostly, it takes a Carl Icahn to do that.

So the intent of the publicly-held corporation was never to let shareholders actually influence how the company was run. It was to give them the feeling that they voted for a group of respected people who oversaw the company's management.

Truth is, the people who founded and ran publicly-held companies, or do so today, don't want shareholder interference- just their money.

People, wake up! Shareholder democracy means you can enter and exit a publicly-held company's shareholder group easily and with minimal price impact.

It doesn't, never did, and is not supposed to mean you actually get to influence the management team, nor how much they are paid.

If you like the total returns you (could) enjoy from a company's management, then buy the firm's stock. If you don't, then don't buy, or sell it.

Period.

Believing that you, as an investor, can do anything more, with any real effect, is simply to delude yourself.