Corporate Governance

Bear Stearns, Corporate Governance, and the Capital Markets: The Need for Access (Part 3)

By J. Robert Brown

We've been talking about the Bear Stearns debacle and the role of the board of directors.  We noted that the dynamics of the board suggested one very deferential to management.  We found evidence of this in the board's favorable compensation packages given to top management.

Was there any alternative evidence?  Bear Stearns did not have a majority vote provision, requiring only a plurality to elect directors.  See Bear Stearns 2007 Proxy Statement ("Election of Directors. The affirmative vote of a plurality of the votes cast by holders of shares of Common Stock is required for the election of directors.").  In other words, there was no avenue for shareholders to shake up the complacent board. 

Bear Stearns could have used the pressure that would have come from the availability of access.  AFSME tried, submitting a proposal to Bear Stearns for inclusion in the company's 2008 proxy statement.  The Company, predictably, excluded the proposal.  It wanted no pressure from shareholders on board membership.  Moreover, Bear Stearns benefited particularly from the Commission.  As a company operating in New York and under the auspices of the Second Circuit, it would have been forced to include the proposal in the proxy statement under that circuit's decision in the AFSCME case.

It was the Commission that took off the pressure, that amended Rule 14a-8 to explicitly allow for the exclusion of access proposals.  It was a short sighted action that while ostensibly done for the good of shareholders in fact had the opposite effect by encouraging boards to remain complacent.  To the extent the problems at Bear Stearn resulted from board inattention, at least some of the blame can be squarely placed at the feet of the Commission.  

Full post as published by The Race to the Bottom on March 26, 2008 (boomark / email).