What is Permissible
June 24, 2020·6 comments·Money
Boards adopt the language of shareholder protection while systematically evaluating decisions through a different lens. The gap between what fiduciary duties promise and what they actually protect has widened into something institutional. Shareholders believe they own companies, but the mechanisms designed to represent their interests have become the most effective tools for management to extract value.
• The shift from beneficial to permissible. Boards no longer ask whether a compensation plan serves shareholders. They ask whether it can be argued that it does. That linguistic difference changes everything about who benefits from the deliberation.
• Institutions designed to protect owners now protect managers. Fiduciary duties, ESG standards, proxy voting services. Each layer of oversight becomes another opportunity for management to frame decisions as following rules rather than serving capital.
• Narratives do the heavy lifting. Equity compensation aligns executives. Market rates for talent justify any price. Returning cash is always shareholder-friendly. These stories are true enough to pass a legal test and false enough to justify nearly anything.
• Revolutionary sentiment gets absorbed and neutralized. When shareholders demand change, companies adopt the language of change without changing behavior. A photo op of Jamie Dimon kneeling became the story instead of whether Chase serves minority communities.
• Asset owners have surrendered direct influence. Fifty years of outsourcing ownership to managers and index funds means shareholders have no mechanism to push back except through narratives that management can simply co-opt. The system is designed for management to win.
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Comments
Well written and terrific article Rusty. Thanks.
Although I hope we can change from within, I suspect that only the “denouement” in markets will force attention and true structural change.
similar to the 1930’s.
IMO, Fair to say that the Federal Reserve Board has added one more carving in their “Wall of Shame” by actively supporting (with public dollars) any and all badly run, greedy management teams.
Well put, Rusty. I’m sure you’ve read Venkatesh Rao’s web series “The Gervais Principle”? I’m struck by your ability to clearly describe one of the key mechanisms of what he splits into “Powertalk” and “Babytalk”, the first being how the management classes communicate among themselves in CYA fashion, and the second being the ESG PR-type stuff.
https://www.ribbonfarm.com/the-gervais-principle/
I am a fan of his work but haven’t seen this series. It’s now on my weekend reading list - thank you!
I think that’s probably right - and part of why I think that seeking structural change is a fool’s errand, especially if we are right about the underlying causes and need to make markets into utilities. But there are not so many public companies that asset owners cannot make meaningful change on a company-by-company basis without spending effort on “structural change.”
Not very sanguine…Hard for a frog to adjust the temperature of the boiling water. Best to JUMP out…The only way for this to STOP is to LEAVE…
Rusty bringing fire today. Beautiful.
I had a pure ET moment today when I read this story: https://www.bloomberg.com/news/articles/2020-06-24/bank-dividends-in-peril-with-crisis-veterans-warning-of-trouble?sref=5dE0gZJ9
Why am I reading this now? Are the banks using their missionaries at Bloomberg to soften the ground for a sector-wide dividend cut? They’d be happy to do it. Companies want to keep the money rather than pay it to us as shareholders. But usually they get clobbered when they cut dividends. But what if you could engineer an environment where not returning money to shareholders was viewed as the prudent thing to do? How would you go about doing it? Would anyone stop them? Not their respective boards, certainly.
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