By DAVID MOON, Moon Capital Management
Contrary to popular understanding, the United States federal government is
not a democracy. It is a republic. A democracy is like my
neighborhood homeowners’ association. Everybody gets to vote on whether or
not we build a neighborhood pool. I am convinced that a majority of the
folks in my neighborhood want a pool, but I can’t get enough of them to show up
for a meeting to vote for it. My friend and neighbor, Otto, on the other
hand, does not want a pool. Otto always comes to the meetings. Ergo,
we do not have a neighborhood pool.
A pure democracy may be a messy form of governance, but it sure is fun to
watch some times. Other than some neighborhood associations, one of the
few theoretically pure democracies in existence today is the shareholder voting
system at publicly traded companies. Rather than gather at a corporate
town meeting, companies ask shareholders to sign a “proxy statement” giving the
company the authority to vote the shareholders’shares. Shareholders seldom
take their annual proxy statements seriously. The proxy statement is where
the company asks the shareholders to approve things like management compensation
plans and the corporate auditor. It is pure democracy. Well, sort
of. It’s more of like a democracy where a person’s vote is proportionate
to the amount of taxes he pays, since each share usually counts as one vote, not
Proxy statements are also where shareholders decide reorganizations.
Such was the case with Hewlett-Packard’s planned acquisition of Compaq.
For some strange reason, HP decided that its best strategy for surviving
(thriving?) in an industry where its products were becoming increasingly
indistinguishable from its competitors, was to buy another company in a
similarly difficult competitive situation. But there was one hitch: HP’s
shareholders had to approve the Compaq acquisition. Usually, this sort of
issue is perfunctory, as most shareholders either ignore their proxy statements
or simply vote in favor of whatever the company executives recommend. But
when one of your board members is the grandson of the founder and owns or
controls 17 percent of your shares, it makes it a bit difficult to approve an
acquisition without his support. When Walter Hewlett announced he was
opposing HP’s acquisition of Compaq, the chips began to fly. Both the
company and Mr. Hewlett spent ten of millions of dollars making their case to
shareholders. Full-page ads in the Wall Street Journal and New York
Times. Open letters in USA Today. Ads in local newspapers in large
cities. Phone calls to shareholders and analysts. It was a regular
Hewlett Packard employee groups took sides. At the shareholders’
meeting where the vote officially occurred, some employees jeered their own CEO
as she addressed the group. People carried both home made and
professionally designed signs outside the meeting hall. Network satellite
news trucks lined the sidewalk. And just like a political election, one
side immediately proclaimed victory, while the other side held a press
conference and declared the vote too close to call. It could be weeks
before all of the finger pointing ends. No chads, but Al Gore and George
Bush could have been proud of this election.
Watching the HP proxy fight was fun. As unwieldy as it is, it makes me
wonder about other proxy votes if the shareholders had been as interested.
How many shareholders are now going to review their proxies to see if Arthur
Andersen is their auditor? Do AT&T shareholders wish they had voted on
their company’s crazy acquisitions in the 1990’s? Would it be interesting
if the executive compensation plans “decided” by proxy vote received similar
attention? I bet there are a bunch of investors in near defunct dot.com
businesses who wish they’d read their proxy statements a bit more
Read the proxies; that is where all of the good stuff is.
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).