Shareholders annual meetings are good example of pure democracy in action

By DAVID MOON, Moon Capital Management
March 24, 2002

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 each shareholder.

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 political campaign.

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 businesses who wish they'd read their proxy statements a bit more carefully.

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).

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