Are Public Companies Owned by the Public?

Board of Directors Keeping a Low Profile Cartoon

Board of Directors Keeping a Low Profile Cartoon

Is the entire governance model of public companies broken?

In theory, public companies are owned by the public shareholders and the goal of the company is to increase the long-term value for them.

In practice , many companies are managed by minority shareholders or ineffective board members , that can not be replaced by the majority public shareholders.

Lets assume I own HP stock. Assume I think the board is not doing a remarkable  job. Since four CEO were changed in recent years, it is unlikely that all CEO’s are to blame.

How can I change the HP board of directors? This is quite impossible as I have a very tiny share of HP shares. But the largest owner has only 7%.

The classic capitalist answer is that I could sell my HP share, and if many people follow my footprints, the board would “Get the message”.  However, there are some very nice incentives for being a board member ($381,000 per year in this case) , so there is no reason for board members to resign. For example John H. Hammergren is a director of HP since 2005 and despite of the stock decline he did not “get it”.

Maybe he is an amazing director ,I don’t have  any data, but the stock does not reflect it.

HP (HPQ) Stock Price 2007 To 2012

HP (HPQ) Stock Price 2007 To 2012

In theory, I can send a fax a nominate my own director , but I have the feeling it would be challenging, as the process is complex.

In 2012, for example, only 20 such proposals were submitted and only 8 actually got to the voting stage.

In other companies, in which the CEO has 10%+ of the share, things might get even worst, as a minority shareholder (10% is smaller than 90%🙂 ) is running the show, and effectively selects the board members on his own. There are many conflicts as a result. It is very hard to believe that his own compensation as an employee is not highly biased because of his shareholder position.

The current practice in which the CEO’s have large influence on board selection seems extremely problematic.

One possible solution is to move to a more direct, democratic, online model elections model.

Each shareholder would be able to suggest a director ,electronically and vote, proportionally to his shares on the best directors to run the company.

As a result, the directors would also have to convince the public on their achievements, independence and value to the shareholders.

It would also help eliminate some of the nepotism , which is often seen in Israeli stock exchange, and in a more subtle ways in NYSE and NASDAQ.

Such a model would be modern, effective and representative of the public interest.

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2 Responses to “Are Public Companies Owned by the Public?”

  1. Uri Gilad Says:

    Great article, really thought (and comment!) provoking.

    Did you just offer democratic style elections for public companies?

    May I share a couple of organizations controlled by democratic elections? : 1. The state of Israel. 2. The United States.

    The two points of light in this capitalist system, for me, are:
    1. Failing companies will die or improve/evolve, example range from Kodak (dying), HP, etc to apple (remember when they booted out Steve jobs, and how he came back) and IBM (another miraculous recovery in the late 90’s)

    2. These companies are ruled by the SEC(and its equivalents) corruption happens, but it is relatively rare (compare the # of scandals to the # of traded companies).

    At the end of the day, one of the key things you forgot to mention is that these companies depend on employees, who get stock as an incentive, and the good ones will leave if the stock is crappy. I have an example we are both familiar with.

    • ophirk Says:

      Yes, I was offering a more direct democratic model for public companies🙂
      I’m not so worried about “corruption” per-se ,but more on missed economic opportunities and conflict of interest between the executives & the public that holds the majority of shares.
      Capitalism s great, but it assumes a market in which information is completely available for everyone and feedback is immediate. My idea is to move forward in this respect.

      The employee stock options are not helping much.
      * In non hi-tech (e.g. Teva, Walmart) employees do not get any stock
      * In public companies the stock for 95% of employee is not that main source of income as it is too small ( or moved to RSU’s anyway )
      * The stock is not even a good way to motivate executives, because if the stock is not doing well, they just get more of them🙂

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