Archive for May 28, 2008

Roots of ProxyDemocracy, part 1

Jim McRitchie, the editor of Corpgov.net, asked me to tell him a little about the intellectual roots of ProxyDemocracy for a piece he is working on. Since others might be interested, I figured I would blog here about the origins and history of the project. Writing history at this point seems a little presumptuous, given that we just publicly launched, but the project has been a long time coming (somewhat embarrassingly long) and many debts have been incurred along the way.    

The short story is that the intellectual ground was laid for ProxyDemocracy during the year I spent as a research assistant for Professor Malcolm Salter of the Harvard Business School, and the seed was planted by the writings of Mark Latham, whose ideas on technological solutions to shareholders’ collective action problems were the direct inspiration for the project. The early part of cultivation (forgive the extended botanical metaphor) relied on some volunteer help by a few programmer friends, and the project ultimately bore fruit because I learned to program, raised some money, and hired a great developer to help me. In this post I’ll relate the first part of the story, and I’ll get to the rest later.

When I graduated from Harvard in 1999 I took a job as a research assistant for Malcolm Salter, a corporate governance professor at the Harvard Business School. Mal needed someone to help write cases about ongoing changes in Japanese corporate governance practices, and while I knew nothing about corporate governance I was good at Japanese and knew how to write and do research, so the match worked. As I began to immerse myself in this new area by working through books and papers on corporate governance and attending Mal’s class “Governance and Corporate Control,” I was surprised by how much I became genuinely interested in the issues at stake. 

What interested me was essentially the same set of puzzles that Berle and Means had written about in 1932: the fundamental conflict between what owners and managers want, and the difficulty shareholders face in creating mechanisms to resolve that conflict. For me, the signal issue was executive pay, which Mal’s class handled in a number of excellent cases. The potential conflict between shareholder interests and manager interests here is obvious, and it seemed to me that much of the talk about the “war for talent” that justified eye-popping payouts was bogus. An array of mechanisms theoretically constrained the worst self-dealing, but it was unclear how well they actually worked.

In Mal’s class I came to appreciate the primary importance of the securities market as a constraint on management: if shareholders are unhappy with managers’ behavior, they can sell their stock; directors and managers don’t want this (primarily because it hurts their own wealth, but also because it makes the company a better takeover target), so they will try to keep shareholders happy. But it was also clear that major information problems made this channel of accountability weak. Not only was it difficult for shareholders to know the extent of the compensation CEOs were receiving, it was also hard for directors to know why shareholders were selling stock, and inside management was unlikely to tell them that it was because of CEO compensation.

In my work at HBS I also encountered the idea that activist investors could successfully fight for shareholder interests. Mal’s class spent a lot of time discussing the slash-and-burn tactics of LBO artists like KKR, but it also devoted attention to the lower-profile efforts of institutional investors like CalPERS to create shareholder value by pushing for governance reform. I came away thinking that the efforts of shareholder activists could be an important way of making sure that corporate executives were putting their investors’ priorities first, which was later an inspiration for ProxyDemocracy.

Next time: Mark Latham and the launch of the project. 

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May 28, 2008 at 3:09 pm Leave a comment


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