Archive for May 31, 2008

Roots of ProxyDemocracy, part 2

In a previous post I explained how my time at Harvard Business School got me interested in mechanisms shareholders use to hold corporate management accountable. In this post I’ll talk about how Mark Latham’s ideas provided the direct impetus for starting work on ProxyDemocracy.

I encountered Mark Latham quite by chance at a May 2003 conference of Transparency International in Seoul, which I was attending in connection with my work on transparency at Brookings. I was mostly busy with my own meetings at the conference but somewhat on a lark decided to attend a session on corporate governance that Mark was holding. I was impressed by Mark’s talk, in which he focused on free-rider problems shareholders face in monitoring management, and spoke with him briefly afterwards; after returning home I read some of the work on his website. The following spring, as I was wrapping up my work at Brookings and getting ready to move on to graduate school, I got in touch with Mark asking if he knew of resources that could help me vote the stock I held in Ford. Mark and I struck up a correspondence (I actually presented his corporate monitoring proposal at a USEC shareholder meeting held in DC that spring) and I continued to think about the ideas he had written about.

In work he had started publishing in the late 1990’s (particularly his paper “The Internet Will Drive Corporate Monitoring”; see all of his papers here), Mark was exploring mechanisms by which shareholders could overcome the collective action problems they face in monitoring corporate management. His vision was that shareholders should elect a “corporate monitor” that would look out for shareholder interests by investigating the performance of the board and senior management. Mark’s key insight was that this shareholder-elected monitor should be paid with corporate funds, which means that shareholders would all collectively pay for the service and the free-rider problem would be solved. With a single, investor-elected monitor doing research on behalf of shareholders (rather than a few proxy advisors doing fee-based research on behalf of a minority of the shareholders and most shareholders investing nothing in oversight), more resources could be devoted to ensuring that shareholder interests are represented. (Mark has since expanded this idea to civic politics and is now advocating the more general concept of “voter-funded media.”)

I thought Mark’s corporate monitoring idea was elegant and interesting, but it seemed to me that there were much more modest steps that should be taken first. In particular, Mark had pointed out in “The Internet will drive corporate monitoring” that a handful of institutional investors had started publishing their intended proxy votes on their websites in advance of shareholder meetings. He predicted that software would emerge to allow investors to automatically mimic the voting decisions of these institutional investors, as well as other trusted sources including security analysts, environmental groups, and journalists. It seemed to me that creating these linkages between specialists and otherwise-passive individuals was a manageable medium-term goal, and perhaps a necessary first step toward further innovations that he and others were proposing. Even if it wasn’t possible to actually implement the automated voting, we could at least help shareholders find out how CalPERS and others planned to vote.

This was the idea that led me to start working seriously on the project that became ProxyDemocracy, in early July of 2004. Being inexperienced and stupid, I thought I could finish the website before entering graduate school in September of that year. Next time I’ll tell you whether that worked (hint: no).


May 31, 2008 at 3:50 pm 3 comments


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