I have read numerous articles which asked the following question in a number of different ways: Does corporate America really need a tax cut? After all, big business pays a lot of people the big bucks to find loopholes and ways around paying its fair share, right? Apparently, these are the same companies which give their top executives eye popping salaries, with all kinds of perks on top of sweetheart fringe benefits.
To be sure, there is plenty of that in the United States. However, it is far from the norm, as just about any business person will tell you. In fact, they are probably just as indignant about that behavior, if not more so, than even the most left-leaning journalist. For every S&P 500 company which makes headlines over egregious executive pay and tax avoidance strategies, etc., there are at least 1,000, at least, small business owners scratching their heads wondering: Why did I not get the memo?
You see, while the companies in the S&P 500 or Dow Industrials Average might be the proverbial face of corporate America in the U.S., they are small percent of the number of actual businesses in the country. So, does corporate America really need a tax cut? I suppose it all depends on your definition of corporate America, but almost no one thinks of it as a five to 10 employee small business.
But what can government do about the perceived abuses in business without hurting the proverbial little guy, gal, or mom and pop? That is a great question.
One of the biggest problems with reigning in big business, if it needs to be, is large dispassionate investors own a big chunk of it. These include things like mutual funds, exchange traded funds, insurance companies, pension plans, etc. In other words, there is a significant wedge between the boardroom and the living room.
Many of these managers follow a passive investment strategy, meaning they base their investment in a company on its weight in an index, as opposed to anything specific to the firm itself. As a result, institutional investors who don’t really care about corporate governance own a substantial percent of the stock market. For instance, my dog could be the CEO of a company in the S&P 500, and many investments managers will buy the stock regardless. Seriously.
So, what chance does a single, activist shareholder, or even a group of them, have in effecting meaningful change in a company controlled by the institutional investment industry? Let’s just say not much.
I submit all publicly traded companies should have a voting share class of stock and a non-voting one. This isn’t all that uncommon in the industry. However, in my perfect world, all passive or index managers and investment vehicles would have to buy the non-voting class. This would effectively remove dispassionate, passive investors from the ultimate management of the company, thereby allowing the potential for great shareholder activism.
Clearly, the devil in this proposal is in the details, and I can’t imagine the executive committees at many large companies meekly acquiescing to such a plan. To be sure, index managers and other passive institutional investors help to keep them a safe distance from the maddening crowd.
Who knows? Maybe we will see more articles about topics like this, as opposed to whether corporate America deserves a tax break or two. As for that, I am all for it, but you probably guessed that already.
(Read more as previously published in the Montgomery Advertiser on December 13th, 2017)