Ripping off Corporate Stockholders

In my senior year in law school, then Senator John F. Kennedy gave a speech to my legal fraternity on the importance of the fiduciary principle in the practice of corporate law, the ethical necessity of corporate lawyers to remain loyal to their client, the stockholders, whose money their corporations held in trust.

Kennedy was to repeat the earlier criticism of the corporate bar  by Chief Justice Harlan Fiske Stone, blaming the activities of that group as one of the causes  of  the collapse ofthe stock market in 1929.   The Chief Justice's point  was that the fiduciary obligation of a corporate attorney, his primary duty, was owed to the stockholders of the company, not the CEO's, nor the Board of Directors nor the Managers. These were merely hired help who owed a comparable duty to the investors who were the real owners of the corporation.

It was understood that the managers of the ventures would be compensated by  the owners of the venture as other employees are compensated for their  service but would be answerable to the owners. Governmental charters were issued, giving corporations legal status and the ability to  contract and making the capital subscribed by the investors solely responsible for the debts of the corporation. This
was in outline the original plan.

It didn't take long however before the managers and attorneys, perceived the advantage of their position and that with their power to direct the day to day operations of the corporations, they were in a superior position to promote their own interests whether in harmony with the interests of the investor or not. The stockholders, having
entrusted operations of the corporation to their managers were not in a position to monitor the day by day operations of the corporation butinstead relied on the Boards of Directors and executives.

The architects of the corporate structures, and  the corporate lawyers, quickly created opportunities for management to distance itself, indeed insulate itself, from the control of the stockholders. Although  directors are nominally elected by the stockholders, the lawyers created staggered terms for the board members, thereby
limiting the effect of a given stockholder election. The lawyers too were willing to ignore the rights of the stockholders as long as the big retainers kept rolling in. Corporate attorneys, operating like stealth bombers; moved invisible to the radar of governmental regulation to promote the interests of the coporate elite. Attempts by stockholder groups to control their corporations have been largely frustrated by legal manuvering.

Formerly when stockholders were unhappy with the activities of their corporation they could vote out the directors and others and install individuals more in tune with their desires. Now virtually powerless, they are told if they don't like how the corporation is being managed they can sell their stock. No other remedy seems to exist.

To facilitate the ability to effect quick trades, many investors were induced to place their stocks in brokerage accounts, removing themselves even further from the actual control of the corporation. Over time the virtual totality of control shifted from the
stockholders to top management.  When the executive committee decided to highjack the corporation corporate counsel drove the getaway car !

The prospectus, initially a straightforward document used to induce people to invest by describing the activities and expenses of the corporation, grew, in the hands of the lawyers, into a convoluted document of many pages, replete with deceptive statement and of such a volume that it was barely understood by the investors.   Similarly,
proxy statement were misleading and deceptive.

Meanwhile, the attorneys devised a number of ways to legalize the highjacking and looting  of the corporation. By layering page after page of procedural balderdash into the bylaws, they  enabled the Board and executives to execute secret agreements, (not subject to the approval of the stockholders) to their enormous profit. Employment contracts with vague guidelines, not usually tied to performance provide the CEO and his gang with multimillion dollar salaries. Contracts usually for a term of years were virtually proof against cancellation  and provided finally for what is euphemistically
described as a "golden parachute,"  usually a huge payment of money to the executive upon leaving, whether by termination or otherwise. Ostensibly this extra compensation is the executive suite's equivalent of unemployment or severance pay  and also the rough equivalent of a pension but on a grand scales although for a relatively short period of service. The stockholders have no way to frustrate these virtual robberies since they are imbedded in the employment contract and were
part of the inducement to hire the executive in the first place.

Then too there are the neat little devises called stock options. In effect it transfers a piece of the corporate equity at no risk. When used in conjunction with insider trading, using confidential information known only to top management great profits were achieved at virtually no risk. With the help of well-compensated legislators, corporate counsels wrote the actual legislation which clothed these larcenous activities with a patina of legality. Corporate lawyers wrote retainer contract  for themselves in megabucks, their share of the swag they obtained for top management.

To defend the now astronomical compensations received by top management the lawyers have created an organ of propaganda called "The Reason Foundation". This organ of disinformation advances a variety of ridiculous reasons why CEO's and other managers re entitled to make millions upon millions annually even if business is bad and cut backs and layoffs are necessary to cover the shortfall. Comparing themselves to movie stars or top professional athletes, they suggest that as the superstars of the corporate world their huge compensation is justified. As  long as there is enough "trickle down" to keep the stockholders quiescent, who can complain about how many Ferraris the boss owns ? If they don't like it they can sell their stock. Whether the corporation prospers or not, big compensation and big parachutes are the rule.   Setbacks or losses are always due to influences beyond the control of management, while when a company prospers, (usually due to a multiplicity of reasons )
the CEO will step forward and take all the credit and seek higher compensation, never once conceding that the coincidence of a good year during his presence may have nothing to do with his management. Now corporate presidents pay themselves millions of dollars annually regardless of the quality of their performance.

Most recently, corporate lawyers are designing a shift into hedge funds and equity groups to get out from under SEC regulations. Part of the argument is they have to be able to compete in the capital market against foreign entities . Goodbye government regulation and stockholder  protection.