July 7, 2009 (FinancialWire) — Since previously citing examples of “Cumulative Excess Returns”, which are the shareholder returns for the stock in question less shareholder returns calculated for a portfolio of the S&P 500 (NASDAQ: SPX), examples of Level Two investing, Non-Control Voting Initiatives, such as the case of Avon (NYSE: AVP), as well as Robert Monks’ unsuccessful proxy battle for a seat on the Board of Directors of Sears (NASDAQ: SHLD), the sixth and final entry in Dr. Susanne Trimbath’s “No Accounting For Corporate Governance” series, entitled “Call To Action”, was recently posted at Investrend Weblogs. The post culminates Trimbath’s description of tension created by institutional investors’ desire to earn extra revenue from stock lending and outlines the challenges to corporate governance presented by the subsequent lack of accounting for voting rights.

From the blog:

“This series of blogs has described a very serious problem. Owners who are managers have day-to-day control over the productive assets of a corporation. When the business is no longer run by the owners, as is the case for modern corporations, the control of the assets (which stays with the managers) is separated from the ownership of those assets. After separating ownership from control, it can be sold off in the public capital markets in the form of stock shares. Shareholders then elect a Board of Directors to represent their interests in the way the company is managed. Boards hire senior management, approve policies, monitor audits, etc. It is through their votes that shareholders are able to influence the profitability of the company, which directly impacts the value of the shareholders’ investment. Shareholders in the U.S. are allowed to vote both for members of the Board and on some specific issues like approving mergers and acquisitions.

“There is evidence that shareholder involvement, through exercising the voting rights that are an integral part of share ownership, has a positive effect on the performance of the company — in terms of both profitability and stock prices.

“Over time, active investing has transformed as laws, politics, and economic forces shift. In Part 2, we traced out some of those transitions over the last half century. The regulatory pendulum goes back and forth between more regulation and less regulation. The go-go junk-bond 1980s on Wall Street culminated in the Crash of October 19, 1987. That led to an upswing in regulation which was quickly forgotten as the dot.com bubble began to inflate. The bursting of that bubble in 2000 was followed in quick succession by the collapses of Enron, Worldcom, etc. Those scandals led to a new round of regulations, the most famous of which is the Sarbanes-Oxley Act of 2002, better known as SOX. The regulatory pendulum is swinging again. Professor John Coffee, Columbia University Law School, described attempts to limit the SEC’s authority over the proxy process this way:

“‘The SEC is under attack from business groups. But shareholders do have a right to nominate directors…and the SEC does have the authority to ‘regulate the proxy solicitation process’. If you try to invalidate the SEC’s authority, other things will fall with it…’”

The entire blog entry is accessible via Trimbath’s “Outside The Ivory Tower” blog at Investrend Weblogs (http://www.investrendweblogs.net/strimbath/).

The previously posted entries are Part One through Part Four in Trimbath’s ‘No Accounting’ series.

The setting for the first entry in the series begins with the October 2008 U.S. Congressional hearing on the financial crisis, in which former Federal Reserve Chairman, Alan Greenspan, “admitted that he was shocked to find out, after 40 years as an economist, that some executives would do things that were not in the best interest of the company they worked for.” And continues by commenting that, “His approach was overly simplistic because the difference between what executives can do and what they should do is the crux of corporate governance.”

Part Two, entitled “A Little History”, explains that, “Over time, active investing transforms as laws, politics, and economic forces shift. At work changing the shape of active investing strategies are significant shifts in the financing markets. Preferred stock was the most favored form of financing for corporate actions (takeovers) during the 1970s. During the 1980s, debt financing was plentiful so that junk bond takeovers and leveraged buyouts were the order of the day for effecting change at inefficient corporations. In the early 1990s, there was an implosion in the debt markets. As the tech bubble began to inflate, equity financing was prevalent.”

Part Three, entitled “Shareholder Activism”, discusses several new investment partnerships that were formed in the early 1990’s, which “presented ‘alternative emerging investment opportunities’ to the major pension plans,” and continues by stating, “These partnerships proposed to make a limited number of restricted investments in major public corporations, and then, to utilize the expertise of the principals to increase the value of those investment stakes.”

Part Four, entitled “Stock Loan Versus Voting Rights” notes that, “from the perspective of corporate governance, the practice of securities lending creates three complications. First, the institutional investor temporarily loses his voting rights and is therefore partially unable to fulfill his corporate governance obligations. Second, there is a risk that the ultimate borrower of the shares will abuse the process by using the shares to influence a vote in a direction contrary to the best interests of the lender institution. Finally, there is a risk that the borrower, in using the shares to fulfill delivery obligations for short sales, will be driving down the value of the institutional investor’s portfolio”, adding, “this last complication was the motivation for the 2008 halt to short selling in the shares of financial companies.”

Part Five, entitled “Why Governance Matters” began by commentary saying, “We cannot over-emphasize the importance of voting rights. Beyond the simple question of fairness, there is evidence of economic consequences associated with voting initiatives. Given the nature of this approach to correcting corporate strategy, the research is naturally limited to case studies. Still it is possible to point to more cases of positive returns than negative returns for the limited voting challenges associated with Level Two active investing, aimed at changing corporate policies or securing representation on the corporate board through the exercise of corporate governance rights associated with ownership. This appears to hold true whether the investor wins or loses the voting challenge.”

Susanne Trimbath, Ph.D. is CEO and Chief Economist at STP Advisory Services, LLC. She was Senior Research Economist at Milken Institute and Senior Advisor on a USAID-sponsored capital markets project in Russia. Her early career included financial services operations at national clearing and settlement organizations in San Francisco and New York as well as at the Federal Reserve Bank of San Francisco. She also worked on Wall Street at the Pacific Stock Exchange and Depository Trust Company. A multi-published author, co-author and editor, Dr. Trimbath holds a Ph.D. in Economics from New York University. Go to http://www.investrendweblogs.net/strimbath-profile to read more about Dr. Trimbath and her “Outside The Ivory Tower” Investrend Weblog. Dr. Trimbath also invites readers to connect with her via Twitter (http://twitter.com/SusanneTrimbath).

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