My newspaper column is about the fight for shareholder rights in an age of super-compensated managers, compliant boards, and institutional ownership. You can read the whole thing after the jump.

Rucker fights for shareholder rights

by Edward Cone
News & Record
3-2-08

Times are tough for investors, and Walker Rucker wants to do something about it. Public companies, he says, are no longer run for the benefit of their shareholders but serve instead as piggy-banks for managers. His goal is to help the rightful owners regain control.

Rucker's ambitions are not modest. He's created a company called Fabius Corp. to pursue shareholder-rights cases. Among its goals: putting independent, publicly accountable directors on corporate boards, getting the issue of shareholder rights on the congressional agenda and ultimately changing the regulations that govern corporate behavior. His current target is Lincoln Financial, the giant insurance company that bought Greensboro's premiere financial company, Jefferson Pilot, in 2006. Rucker argues that Lincoln underpaid for JP and that investors should be compensated; he plans to file suit this spring. It won't be an easy fight. Rucker lost an earlier attempt to sweeten the deal, Lincoln is rich and powerful, and the merger closed long ago.

But Rucker has played the underdog before. He made his bones as a shareholder activist back in the 1990s, when he challenged the management of the N.C. Railroad, a company founded by his great-great-grandfather, Gov. John Motley Morehead, a.k.a. the man who made Greensboro by running a rail line through the small town back before the Civil War. The numbers behind the railroad's long-term lease with Norfolk Southern Corp. made Rucker's blue blood boil, and he was able to win better terms for the company and its stockholders, of which he was a large one. Since then he has fought and lost other battles over the remains of our old economy, including one over shares in bankrupt Burlington Industries. Energetic and erudite at 84, he remains undaunted, using his now-familiar arsenal of provocative cartoons and classical allusions to goad his foes and fire up his allies.

Regardless of the particulars of the JP deal -- and while I lament the loss of the company, I don't know that Rucker has a case, much less a shot at winning it -- regular folks need all the help they can get these days. (Full disclosure: Both Rucker and Dennis Glass, the former JP chief executive who now runs Lincoln and is one of Rucker's prime targets, are friends of mine.) Giant institutions control most shares, and rubber-stamp boards and sweetheart management contracts make sure the bosses get paid handsomely even when the owners suffer, but voices for the little guy are few and far between.

Writing recently in the Financial Times, author and former investment banker William Cohan looked at the enormous payouts received by the former heads of Merrill Lynch and Citigroup upon losing their jobs in late 2007, after their firms rang up billions of dollars in losses in the mortgage meltdown. "The truth is that Mr. O'Neal's $161 million and Mr. Prince's $42 million exit packages are in no way justified by their performance either as executives or as fiduciaries for their shareholders," said Cohan. "These vast overpayments -- contractual though they may be in part -- for mediocre performance are the latest examples of how irretrievably broken Wall Street's compensation system is."

And the situation is, to quote one of the more useful lyrics in the Grateful Dead canon, even worse that it appears. Cohan says, "It is no exaggeration to lay the blame for the financial crisis and a host of others -- among them, the internet bubble (1999) and the telecommunications bust (2001) -- on Wall Street's compensation system." His argument is that the system gives bankers enormous financial incentives to create and sell abstruse securities and to close mergers and acquisition deals rather than give sound advice.

Worse still, these highly paid bankers and the big institutional investors don't always understand the complex products they buy and sell. Wall Street firms have started categorizing their assets as Level 1, or stuff for which there's a market; Level 2, investments that can be priced according to a model; and Level 3, which the Wall Street Journal describes as being valued by "little more than management guesses." People hardly even blink anymore when another few billion in assets gets shoveled onto the Level 3 pile.

Most people have never heard of financial instruments called credit default swaps, although the market for them is twice the size of U.S. stock markets; trouble figuring out how to value its own holdings in these things caused highly respected A.I.G., the parent company of Greensboro's United Guaranty, to lose 11 percent of its share price in one day last month.

Cohan says part of the problem is that the bankers aren't accountable for their actions. It's a giant mess, one that makes Walker Rucker's quest seem all the more daunting. But you've got to start somewhere, and Rucker seems to relish the fight.

© News & Record 2008

 

Edward Cone (www.edcone.com, efcone@mindspring.com) writes a column for the News & Record most Sundays.