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THE ENRONIZATION OF KENTUCKY'S CONSTITUTION
by Richard A.
Bennett
Is the current proposal to change Kentucky's corporate law a cynical and
contrarian attempt to attract corporations by declaring the commonwealth a “CEO
Friendly Zone”? Did the headlines
of the past year involving misdeeds at Enron, WorldCom, Adelphia, and countless
others somehow bypass Kentucky?
Whatever the answer to these questions, the proposals put forward as the
proposed Constitutional Amendment on the upcoming ballot contain an outrageous
array of the worst practices of corporate governance, sending the recent
corporate accountability debate back twenty years.
According to leading corporate governance expert Robert A. G. Monks, “If
this amendment becomes law, the default setting for a Kentucky corporation will
be Dictatorship by the CEO.”
Ironically, under the guise of “updating” and “modernizing” the Kentucky
corporations law, the lawyers and lobbyists for business managers have turned
the clock back on recent progress in corporate governance and CEO
accountability. While there are
indeed legitimate provisions in the law to allow for “electronic transmission”
of corporate documents, the use of “credit cards” to pay for filing fees, and
for the recognition of “facsimile signatures,” most of the measure is reserved
for an insidious series of changes geared to one end: taking rights away from
shareholders and giving them to CEOs with enormous new powers.
Indeed, it seems that while the rest of the country has taken a step
forward in protecting the rights of employees, pensioners, and investors –
working men and women – this Commonwealth is being encouraged by businesses with
a vested interest in obtaining more power to take a step – several steps –
backward.
Section 10 of SB 121 specifically gives the Board the unfettered ability to
dole out shares for peanuts to cronies.
This section allows the board to issue shares in exchange for “any tangible or
intangible property or benefit to the corporation, including cash, promissory
notes, services performed, contracts for services to be performed, or other
securities of the corporation.”
This provision removes from current law the need for the issuance of shares to
be commensurate with the “market price” of the services or contracts being
exchanged for shares. This permits self-dealing and favoritism on the part of the
Board and dilutes the value to the company’s shareholders. For example, if the stock is trading at $50 per share, and a
“contractor” is performing $5,000 worth of work for the company, under existing
law, he could be paid for his work with 100 shares. Under the proposed change, if the Board decided they wanted
to give this “contractor” 2,000 shares (a $10,000 value), that would appear to
be okay. And remember, if the Board
does this too often, it dilutes all of the existing shareholder's value.
If 50% of the Company's shares are “given” away, what does that do to the
stock’s value, and thus to the value of workers’ pensions and 401(k)'s invested
in that stock?
To make matters worse, the Board is allowed
to delegate this expanded power “to the CEO to approve the issuance, sale, or
contract for sale of shares or to determine the designation and relative rights,
preferences, and limitations of a class or series of shares.”
No longer is the CEO charged just with working to enlarge shareholder
wealth. Under Kentucky law the CEO
would be able to distribute the wealth, too.
This puts far too much concentrated power in the hands of the CEO.
Have we learned nothing from Enron and WorldCom?
Sections 15 and 18 of SB 121 entirely reverse Kentucky law on the question
of cumulative voting, a powerful tool for shareholders in replacing complacent
directors and curbing executive abuses and incompetence.
To date, the default in Kentucky has been in favor of allowing cumulative
voting and empowering shareholders.
If approved by the voters in November, cumulative voting would be allowed only
if the corporate charter specifies it.
What does this mean for the minority, unaffiliated shareholder?
Under current law, if there are three directors’ seats up for vote, and a
shareholder has 100 shares, he can vote 100 votes for each of the three, or
group his votes, and vote all 300 for one single candidate.
This permits a small shareholder to have a meaningful say in who
continues to sit on the Board.
Accordingly, it also helps the small shareholder to have a better chance of
removing the CEO's cronies from the Board – who may be using their power not to
increase shareholder value, but to increase their own wealth, power and
position.
This ability for the minority shareholder to cumulate, or cast all his votes for
a single candidate is the current default setting in Kentucky – and many
jurisdictions – and some Kentucky Corporations, namely, Ashland Oil Inc., would
have the voters change this to eliminate cumulative voting so the entrenched
Board and executives could better hold on to their power.
“The Constitutional proposal is an assault on shareholder rights and a license
for entrenched power in the boardroom.
Cumulative voting is a means of assuring corporate directors are accountable to
their shareholders. Suddenly switching the default setting in Kentucky
corporations from allowing cumulative voting to prohibiting it sends the message
that Kentucky is a safe-zone for the worst practices of corporate governance,”
says Monks [www.ragm.com]. |