On the importance of direction

The Globe and Mail points out that CIBC is taking a cue from the recall election concept in its corporate affairs:

Under CIBC's new rule, a director who does not receive majority support from shareholders must submit his or her resignation to the corporate governance committee of the CIBC board of directors. The committee will decide whether to recommend that the board accept the resignation, and the board will make a decision within 90 days of the annual meeting and issue a press release either way.

CIBC said that in the absence of extenuating circumstances, the committee “would be expected” to recommended that the resignation be accepted...

(Two shareholder rights activists) predicted that there will be a more substantial change in the future. The CCGG and others have been lobbying the federal government to amend the Canada Business Corporations Act to change the rules around shareholder voting.

Presumably the measure itself is in some part a means to deflect attention away from CIBC's rough year in terms of both profits and jobs. (Though that fact is one readily explained by the aftermath of Enron.)

The problem is that while it seems a popular choice among the people interviewed for the article, it's not an idea that deserves attention. In fact, the recall model may be even worse suited to corporate direction than to politics (and I'm no fan of it there either).

At least in politics it's possible to justify the recall process by the fact that the duty of a representative must be to his or her constituents. Indeed, the representative's power is derived purely from the voters' intentions. (Again, I present that simply as a theoretical justification; the practical experience with recall elections isn't one that I'd want to see replicated.)

Directors, on the other hand, owe their duties to the corporation generally, including some duties to all stakeholders within the corporation, rather than to the immediate interests of a majority of shareholders alone. The changed policy would either place the directors in completely unworkable conflicts between the desires of the shareholders and their other obligations, or would be used as justification to narrow the directors' focus further to nothing but immediate share value. And that's a recipe for even more of the kind of shortsighted corporate direction that got CIBC in trouble in the first place.

What's worse, from the sound of the article the standard applied by CIBC will be a particularly hazardous one. As best I can tell (and I hope it's just a matter of either me or the article having this wrong), directors will essentially be removed by default if there isn't demonstrated majority support, rather than removed only if there's a demonstrated majority against. I'm not sure what proportion of shareholders normally exercise their voting rights, but it sounds like it could only take an unusually apathetic group of shareholders to leave a corporation completely directionless. And that would be so even if the inactive shareholders had no desire to see the directors removed.

Even if that potential flaw isn't ultimately in play, the idea is still a dubious one. Hopefully the trial balloon will be allowed to float by once it's done the job of distracting investors from CIBC's job cuts. If not, it seems likely to eventually blow up in the face of all involved.