Mind on Money: Time to hold boards accountable | F. Marc Ruiz: Your opinion on money
I serve my clients as their trustee. Serving in this capacity requires me to identify, manage and mitigate situations where my firm’s business practices may conflict with the best interests of my clients. In situations where sufficient mitigation of conflicts of interest is not possible, clients should be informed in plain language of the nature of these potential conflicts.
There are many rules regarding the implementation of the fiduciary standard. Some of the rules are easily seen as common sense, some of the rules are more technical and less obvious. We go to great lengths to observe and document our rules and obligations as fiduciaries.
Legal professionals, trust companies and sometimes accounting firms also have a fiduciary duty to their clients. Each of these professionals has different rules and standards used to perform their duties, and different types of conflicts that need to be managed.
There is, however, another type of fiduciary duty that may not be as visible as law firms or investment advisory firms. This is the fiduciary duty incumbent on those who sit on the boards of public companies.
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A member of a corporation’s board of directors has a very limited type of fiduciary duty. These people are chosen by the shareholders specifically to look after the interests of the investors, i.e. the common shareholders, of the company. In this duty, boards of directors are not responsible for the day-to-day operations of the company, but they have very specific responsibilities such as hiring and firing senior management, declaring dividends and developing corporate strategic planning. On the ladder of control, the board of directors sits at the highest rung, which is appropriate because it represents the true owners of the company.
Over the past few weeks we have had some very high profile situations where the role of boards of directors has come into play, and in both cases, in my view, a new type of conflict of interest, going beyond the typical financial and ethical obligations of directors, was revealed. I will discuss these situations not from an investment perspective, which means not whether companies are good investments or not, but rather from an “investor” perspective, i.e. what are the rights and obligations of investors in America.
I know a lot of investors in Disney, including myself. I bought Disney stock the day they announced the acquisition of Lucas Film (Star Wars) many years ago. I was excited about Disney’s unique ability to improve this entertainment franchise for the future, creating great Star Wars experiences for generations to come. My sentiment is not unusual with Disney investors I know. Whether it’s traditional wholesome stories, Marvel, sports on ESPN, or the uniquely American experience of Disney theme parks, Disney investors tend to believe in Disney products.
So let’s go. What the hell was Disney management doing when they publicly engaged in a contentious political debate over parental rights in Florida? Regardless of where everyone stands on the new Parents’ Rights Act, Disney is creating entertainment experiences for a huge number of American families. There are going to be differing opinions among a very diverse customer base for Disney products, and while I can sympathize with Disney management trying to balance the opinions of some Disney employees, stepping into this very public political arena is likely to cost the company dearly.
This is where the board comes in. The board exists to represent the shareholders of the corporation, and allowing management to put shareholder value at risk by deliberately and publicly dragging the Disney brand into turmoil, to me represents a new kind of fiduciary. breach of duty. Ideological conflict of interest.
Twitter’s board this week also flirted with this new kind of conflict, in my opinion. When Elon Musk offered to buy Twitter, his reason for doing so was that he believed in Twitter as a platform and a product. As a former Twitter user my opinion is that the platform has been horribly mismanaged due in large part to ideological bias by its management, the board has also apparently been impacted by this culture of bias before to seemingly rediscover that his duty is to create shareholder value and accept Musk’s offer.
As small investors, we have a role to play in this process. I personally own about 40 shares, which means I receive a shareholder proxy card in the mail or email about every week. These proxy cards are where administrators are selected. Admittedly, I throw a lot. It’s easy to think that as a small investor, I have no influence over these huge corporations. But I would never vote in a political election, even if I am only one voice in this process, and it is time to start taking the same initiatives on our investments. When we invest in stocks, that proxy vote is our right to be heard, and going forward, I will consider it my obligation as well. The accountability of shareholders begins with the board of directors; it’s time to start holding them accountable too, and it starts with those pesky proxy cards.
The opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations to any individual. Investing in stocks involves risks, including price fluctuation and loss of principal. Marc Ruiz is a Wealth Advisor and Partner at Oak Partners and a Registered Representative at LPL Financial. Contact Marc at [email protected] Securities offered by LPL Financial, member FINRA/SIPC.