Agenda for a New President: Improve Corporate Governance

Nell Minow is the editor of The Corporate Library, an independent research firm specializing in corporate governance.

By Nell Minow

President Obama will come into office with very little time to head off a long-term economic downturn. The recent volatility we have seen shows that the need for better corporate governance has never been clearer or more pressing.

The 21st century’s version of "mutually assured destruction" does not require weapons; it is the global economy, one in which we all are now are inextricably intertwined.

Previous scandals – insider trading, the savings and loan abuses, accounting fraud, market-timing, backdated options, and more – could be compartmentalized, attributed to a few bad guys abusing the system.

But this latest mess is so pervasive and so – apparently – legal that it has called into question the most fundamental notions of trust in Wall Street and in the American economy. The impact of America’s sub-prime loan disaster is felt around the world just as economic crises in other markets affected us.

The new President will have to do a lot more than tweaking some rules and issuing some new lists of best practices and disclosure requirements.

And even a new administration will be limited in how far it can go in reminding corporate boards that good governance is more than simply compliance and check-lists. It is about transparency and accountability, but most of all it is about making sure we have board members who are committed to asking good questions and insisting on good answers.

If the transition team asked me for my to-do list for improving corporate governance, I would provide a combination of quick steps and long-term, more ambitious and far-reaching proposals including:

1. "Say on pay" - When an overwhelming majority in the House approved legislation to give shareholders the right to cast a non-binding vote on executive compensation, it was Senator Barack Obama who introduced it in the Senate. So we can expect administration support for getting it enacted promptly.

2. Race to the top: Shareholders should determine the state of incorporation, a more market-based approach that will encourage the states to protect shareholders, not management.

3. "Majority vote" – The law now permits a director to continue to serve without getting majority vote from shareholders if there is no dissident candidate. Nearly 30 directors currently serving on U.S. corporate boards did not get majority support from shareholders. One way to remind directors that they represent shareholders is to make it possible for shareholders to remove those who overpay executives and fail to manage risk.

4. Appointments – The Bush administration recently added new SEC commissioners, limiting the new President’s ability to change its direction. But it is the President who decides who will be SEC Chairman, and the Chairman has the greatest power in setting the agenda and making division-level appointments. There are also positions at Treasury that will be very influential. And it is important to remember that the Assistant Secretary of Labor - with responsibility for ERISA, which governs the largest group of equity investors - should be an expert in capital markets, not just benefits. The failure of ERISA funds to exercise share ownership rights as fiduciaries should be on the agenda for investigation and enhanced oversight.

5. Reorganization – Combine the SEC and CFTC and eliminate the "self-regulatory organizations" that continue to give the securities industry too much authority in regulation and enforcement. This antiquated structure has been out of date for decades and there is no remaining justification to continue it.

6. Corporate governance has to be reviewed from the "demand side" as well as the "supply side." It is not enough to focus on what boards and executives must do. We must also focus on what investors, especially institutional investors, must do. The US needs something along the lines of the UK’s Myners Report, putting the burden on institutional investors to explain why they are not doing more to demand action on issues like poorly performing boards.

The SEC must also stop blocking the "broker vote" rule to end automatic "for" votes on governance-related issues. ERISA funds and other private institutional investors should be required to disclose all of their proxy votes, their proxy policies, and report annually on their exercise of other ownership rights, including the filing of shareholder proposals, meeting with management, proposing director candidates, and litigation.

7. Regulatory policy – SEC rules almost always encourage a compliance-oriented approach and discourage innovation. We need a shift to a more flexible "comply or explain" approach that makes the rules the floor instead of the ceiling and encourages innovation. A fundamental, zero-based, 21st Century approach to all of securities regulation is long overdue. The SEC should also step up Chairman Cox’s efforts to use technology to make federal filings more user-friendly. There is enormous opportunity to use online technologies for bail-out related tasks, especially valuation.

8. Global coordination – As capital markets become seamless we need to work more closely with other developed and emerging markets to assure transparency and consistency.

These steps would do more than make important changes in removing obstacles to the shareholder oversight that is an essential element of our markets' efficiency and resilience. They would send a powerful message that corporate managers will no longer be able to game the system for their own benefit.

Comments

[Eugene Modica]

I agree that there is a need for corporate governance but, it also has to be considered that a lot of investors just collect the dividends and don't understand the fundamentals of business very well when voting.

[James McRitchie, Publisher Corpgov.net]

Minow's recommendations are all well worth implementing. Glad to see her involvement with The Icahn Report. Here's a few more:

Proxy access. Shareowners need to be able to avoid the cost of a separate solicitation and should have the ability to place the names of their director nominees on the corporate ballots. Ownership thresholds should be at 3% or 100 shareowners, holding at least $2,000 of stock for a year. We need that provision for groups of small shareowners (like they have in the UK) because many small companies in need of corporate governance reform have no significant institutional share ownership. We need proxy access so that "independent" directors will know they ultimately answer to shareowners, not CEOs.

Proxy exchange. Shareowners shouldn't have to instruct management as to how they want their proxies voted. Instead, they should provide their instructions to an independent proxy exchange.

Proxy assignment. Institutional investors should be encouraged to announce their votes in advance so that retail shareowners can "vote by brand," imitating the decisions of trusted investors. The law should facilitate the assignment of proxies to voting agents without fear of penalty for solicitation.

Expand fiduciary duty. The ultimate purpose of corporations should be to serve the interests of society as a whole, not just shareowners. As Kent Greenfield notes, "there is no such thing as a limited liability society." Extending fiduciary duties to employees would begin the process of making the internal governance of companies more responsible to the larger society. Many studies have shown that companies with employee ownership and participation are more productive and efficient. (Greenfield, Reclaiming Corporate Law in a New Gilded Age)

No More Lies to Labor. The law attempts to protect investors, but not investors, from corporations that lie. A very simple law modeled after SEC Rule 10b-5 could create more competitive and efficient markets for the allocation of labor. The rights of labor to the truth should be no less than the rights of investors. (Greenfield, The Unjustified Absence of Federal Fraud Protection in the Labor Market)

[Virgil Bierschwale]

Great article.

One thing that I must say though is there is no possiblity for capital markets on a global basis to become seamless until we develop a fair system so that each country will be able to continue to generate the taxes on wages that they need to continue, because the current system where we can send jobs offshore is beginning to make it where our community, county, state and federal governments will not receive the taxes that are necessary to survive, let along prosper and the current reduction in wages on a large scale basis is the culprit in my opinion that is putting our retailers, manufacturers and raw material producers out of business.

Virgil
http://www.KeepAmericaAtWork.com

[Mike McConnell]

Great article but our more urgent issue is handling bailout money. It needs to be handed out with strings like an investment for the US. Buffett is probably the only person smart enough and has enough public trust to manage that. Please ask him to do it. He can enlist Mr. Icahn and other fellow billionaires to help and even retirees for clerical assistance if needed. I would immediately reinvest if that were done.

Mike

[Trent]

Common shareholders are fed up with special perks, special stock options, no representation during business strategies/bankruptcies and manipulation of information. Fellow Americans would much rather bury their money in the back yard vs investing in this robber baron market, only to lose their hard earned money.

I would say the citizens uniting started nine months ago and will continue until a truce has been declared on fellow americans. We don't owe the big three or any any other corporation tax money bailouts because they have laid off good hard working americans only to satisfy the misinformed/money hungry analysts and folding chair robber barons.

Like others I'll just stay away from this unfortunate event and hope Carl you have influence over the game changers. Why buy american? When we lay off americans for profits, bonuses, common shareholder failures, etc..

Government of the people, by the people, for the people!

[Marcy Murninghan]

A must read for those left baffled by the ballooning bailout... and confused about "blurred borders" between public and private interest...

I would only add the states to this regulatory mix, given their authority over an important class of institutional investors that are exempt from SEC oversight: the myriad endowments, which in most cases are accountable to offices of attorney general, and IRS.

[Bruce W. Morgan]

Much of our current financial mess is attributable to incompetent, inattentive, and even somnolent and dishonest corporate directors. At least in the case of each corporate bailout recipient, perhaps the Treasury could assign two or more independent directors, responsible to a Treasury oversight board, who would further serve on the audit and compensation committees and who would report periodically to the Treasury. Additional compensation might be provided to these directors. Meanwhile, a further requirement might be to separate board chairmanships from management. That combination often impedes full board communication and undermines shareholder interests.

[Ray Petrone]

It seems as though members at the G20 meeting agree that something must be done about executive compensation. I find it sad that it has come to world government consensus that executive pay is, by and large, excesssive and out of touch with results. PM Brown mentioned the executive compensation issue in his speech to the group today and said there was widespread agreement on this (and other topics).

I have warned Boards of Directors for more than five years that it was likely that government would intervene if Boards did not take action on their own. Now it appears that government will almost assuredly take action on this issue. Let the chips fall where they may. Boards have ignored the warnings of a gathering storm and will live with the consequences.

[Milt]

Eugene, While a lot of investors may not understand the fundamentals of a Industry,
WE ALL UNDERSTAND THE FUNDAMENTALS OF BUSINESS.
Paying 7 and 8 figure salaries to people to
run a company in the ground and to lose millions
for the company is insane.
I hope you don't support that. While good pay for good results are needed, just the same I have several stocks like WaMu that make me want to
throw a revolution because of CEO and corporate pay.
How could any board of directors let this happen as much as it has in the past several years?

[Thomas Foskaris]

This type of grassroots shareholder initiative - the "United Shareholders of America" is long overdue.

Together we can help spearhead reforms that will level the playing field and work to protect shareholder interests.

Sadly, too many corporate boards and committees have long been stacked in favor of management while the long-term interests of individual shareholders have been largely neglected and/or ignored. As a result, we've seen gratuitous executive compensation packages reach new and obscene heights.

Don't get me wrong: I'm not against fair compensation for quality management. But, I'm a shareholder too and I resent a system that allows entrenchment, manipulation, and (in my opinion) the legal piracy of corporate profits by management at the expense of the companies (and therefore the shareholders) long-term best interests.

Today there is a valid discussion occurring in the USA about a feared "redistribution of wealth" under the new Obama administration. It's a valid discussion and should be debated.

But I would point out that we already have an epidemic of greedy management coupled with ineffective or mediocre boards which has already allowed a significant redistribution of shareholder wealth "from the many (shareholders) to the few (management)".

Fortunately the American Dream is still alive, but, it has been wounded in the current financial crisis. The time has come for someone (on the shareholder side of the table) to start an initiative like this.

Although we've never met, I'd like to say "Thank you Carl", for your efforts to unite shareholders at the grassroots level. It's time we let our political leaders and corporate boards & managers hear us loud and clear with one voice. Let's clean this mess up... Let's ROAR!!!

DISCLAIMER: The opinions & comments which appear in my post are not sanctioned by any other entity and I am solely responsible for them. Also, due to certain contractual restrictions, media interviews will not be provided.

[Wil]

It's the same happening around Asia (Singapore, China, HongKong etc).

A lot of CEOs are fattening their own wallets (thru' bonuses, options, benefits) at the expense of the common shareholders.

Unfortunately, we don't have a Carl Icahn in Asia yet.

Let's hope someone of that mold will appear soon.