Corporate Boards That Do Their Job

As seen in the Washington Post.

The entirely preventable financial catastrophe we have watched unfold over the past 18 months has many culprits: reckless executives who gambled with their company's futures, feckless regulators and somnambulant boards of directors.

But while executives and regulators have justifiably taken heat for this multifaceted debacle, board members have largely been let off the hook. Why?

It is a board's responsibility to oversee management and to ensure a company's long-term survival. Its job, in short, is to represent the owners -- the shareholders.

With the tumbling and collapse of dozens of major financial and other institutions, can we draw any conclusion other than that those directors utterly failed in this regard?

Yet, increasingly, we are hearing apologists rise to the defense of boards, evidence that the process of obfuscation of the boards' guilt has begun. This is dangerous.

Evidence of this trend includes a recent Business Week article, "How Much Blame Do Boards Deserve?" by Jack Welch, the former chairman and CEO of General Electric, and his wife. Now, I have a great deal of respect for Jack Welch. But this defense of boards was wrong.

Non-executive directors at our battered and bankrupt financial institutions could not have been expected to understand the risks of complex, highly leveraged derivatives that brought about our financial crisis, the Welches wrote. That is nonsense. A board member should be able to understand when a company is leveraged up to 40 times the value of its assets, as some were. In my view, many were just not doing their jobs.

Jack Welch believes that some boards' members should have pressed managements more on their risk strategies. Chances are that some directors did take this approach. But did they demand any change of course? Or did they just accept the management line that certain risks are necessary to generate returns?

I think we have a right to expect more from directors. The system of checks and balances between boards and executive teams has, in too many cases, disintegrated. In this global meltdown we are seeing that many board members were demonstrably unqualified, abjectly remiss or simply too cozy with management.

Clearly, we must strengthen boards at public companies. Some measures must include splitting the role of chairman and chief executive; eliminating "staggered" boards, which allow for only a minority of members to be elected in any one year; and giving shareholders the right to propose board members and resolutions on company proxy statements.

Non-executive board members are fiduciaries to shareholders who choose and oversee managements, and the chairman is the main shareholder representative. How can the chairman oversee the CEO if the job is one and the same, as it is at a majority of Fortune 500 companies? Splitting these roles would eliminate this inherent conflict.

Similarly, how can shareholders exercise greater power if managements are allowed to thwart them from being nominated to company boards? In many states, provisions such as staggered boards, which are meant to prevent a full board takeover in any one year, and "poison pills," which effectively block takeovers by new managements, are perfectly legal.

The dictum of the new White House chief of staff Rahm Emanuel, "You never want a serious crisis to go to waste," applies to our financial and economic situation. Inept -- and often very well-paid -- managements and boards got us into this mess. Let's respond by making lasting changes to make them more accountable to stakeholders, which includes everyone in this country.

Corporate law is largely the province of states, which to varying degrees protect flawed governance models. What is needed is a superceding federal law that gives shareholders the right to vote by simple majority to move their company's legal incorporation to states that uphold greater shareholder rights.

North Dakota, for example, is recognized as having the most shareholder-friendly corporate laws in the nation, thanks to recent legislative action. By incorporating in the state and adopting its provisions, a public company would in one easy step improve rights for its shareholders and eliminate the often too-cozy relations between managements and boards.

I want to be clear: Jack Welch did a masterful job as the chairman and chief executive of GE for two decades, until 2001. But with GE Capital soaking up $139 billion in government loan guarantees, it's fair to ask whether the board demanded answers from its current CEO and chairman, Jeffrey Immelt, about the risks embedded in that critical division. Alarm bells should have gone off in the boardroom long before this blue-chip company sought taxpayer help.

Our disastrous market meltdown makes clear that it is high time for shareholders to demand and receive more accountability from the boards and managements of their companies. I have created the United Shareholders of America campaign to focus on just these issues. Only by concerted action can we make changes to how our companies are managed.

Comments

[Paul Belford]

I very much enjoyed and agree with the "Corporate Boards That Do Their Jobs" and believe action here is crtical the state of the nation. Here is a piece I did for the Woodstock Business Conference recently that I thought you might find of intersest.

SACRED TRUST

Oct 2008

So, once again, and all too soon, we are in an economic crisis. The last, the .com meltdown of 2000, later complemented by Enron/Arthur Andersen fiasco, was sourced largely the same as the present one. And the same could be said of the savings and loan debacle of the early 1990s. They each had in common the careless abandonment of established industry standards and professional responsibility, as enhanced in their effect by wholesale, wanton greed – a rapacious, insatiable desire for wealth and possessions.

Greed is good, Gordon Gecko told us. Well, we know that to be wrong, and wrong headed, as well. Greed is not only morally wrong, it is a highly ineffective business model, as well. Greed weakens the commercial effectiveness and socially beneficial impact of the corporations and enterprises it infects. While greed may be a building block of large and super large personal fortunes for those given to it, its impact on the prospects of a particular corporation can be ruinous, and generally is. Indeed, greed doesn’t build good companies, it destroys them.

And when engaged in pandemically, as in the current crisis, the risks associated with greed rise geometrically. Not only were the savings of depositors and the capital of investors put at extraordinary risk, if not in fact lost, the validity of the private financial sector itself has been called into question. The coming 20% ownership of the commercial banking system by the U. S. Treasury, following its assumption of obligations undertaken by the nation’s largest insurer, AIG, reflect a wholesale abdication of functional responsibility by the core and corps of this nation’s financial community. Not only did these firms squander their capital and the public trust, their behavior so impaired the flow of working capital that the entire economic system was more than at risk of catastrophic credit seizure, it was already in the early stages of it.

That we are now in a recession is clear, and perhaps a bad one. What prospect there is of avoiding a complete melt down of the economy, a full scale depression, is due largely to Treasury, Federal Reserve and other governmental intervention in virtually every corner of the financial sector. Reduced to its simplest terms, the government is seeking to supplant, rebuild and restore the trust between and among the principal factors of our economy that is absolutely essential to is functioning, the trust which was so violated by those at the very pinnacle of the private sector’s financial leadership. (For the cynic, at least, we now have some sense of the dollar value/cost of trust in our financial sector – approaching two trillions and still climbing.)

The finger pointing, of course, has already begun. Congressional oversight hearings are underway, indictments may be sought, regulations will be rewritten and strengthened, controls instituted, agencies formed, rules instituted -- and absolutely nothing, fundamentally, will have changed. And why is that? Because our present crisis, as with those before, was not nearly so much caused by a failure of the system, but by a failure of and by the people entrusted with its functioning, both public and private. The most telling element of the present crisis is not that regulations were broken, but that they, the leaders of the financial sector, broke their own rules. And if those in charge are going to break their own rules, they will certainly find a way to get around the rules of some federal or state agency, or just flat out break them. Ultimately, it is not so much a matter of the adequacy of the regulations of the system as it is the values of those in it.

Indeed, the effectiveness of a rule or regulation will be largely determined by the mindset of the players in the market place. Admonitions to play nice can have some effect, depending on who is promoting and advancing them. But more is needed still. The behavior of the prime actors needs to be consonant with a living appreciation of the fundamental and structural role played by the economic realm in the founding of the nation’s political freedoms, and their continuing protection and advancement.

What is needed is a causative understanding of how the nation got to where it is and the vital role played by the business sector, the economic realm, in this track, and the essential nature of its continuing role. Until there is a true and affecting appreciation of the economic realm’s role as guarantor of our political freedom across corporate leadership – executive and governance - the economy will be gamed and abused. Failing this, we will be at continuing, and likely increasing, risk of the political realm assuming a permanent and ruinous dominance. For this, we need to step back for a minute or three to the beginning of the modern era, to understand what exactly it is that we are.

As Europe moved from medieval times through the Renaissance and toward the Enlightenment, there were essentially two realms, the spiritual and political, i.e., church and state. It was in the context of these two realms that the people of Europe found their place and lived their lives. Between the two, the political realm had come to its ascendancy during this period even as the realms remained mutually supportive and interdependent. And in this they shared a common code -- rigid control of succession, of who was to be in charge; to preserve the system for those already in it, their heirs, and those who would swear allegiance to them.

Enter the economic. From the early Renaissance forward, Italian City States had become important centers of trade, generating monetary surpluses that financed industrial undertakings in cloth and other manufactures which in turn created opportunities that drew farm workers and rural tradesmen to city centers. Land came under challenge as the dominant source of wealth and political power as merchant families came to holding great fortunes which they used to influence and find place in the political and spiritual realms. In time, as the Renaissance’s individual and the Enlightenment’s science and invention increased productivity, even more wealth was created outside the traditional land-based economies.

What emerged, in effect, was a third venue to the top. Respectful of the political and spiritual realms whose favor the newly rich sought, and bought, they picked away at privilege and prejudice creating crevasses and later fissures for the man in the piazza to rise to the top. The significance of this development is impossible to overstate. The genie was out of the jar, throughout Europe, and increasingly in its northwest -- England and The Netherlands. Vertical mobility was increasingly available to those outside church and state. And not so much because they could buy their way up in the political or spiritual realm, but because there was an entirely new realm, a third ladder to the top, the access to which was determined not so much by privilege or line of birth, but by right of birth, by the simple act of being alive, being the citizen of a country.

The world had gone horizontal. The value and price of a thing was no longer to be determined in a church/state hierarchy, by some prelate or bureaucrat. It was now to be determined by the utility of the thing to the man in the piazza who, by reason of the markets of the economic realm, had the money to buy it, as well as had a continuing impact on what was to be made and offered in the market place. To be certain, there were still kings and counts and dukes to be dealt with, not to mention church land holdings and cultures to be accommodated. By the emergence and growth of a separate, yet contiguous, economic realm across Europe had become a reality. A new door had opened and those who ventured through it changed the world.

And while this realm in Europe struggled against tradition and imbedded interest, here in America the obstacles were far fewer and the impact of its emergence more widely and profoundly felt. Here there were no kings or counts or bishops to slow the process. Here there existed from the earliest days an environment that favored the emergence of three separate realms without the encumbrance of an overarching state/church amalgam. In fact, it was to flee that very culture that many of those who landed on American shores primarily came.

Such was the sense of independence and liberty in these earliest settlers that those in the colonies for much of the first 100 years of British settlement lived lives largely beyond the control of the British crown. In fact, it was just this sense of independence that grounded their resistance to British efforts in the mid-1700s to establish stricter political control over the colonies. The colonies had, in fact, become largely self-governing, most with some iteration of their own elected legislatures. They saw themselves as free men who would not submit to a distant Parliament in which they had no representation.

This sense of liberty reflected the fact that a person can be politically free only if he or she is economically independent of the state, the political realm, i.e., does not depend on the state for a job or sustenance. As for religious freedom, it is only possible where an established or dominant church is incapable of economic and/or political sanction. As emergent and separate, the economic realm had the effect of requiring of the first two that each stand on its own merits and apart, without the power to threaten economic loss. In turn, the political and spiritual realms provide to the economic realm the legal and moral context of its existence; i.e., structures and value systems through which the economic realm can find meaning beyond the mechanics of the market place. In effect, it is in the distinctness of the three realms that the legitimacy of each is confirmed.

It is in achieving a mutual respect and balance within this system of forces and needs that our freedoms have found expression. Indeed, without this system they cannot survive. While the Founding Fathers in crafting the Constitution may not have been aware of this dynamic’s impact on the circumstances that brought them to that time and place, or even less to have anticipated its future impact or importance, it was not only consistent with their purpose, it was essential to the achievement of it.

By its very nature, the three realm dynamic is not a static state phenomenon. Within the dynamic, each of the realms is acting and reacting continuously to circumstance and purpose within itself, as well as to circumstance and purpose in the others. In this, over time, one or another realm will experience an ascendancy vis-a-vis the others which will in turn absorb and react and work toward a new balance, i.e. to the point where none of the three is in an ascendant mode or attitude. Ascendancies and their impact are long term in nature, two examples being the rising of the economic realm from the period following the Civil War to the close of the 19th century and the other being that of the political realm from the 1930s until the 1980s.

Certain individuals can be identified with the leveling of each of these ascendancies, Theodore Roosevelt in the former and Ronald Reagan in the latter. The closing of each ascendancy had in common a deep and growing sense of the danger of bigness, that the other realms were at risk of place and effect and being in need of a righting. Each period was also marked toward its close by an increasing concern about the rights and place of the individual. Ultimately, it was a question of accountability, not among the realms but between the realms as a system/structure and the individual, as a person, and in each case it was settled in favor of the latter.

In short, it is the existence of an economic realm as distinct from the political that ensures and facilitates the vertical mobilization of the individual, the nation’s human capital. Failing this, a regression to the two realm dynamic of the Middle Ages from which we came is inevitable, just as certainly as would be the loss of our political and religious freedoms. And parallel to and causative in the development of the three realm dynamic was the emergence of the core secular value system of the West, that which came to find its clearest and most dramatic expression in the Declaration of Independence.

Now some might say the key concept in this system was democracy, but that would be inaccurate. Though democracy is, indeed, equated by many, or even most of us, with freedom and liberty, there are differences and of a substantive nature. While democracy the word has come to encompass a cultural sense or tradition, e.g., liberal democracy, it is essentially a mechanism and/or process, whereas freedom and liberty are values and states of being. Democracy as process or mechanism does not cause freedom. Rather, it facilitates it among those who seek and would insist on it. In the experience of the West, a working democracy is the practical consequence of an already existing, or at least emerging, three realm dynamic, not its cause.

And as the dynamic emerged over time, so did the sense and expression of the two core values of the West:

Each human being is of value, of worth, in and or himself or herself, without need of validation from any state, or religion, or sect or other person.

Each person is responsible for his or her actions, for the state of their lives.

And these are related. A person is of value because he or she can be responsible, and because a person can be responsible, he or she is of value. The three realm dynamic by which we live our lives is, in fact, the practical expression of the seeking, recognition and establishment of these core values, the man in the piazza free to live a three dimensional life – spiritual, political and economic.

While history holds us from claiming to have found the ultimate human state, it equally holds us to focus on the value of what we have achieved and how to maintain it so that it can be both improved and built upon. And in this, if we hold our political and religious freedoms as sacred, then so must we hold the economic freedoms without which the others are not possible. And as we expect those in authority in the political and spiritual realms to assume the responsibilities and roles of duty and devotion, should our standards for those in authority in the economic realm be any less demanding? Do they not also bear a Sacred Trust? Certainly they must, for to hold them to a lesser standard imperils the very system and structure in which the question can even be openly raised.

And where specifically in the economic realm does this responsibility -- and authority -- lie? Ultimately, it must rest in the hands of those who sit on the boards of the companies comprising it; i.e., corporate governance. It is here that a company’s place in and impact on the system in which it operates must be weighed and decided. It is here that the interests of the firm must be advanced in the context of the system and structure that allows it life. The dishonest firm cheats not only its customers, suppliers, employees and investors. More ominously, it lessens and threatens respect and place for the economic realm itself.

And this is where change is needed, this is where the assumption and responsibility and accountability can have its greatest impact. What is needed is the initiation of a national dialogue on the concept of the Sacred Trust; i.e., it is the responsibility of corporate governance that companies behave in a way that does not threaten or harm the structure that houses them. This, in fact, would be asking no more of corporate governance than what was intended in the laws under which joint stock companies were created in the first place. It is to ask no more of corporate governance than should be expected of it.
© Paul Belford 2008

[Bruce Feher]

From one Queens boy to another, RIGHT ON CARL!

[Henry E. Kilpatrick, Jr.]

The classic book, The Modern Corporation
and Private Property by Adolf Berle and Gardiner Means, published in 1932, gets to the heart of the problem, which is not a new one. When professional management controls the company, as it does in most S&P 500 companies, and ownership is diffuse, nobody is answering directly to the stockholders. And it has grown considerably worse since 1932, because now the ultimate owners of the shares usually have a layer of fund managers separating them even further from control of their assets.

I have been buying stock in small quantities since 1977. I buy and hold; I do not trade in and out of the market. I have watched these corporate managers being paid huge amounts of money with no good economic rationale for decades now and the only recourse I have is to sell the shares and buy another company that also overpays its management. You don't engage in a proxy fight with a few hundred shares.

Let's face it, it is not supply and demand that sets these salaries and bonuses. Talented managers who can spin their magic in any corporate environment, any company and any industry are few and far between. Most corporate executives would be completely lost trying to run another company. They rose through the ranks of the company they work for and much of their skill is related to the knowledge of that entity alone.

It is good to have such people in charge. They are worth some multiple of what their company's average worker bee receives. But not 400 times as much out of some false fear that they will go elsewhere.

I will not hold my breath waiting for directors to reform their practices. Directors generally fall into 3 categories: managers of the corporation, managers of other similarly situated corporations, and business or political celebrities, who may or may not understand a corporate income statement or balance sheet, much less know anything about what products the company sells. Probably the best way to reform the system is to require that directors own significant shares that they paid for out of their own pockets. But I am not confident that this is even possible anymore.

[mhelburn]

It all comes back to ethics. Why would a person who can't or won't understand the products that a company produces ever accept a position on a board? A product sold that requires 500 pages of legal description is designed to be obscure. These products were designed to be obscure because they were not what they were purported to be.

If board members who are personally rewarded for the survival of a bank are unable to oversee the workings of a bank, how can we expect regulators, who are not so motivated, to oversee the risk? Then we have the lawmakers who are not motivated to oversee the regulators until we have a crisis, having decimated the rules that would make it easier to limit the risk.

The risk touted of over-regulation and not being globally-competive, while regulation and oversight was decimated, was a race to the bottom. An international bank is already globally competitive. Our bankers, instead of using sound banking principals, ended up using those of their most unsound competitors. Our banks created this crisis with unsound products. These are no different than the toxic food products that are shipped here and around the world from China. It is impossible for the US to monitor the products in China, just as it is impossible for the Chinese government to monitor counterfeit MBS produced here.

Honest competition against Swiss Banks and their secrecy laws is nigh onto impossible. Why did we ever let UBS into this country? If they can't play by generally-accepted tranparency laws, they don't need to be here. Why do we allow what I view as a criminal enterprise come into the country and compete with our banks, absounding with assets and refusing to obey our laws? Why are they being allowed to advertise in this country?

The bankers who sold toxic products are lucky they are not in China. There they reward incompetence and greed so that that person never has the opportunity to do it again.

White collar crime results in poverty and death for innocents across the world. The Chinese punishments for white-collar crime are commensurate.

Horse thieves were hung in this country because it was understood that people could die without them. People die when their money is stolen and they are impoverished. The lack of enforcement and the lack of meaningful punishment for those like Michael Milken who was responsible for the last great fraud on the market show that we don't have the proper understanding of white-collar crime and the consequences of this on our world.

Madoff is responsible for two deaths from suicide. One in NY and one in Germany. Morally, he could not suffer enough for what he has done. He would already have confessed and pleaded guilty and would be in jail if he had remorse.

The boards of these banks are insulated from their actions by the life-styles they lead from their accumulated wealth. They don't understand yet for that which they are responsible.

[S O Bill]

Its really simple. From Reagan on.... we never forgot what Stalin did in the 40's or 50's but forgot what the banks did in the 20s and 30s and the markets.
Capitalism needs regulation as human nature does... it functions best with real ground rules and is the best of all worlds like everything with a checks and balances.
There is nothing conservative about de-regulation. It is as liberal as it gets. Lets give toddlers knives and then scold them when they cut themselves.
These guys and gals aren't really as talented as they are made out to be. You can get people with the same or better talents for 60% percent less. Let them eat cake.

[joe g.]

Anyone know why BOD minutes are not available for shareholder reading?

[BE]

How can an honest small shareholder have any effect on majority shareholders who have millions of shares and no ethics? AGMs are totally controlled by the larger shareholders who have all the votes; if they have no morals the small shareholders are helpless.

[Jonathan Short]

Mr. Icahn,

First I want to thank you for your work on behalf of shareholders. I believe that together we can effect change that benefits not just owners but markets, as well.

Unfortunately for us, being a bad director is not a crime. Do you think it is possible to hold directors accountable in civil court? We have certainly suffered specific and measurable damages from many directors' negligence. And I believe that most Boards carry insurance for the errors and ommissions of their directors.

More importantly, pursuing this matter in the court system sends the message that we as shareholders rely on directors to protect us from management, and that this duty should be undertaken only when it can be fulfilled competently.

Best,
Jon Short