While researching Bailout Nation, I learned one of the causes of the disconnect between financial firms and the subsequent meltdown: Corporate governance.
Or the lack there of.
Boards of Directors have historically been a collection of business associates, cronies and golfing buddies, with interlocking memberships between companies.
Board members are nominated by fellow insiders, effectively disenfranchising shareholders. This allows management to become ensconced, with little in the way of owner input into a company’s direction. Open competition for Board seats is difficult, even for large shareholders.
And as we have seen, Bo0ard members don’t make the tough calls. They give executives absurd compensation packages. Exec pay packages include rewards for secular trends unrelated to management, for bull markets, low stock prices (via resets) and for volatility. Out-performance versus their peers is hardly considered, relative performance within their sectors is ignored, as is total market action.
Compensation consultants (AKA covering the Board’s asses) deflect responsibility further. And the biggest shareholders of public comp0anies, the mutual funds who typically hold the vast majority of a firm’s stock on behalf of shareholders, refuses to engage in any corporate governance.
Some of these issues might be addressed in the latest bill to re-regulate Wall Street: Bloomberg’s David Reilly notes that “buried deep within the 1, 136-page, financial-reform legislation unveiled this week by Senate Banking Committee Chairman Christopher Dodd. It is a proposal to let shareholders nominate directors to corporate boards.”
This is a potentially significant disruption of Business-as-Usual. Direct nomination of BoDs will decalcify corporate managements.
“Never mind that corporate boards as we know them were willing accomplices in the mismanagement and fraud that led the financial system and economy to the brink of ruin. Directors sleep-walked through meetings, lavished CEOs with outsized pay and perks, and failed to take heed of the risks building up on their watch.
When things started to blow up, top executives pulled the rip cords on their golden parachutes, directors skulked away and taxpayers were saddled with the losses. The tenure of former Treasury Secretary Robert Rubin as a director and senior counselor of Citigroup Inc., and the forced but lucrative departure of Stanley O’Neal as CEO of Merrill Lynch & Co., are but two examples.
Meanwhile, shareholders can do little about the sorry state of affairs in America’s boardrooms. Proposing directors to oppose management’s pals involves long, costly proxy battles. And there is usually no way to vote against a director running for re-election; withholding a vote usually doesn’t do anything.”
The Dodd proposal gives the SEC wide latitude in implementing new rules. The SEC would likely require shareholders to own a certain percentage of stock relative to firm size; they also will have owned the stock for a longer period of time (i.e., one year).
These seem like reasonable common sense ideas.
We have been forced into a situation that is intolerable — massive taxpayer bailouts of incompetent bankers, with AWOL Boards. Its hard to see how any change could make matters worse. It just might start improving things.
Hedge Funds Can’t Mess Up Worse Than Bob Rubin
Bloomberg, Nov. 13 2009