Monday, July 25, 2011

Corporate Governance, Power and the CEO

Over the last several months I took some time to look at several Corporate Governance concepts that I found confusing or inapt. I heard from a lot of you and there was some interesting discussion. What are we to make of it? So many of the foundational terms and concepts of corporate governance are misleading – and some are just not true. But if I came to any one conclusion in the last year it was this: Autocratic power rests with CEOs and they have come to control the discussion. 

Yes, corporate governance is about power. Power over the economy, over the political process and even, to a degree, culture. And in the game of power corporations have come in the last few years to overwhelm any entity that might check their power. This has become all the more serious and evident in the last couple of years as they are now deemed, in the US at least, citizens with a political voice. Their voice is so dominant – so well and perpetually funded – that they are the dominant player in politics and policy. 

CEOs effectively control corporations. Boards of directors are, in general, hand-chosen acolytes with marginal involvement in decision-making. The pattern of CEO compensation alone indicates their power in the process. They are making billions regardless of their success. They are the ones deciding where and when to make political donations. They are the ones applying political pressure and sending out lobbyists. Oligarchy is the word thrown around a lot these days and I’m reluctant to jump on board. I want to hold out hope that it’s not true…but can you think of a more appropriate term for where we are?

That’s where we are. So what to do? Here are the three areas where I think we need to focus energy in corporate governance:

  1. Shareholder right to call a meeting and oust directors.
  2. Separating director and CEO. 
  3. Trustees must take fiduciary duty seriously and be active shareholders on behalf of the beneficiaries.

Then there are still three big issues facing shareholders, corporations and government. I’m not sure yet how to address them but I hope our discussion can address them.

  1. Globalization. Federal laws, let alone state laws, are increasingly ineffective in dealing with corporate issues. Multinational corporations and international business is here to stay so we have to start looking at laws that address them. Domestic corporate domicile laws are woefully inadequate on the global stage and if we don’t lead on this issue some other country – or sovereign or corporate entity will.
  2. Fiduciary duty & conflict of interest. Globalization aside, there are workable laws on the books that address a corporations duty to the shareholder.   These are not enforced. As I said in an earlier post, there has never been a fiduciary duty suit on behalf of ERISA beneficiaries. If ERISA beneficiaries can’t have confidence in their trustees, who can?
  3. Lobbying and political influence. In all reality, we may already be too far down this line. And, if that’s the case then everything else is so much hot air. Dodd-Frank was fairly well stripped of any real corporate governance measures when it passed and yet, corporations are working to “reform the reform.” There is so much money and legions of staff dedicated to influencing – and even making – policy in Washington that it’s hard to think where shareholders can have impact. Still, we must try.
July 25, 2011  |  1 comment  | 

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Posted by Nicholas Benes on Aug 9, 2011 at 1:04 PM
Bob, spot on target.

The scary thing is that here in Japan, it is equally true that "autocratic power rests with CEOs and they have come to control the discussion," despite the fact that even relatively small shareholders have full access to the proxy. The CEOs have simply found a different way to keep their power: cross-shareholdings.

I think the major problem is that the topics of corporate law and governance are seen as being so complex and arcane, that it is very difficult to galvanize voters into caring deeply about the details that count, and conversely, they are a cinch to fool in the wrong direction. Given these dry and complicated topics, voters want "something to be done" after an Enron or a Lehman, but are eminently susceptible (a la Dodd Frank) of being fooled that what was most recently done, was the right thing.

How do we (a) popularize/simplify the topics and make them more understandable, less subject to sabotage; and (b) focus on the one or two issues that are most important? Your Youtube videos are a very good start. That is definitely the path forward.
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