1. The Elephant in the Living Room.
The single best indicator of the state of corporate governance – a system of accountable power – is the capacity of senior management to increase their own compensation that has been going on for two decades. The metaphor of the elephant in the living room is particularly apt as, incredibly, nobody wants to talk about this problem. On the side of management, from the Chamber of Commerce, the Business Roundtable, and the “courtiers” – legal and otherwise, there is silence; there is not even pretence of justification, there is simply bland silence. None of the famous advisors even attempts a substantive defense of the realities of CEO compensation. So long as this situation prevails, one cannot even pretend that an effective system of corporate governance exists.
2. Rabbit Tracks.
There is a continuing tendency to direct governance attention toward matters of little real importance. So, we are told that governance activists have achieved most of the reforms they have sought to effectuate:
a. Majority voting. This is the classic example of inventing a problem so that its solution can be hailed as a great victory.
b. Annually elected boards. Again, thirty years ago companies “staggered” their boards to protect against hostile takeovers. Today, they have different defenses and have reverted to the long time status quo.
c. Say on pay. On the extreme margin, this may have some useful impact. If a company has reason to believe that shareholder support will be low, it should consider whether to proactively commence a dialogue to encourage support. In the case of Pfizer, Johnson & Johnson and other companies, such engagement appears to have had a demonstrable impact on their say on pay vote results last year.
d. “Super majority board independence.” As Peter Drucker put it thirty years ago: “Whenever an institution malfunctions as consistently as boards of directors have in nearly every major fiasco of the last forty or fifty years it is futile to blame men. It is the institution that malfunctions.” Independence is an oxymoron in the context of a self perpetuating institution. Nor is it possible that a board can meaningfully monitor the functioning of a CEO who, as Chairman of the Board, also acts as its sole provider of information from within the company, sets the agenda for board meetings and presides over the meetings.
So long as the energies of corporate reformers, public and private are focused on diversionary “rabbit trails” such as these, genuine reform will continue to be elusive.
3. Obsessions of the Incumbents
a. Those in power will oppose even a scintilla of possible shareholder involvement in the nomination of directors. Reform efforts have not even broached the question of election of directors. Consider the formidable energies employed in recent years:
i. Lobbying against any provision for shareholder access to the ballot in Dodd-Frank.
ii. Success in diverting Congressional authorization to empowerment of the SEC.
iii. Success in persuading the DC federal circuit court that Congress and the SEC are unable to enact a common sense provision applicable to public companies.
Exactly, what can a single director “damage” in the functioning of a board? He can raise the question of “fiduciary compliance” in the fixing of executive compensation. Once this cat is out of the bag, the whole board could well be accountable (as, by law, they should be right now) for failure to “act in good faith” or to exercise fiduciary duty. It’s all about the money!
b. Cripple Proxy Advisory Firms
i. Proxy advisory firms – ISS, Glass Lewis – have the distinction of being the only category of professional service providers, including lawyers and accountants, not to have been suborned by corporate management. There has been over the last thirty years not a single allegation of proxy advisory firms either accepting bribes or of acting in bad faith. Their “crime” is that they represent a threat to the autocracy of the CEO and incumbent boards.
ii. Note well – what is the scope of activity of proxy advisory firms
1. They give advice as to votes on company proxy statements. They have no authority to raise issues on their own–they can only advise on issues raised by others.
2. There is no compulsion on shareholders to employ the services of proxy advisors firms.
3. Proxy advisors have no power to vote except as expressly authorized by the legal owners.
iii. It is an unhappy commentary on the state of public life in America today that managements have been successful in diverting Congressional and regulatory energies to proxy advisory firms.