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January 2003 Message Friends, I wake up some mornings and think that I am
Rip Van Winkle. Where are Herbert Hoover and Treasury Secretary Mellon? It is
hard to imagine living in a country where the economic policy is directed by
former Managing Partner of Goldman Sachs, former Head of the New York Stock
Exchange and former Head of the Business Roundtable. 2003 certainly is a
Dickensian best/worst of times for corporate governance in the US. The tsunami
of reform swept an unwilling House Chairman, wavering Senators and a denying
President to a smiling signing ceremony in the Rose Garden of the White House in
late July. Issues like states’ proprietary rights over corporation law which
had impeded most reform for the previous seventy years simply weren’t
mentioned. The law itself was flawed with compromise eliminating such provisions
as requirement for auditor rotation and the expensing of stock options. Every
day since has witnessed a dilution in reformist zeal. The heralded independent
board to regulate the accounting profession has no chairman and no budget;
Harvey Pitt left several bold initiatives in process before gracefully (history
must record that this most maligned of public servants departed with grace)
retiring on election night. We can evaluate SEC Chairman designate Bill Donaldson, a man capable of doing anything, from his response at confirmation hearings. How does he stand on: · Requiring that mutual funds (subject to the 1940 Act) disclose publicly how they voted portfolio company shares. Aside from Pitt’s proposed rule, it is sad to report that the SEC has been a subsidiary of the Investment Company Institute for the last thirty years (and probably longer ). Some 6000 people supported Pitt’s proposal, ICI opposed it – surprise! How does Donaldson see it? · Pitt proposed eliminating the “ordinary business” exclusion from the right of shareholders to propose resolutions for inclusion on the company’s annual proxy statement. This had been the device with which the imaginative and persistent corporate bar has used to “gut” the importance of section 14(a) of the 1934 Act. It has been said: “If the SEC requires the resolution be included, it cannot have significance; if the resolution has significance, it will be excluded.” How does the chairman designate feel about this? ·
There is a shareholder initiative asking that the Commission
consider allowing the proposal by shareholder of nominees for the board of
directors. This would allow the “independent” directors, so beloved by rule
makers, and so absent from boards. Imagine a board member produced by a process
other than self perpetuation. The very idea! Does the chairman designate believe
in this amount of independence? The President’s in house economic
advisor’s appointment is not subject to Senate confirmation. One can only
count the days before the President, like his predecessor, concludes that he
would like to be reincarnated as a bond salesman. The Secretary-designate of the Treasury
presents a more serious problem. History will record that the last five years of
the ninth decade of the twentieth century witnessed the largest peace time
transfer of wealth in recorded history. The percentage of ownership of publicly
listed companies by top executives – preponderantly the CEO – rose from 2%
in 1990 to 12% in 1999 – at market tops, roughly one trillion dollars. There
are CEOs who earned this money and were worth what they were paid. Secretary
designate Snow is not one of them. His record as CEO was mediocre; his pay
record is probably in the bottom one percent (a subjective judgment to be sure)
with a pattern year after year of incentive targets not achieved, a board that
must itself be considered for these acts alone among the worst that found some
other way of compensating him, and then again and again. So much compensation
was piled on the CEO that he found surrendering the odd $15 million to which he
would have been entitled because he chose to retire early – albeit for public
service – a mere token. At a time the President inveighs against corporate
corruption, it does not seem right to ratify the compensation practices of CEOs
that have undermined public confidence in capitalism. That is a strong statement, but it needs to be
said, again and again. The basis for an “equity culture” is trust – trust
in the financial statements. Enough has been said about that elsewhere. And
trust that the principal officers are running the company for the benefit of the
shareholders. Can anyone evaluating the stewardship of CSX conclude other than
that the corporation was run for the benefit of the CEO? If he is confirmed, a
return of confidence to the investing markets will be indefinitely postponed. In the UK, the Institutional Shareholders’
Committee has undertaken a massive effort to involve institutional owners in
responsibility for portfolio companies. One watches with humility and hope. My colleague Allen Sykes and myself authored Capitalism
without Owners will fail, published
in London and New York by the Center for the Study of Financial Innovation in
November 2002. For copyright reasons, we cannot make the published text
available, but you will find on my web site a somewhat longer version. It is our
effort to separate appearance from reality in this elusive field. We hope you
enjoy it. 2003 will not be dull. Your Friend, |