|
LABOR DAY 2003 By Robert Monks September 1, 2003 Richard Breeden’s report, as Corporate Monitor, on Corporate Governance for the Future of MCI, Inc. intends to and succeeds in articulating the “state of the art” of corporate governance in the United States as of this date. It is, therefore, a useful foundation for the next generation of reform. We must recognize that governance reform has not emerged from the exercise of “shareholder democracy”, but rather is being defined and expanded through judicial settlements of private claims, like Siebel, Sprint, and Hanover Compressor and bankruptcy reorganizations, like MCI (formerly WorldCom). This conclusion, supplemented by the perplexing increase in CEO pay, suggests that failure of power and will continues to hobble governance reform along traditional lines. This is a first class piece of work. My criticisms are in the spirit of “Don’t blame Columbus because he was not Magellan.” There are a number of questions which are not addressed: #1 – The conferral of rights on to shareholders in many areas is both welcome and necessary, but it is essentially meaningless in the absence of comparable attention to the responsibilities of shareholders. The existing situation is evidenced by failure of virtually all classes of institutions (all except public pension funds) from meaningful ownership commitment. In all cases, there is the underlying “collective action” problem making individual initiative diseconomic; in many cases, there is the conflict of interest problem which causes institutions to favor their commercial relationships rather than their trust responsibilities [i.e. Hewlett Packard v. Compaq – Alex Brown’s conduct]. #2 – Is there a finding that conforming to “ideal” governance standards and value optimization are correlated? Governance, in the idiom of Breeden’s report, is observed more completely in the United Kingdom than in the United States. Yet, there is little, if any, evidence that performance of these companies, under any definition, is competitive with to say nothing of superior to that of American companies. Is the prevailing truth of CEO as dictator – hopefully benevolent – dead? Allen Greenspan didn’t think so in his speech to the Stern School of Business a year ago. Because the mandate of management to optimize long term performance has been retained, the seeming lack of correlation with standards of governance needs to be addressed. #3 – Is the premise of director full accountability to shareholders unequivocal? There are several ingenious suggestions in the Report, some of them new, for improving the interrelationship of the two bodies, but the proposal stops short of the entirely satisfactory UK answer - absolute right of 10% of the shareholders to call a meeting at which a majority may remove any or all of the directors with or without cause. #4 – Is there suggestion that the board and the audit committee may appropriately adopt a company specific “generally accepted accounting principles” which would result in socially responsive costing and a “market” that could be sustained indefinitely. Some one must be responsible for moving from the present universally condemned accounting system to one which reflects more carefully human values. Probably, each company should undertake this responsibility. Breeden makes 78 individual recommendations. Most of them deserve comment, some do not. I will use his numbering system, but limit myself to a very few suggestions. Before moving to those specific suggestions, I will comment on the dozen themes identified by the author. 1. Moving the governance standards to the corporate charter which can only be amended by shareholder vote is a very large change from the existing circumstance where virtually all such powers are in the control of the board. However, unless some provision is devised to assure informed and loyal involvement by shareholders, the provision will not have its plainly intended effect. 2. The idea of a “shareholders’ town hall” is a welcome liberation from the seventy year tyranny of SEC administration of Section 14(a)(8) of the Securities Exchange Act of 1934. I must confess that I continue to like the tool of a company financed shareholders’ committee that I required Exxon to include on its 1991 proxy statement. See Appendix I. 3. The involvement of shareholders in the nomination process for director must be good. The distance from where we now are to the ideal of a “group of shareholders” being committed to participate is so long as to make one worry that the devil is in the details. 4. Quantified criteria are virtually irrelevant to whether an individual is or is not “independent”. It is a matter of character. Sometimes, the attenuated recitation of indicia of independence can be used as an absolute defense in the selection of an individual intuitively known to be responsive to his appointer’s will. 5. In our enthusiasm for “bright line” guidance on the characteristics of leaders, it is amusing to note that Sir Adrian Cadbury would not – under this Report - have been qualified to be Chairman of Cadbury Schweppes. 6. Moving power to committees, with very specialized agendas, personnel, expert consultants and – above all else – ability and willingness to commit time vastly in excess of that required by board members seems appealing. We must keep in mind that, as much as any other single factor, including dishonesty, the dysfunction of the independent committees of Enron was responsible for the colossal corruption and losses.
|