Tomorrow’s Problems and Yesterday’s Solutions

Bob is traveling this week but he sent this post ...

I do not know sometimes whether I am particularly paranoid or whether others are stupid or, perhaps a bit of both. Either choice is unpleasant. And yet, most of the suggestions by “corporate governance reformers” are either so cleverly conceived by those who wish to preserve the status quo or so insensibly focused on yesterday’s problems that one is left in wonder.

#1 – Executive Pay

“Say on Pay” is offered as a solution, notwithstanding the unmistakable evidence from the UK that it simply has no positive effect. Consider the recent case of Royal Dutch Shell when the Compensation Committee overruled its own criteria to award bonuses and earned over 65% condemnation by shareholders, only to find out that the money has already been paid. And so forth.

#2 – Proxy Access for shareholder nomination of directors

I wish that more people had shared my experience of running as the shareholder nominated candidate for the Board of Sears Roebuck. The problems of trying to assemble a consortium of institutions – all with their own risk averse trustees, all with their own beneficiaries with distinct value systems – to agree on a single nominee are so apparent that one is appalled at the continuing vitality of this proposal. Also, who will pay the costs, who will chose the nominee. In the case of Sears, I nominated myself and paid the $500,000 cost. It will be virtually impossible to replicate this act of self indulgence.

#3 – Splitting board chairman and CEO

This is simply a commitment that a company actually believes in having a board of directors independent of the power of the CEO. It confers no particular rights on shareholders. As I trudge to Exxon Mobil Annual Meetings with this proposal, I whisper to myself – it’s better than nothing, but not much!!

#4 – Requirement for majority votes for a director to be elected.

This would have some relevance if every corporation had Roy Disney and Stanley Gold ready to spend $25 million simply to rid themselves of a personal and professional nuisance. Otherwise, who is going to put up the money to secure such vote withholdings?

The problem which needs to be addressed is the reality of the accountability of directors to shareholders. In every country of the OECD world except the 50 United States, there is provided an adequate and simple solution;

#5 – 10% of the shareholders may call a Special Meeting at which any or all of the directors may be removed with or without cause.

This provides a simple – shareholders only have to share dissatisfaction – and fair – majority vote is required – method for shareholders to maintain a creative tension with the board. If shareholders do not like board nominees, it is within their power to replace them. This gives creates a dialogue between shareholders and boards resulting in mutual agreeable board members.