Public Company Governance Needs Change
The current economic distress we are encountering is in no small measure the result of a system of corporate governance that allows officers and directors to operate in ways that do not serve the shareholders with minimal direct ramification. We have seen how many of the financial institutions in the U.S. have taken on risks that were excessive. In part this is the result of compensation practices that give incentives to short term performance measures and no ability to recoup compensation in the event of failed performance as measured over a longer period of time.
The proxy statements and proxy voting are clear sources of the problem. In almost all instances shareholders do not have a choice in who to vote for in directorship elections. In the event that a director or group of directors underperform it takes a group of shareholders to rise up and fund a proxy campaign against encumbents. In many instances it is easier for shareholders to sell away their positions than try to get management to perform. Of course this comes at a significant cost to the shareholders. The encumbent management can use the Company's resources to defend itself against a challenge. This method of election is more reminiscent of Iraq or Iran than the United States.
Now there is good reason not to have anybody and everybody who think they would be good directors to be eligible to run. The elections would be prohibitive in terms of the cost and time spent gathering and analyzing the qualifications of the various candidates. It is easy to predict that various people of extreme political views would find this an opportunity further their causes, possibly to the detriment of the Company. On the other hand, the current method gives far too much security to directors. There is a higher probablity of a member of Congress getting voted out than an encumbent director.
I propose that directors stand for a vote of confidence rather than re-election. If a director receives a majority of votes against return then the largest shareholders will have the responsibility to nominate replacements. I would want at least two times the number of nominees as vacancies. The largest five shareholders could nominate a number of people equal to the number of vacancies. To the extent there are not enough nominations then each of the next five shareholders could make nominations until a minimum number of candiates are nominated. If there still are not enough nominees then the SEC will nominate the remaining candidates. This should motivate the shareholders to make their own nominations.
Elections then could be held with all the nominees presented in a consistent format that provides background information such as experience and education and may also provide some space for a statement of vision for each candidate. In addition, if a candidate had been voted out of another company that would have to be disclosed.
The need for change is clear. Over the past several decades CEO compensation has consistently grown faster than inflation. The money earned is many instances was far outside what their performance would dictate. Too many options programs provided excercise prices that ensured that mediocre performance could still obtain enormous compensation. Risk taking was allowed to occur that reflects either an inability to recognize its danger or unwillingness to challenge the executive decision makers. This has been enabled by the cosiness of relationship between the directors and the officers they are overseeing. I believe that a higher level of answerability will serve as a deterrent to this type of compensation and risk taking and a reinforcement of the fiduciary responsibility owed to the shareholders.