Dodd: Shareholders Should Nominate Boards Directly
While researching Bailout Nation, I learned one of the causes of the disconnect between financial firms and the subsequent meltdown: Corporate governance.
Or the lack there of.
Boards of Directors have historically been a collection of business associates, cronies and golfing buddies, with interlocking memberships between companies.
Board members are nominated by fellow insiders, effectively disenfranchising shareholders. This allows management to become ensconced, with little in the way of owner input into a company’s direction. Open competition for Board seats is difficult, even for large shareholders.
And as we have seen, Bo0ard members don’t make the tough calls. They give executives absurd compensation packages. Exec pay packages include rewards for secular trends unrelated to management, for bull markets, low stock prices (via resets) and for volatility. Out-performance versus their peers is hardly considered, relative performance within their sectors is ignored, as is total market action.
Compensation consultants (AKA covering the Board’s asses) deflect responsibility further. And the biggest shareholders of public comp0anies, the mutual funds who typically hold the vast majority of a firm’s stock on behalf of shareholders, refuses to engage in any corporate governance.
Some of these issues might be addressed in the latest bill to re-regulate Wall Street: Bloomberg’s David Reilly notes that “buried deep within the 1, 136-page, financial-reform legislation unveiled this week by Senate Banking Committee Chairman Christopher Dodd. It is a proposal to let shareholders nominate directors to corporate boards.”
This is a potentially significant disruption of Business-as-Usual. Direct nomination of BoDs will decalcify corporate managements.
Here’s Reilly:
“Never mind that corporate boards as we know them were willing accomplices in the mismanagement and fraud that led the financial system and economy to the brink of ruin. Directors sleep-walked through meetings, lavished CEOs with outsized pay and perks, and failed to take heed of the risks building up on their watch.
When things started to blow up, top executives pulled the rip cords on their golden parachutes, directors skulked away and taxpayers were saddled with the losses. The tenure of former Treasury Secretary Robert Rubin as a director and senior counselor of Citigroup Inc., and the forced but lucrative departure of Stanley O’Neal as CEO of Merrill Lynch & Co., are but two examples.
Meanwhile, shareholders can do little about the sorry state of affairs in America’s boardrooms. Proposing directors to oppose management’s pals involves long, costly proxy battles. And there is usually no way to vote against a director running for re-election; withholding a vote usually doesn’t do anything.”
The Dodd proposal gives the SEC wide latitude in implementing new rules. The SEC would likely require shareholders to own a certain percentage of stock relative to firm size; they also will have owned the stock for a longer period of time (i.e., one year).
These seem like reasonable common sense ideas.
We have been forced into a situation that is intolerable — massive taxpayer bailouts of incompetent bankers, with AWOL Boards. Its hard to see how any change could make matters worse. It just might start improving things.
>
Source:
Hedge Funds Can’t Mess Up Worse Than Bob Rubin
David Reilly
Bloomberg, Nov. 13 2009
http://www.bloombergnews.com/apps/news?pid=20601039&sid=aAZgGg448K3E
November 13th, 2009 at 6:41 am
And with staggered elections, it would be a gradual change, not a radical shake up.
November 13th, 2009 at 7:33 am
“The cure for the ills of democracy is more democracy” — Al Smith
November 13th, 2009 at 8:03 am
Dudd is an insincere crook. I wouldn’t put too much faith in anything he proposes.
That aside, the idea certainly has merit, but as always the devil is in the details. How to ensure that this is not another avenue for introducing conflicting interests (i.e. labor unions)?
November 13th, 2009 at 8:08 am
“Proposing directors to oppose management’s pals involves long, costly proxy battles. And there is usually no way to vote against a director running for re-election; withholding a vote usually doesn’t do anything.”
except for maybe big institutional investors- i don’t think most shareholders care- they are just “renting” the stock anyway-
no long term concern or vision of the company if you just hold a stock a few minutes, a few days or a few months
November 13th, 2009 at 8:13 am
Interestingly, enough, that firms like
http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=Institutional+Shareholder+Services
or the idea that the Proxy, for those shares, has been stripped from the holders of the ‘Economic’ interest in them..
Disintermediation, depending on your POV, is a G-dsend..
but, do note that ‘evil’ HedgeFundz are set up as the ’straw-man’.. Heaven forfend, should ‘Individuals’, you know, the ones, actually, buying the Right to Vote, be able to execute their own Proxy..
that’d take the Fun out of everything (?)
note http://finance.yahoo.com/q?s=CMCSA
v.
http://finance.yahoo.com/q?s=CMCSK the voting share trades at a premium, yet, peep, via MutFunds, et al., Pay to their Proxies stripped from them..
again, POV dependent, That’s a Sweet Deal!~
November 13th, 2009 at 8:58 am
I agree that corporate governance (allowing management to “take something off the top”) is a giant problem and that the way to fix these riduculous management salaries is to change corporate governance, but…
“The Dodd proposal gives the SEC wide latitude in implementing new rules. ”
Its pretty clear that the SEC is completely owned and operated by wall street. Why expect them to produce rules with some bite when they don’t enforce the rules that already exist (insider trading, naked short selling, etc.)?
There’s got to be some clear basic reform of the entire political system before we make progress as a country, but I don’t know what that reform should look like.
MontyHigh
November 13th, 2009 at 9:05 am
And something might need to be done about corporate shareholders — I’m not at all convinced that pension funds, mutual funds, hedge funds, etc ever do anything more than what most individuals do — check the “vote as the company recommends” box. Perhaps restricting voting to direct individual shareholders would improve things as well.
But I’m not terribly optimistic that this will change things. Requiring direct shareholder votes on compensation packages and pools — for ALL employees — might be better.
I think that publicly-owned corporations need to have a much tighter set of controls foisted upon them, impacting a whole buncha areas. The inevitable loss in efficiency would be offset by the reduction in corruption and greed, which is endemic throughout corporate Bananamerica.
November 13th, 2009 at 9:16 am
Adam Smith pointed out the critical flaw in ‘join-stock’ companies over two hundred years ago:
The directors of such companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master’s honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.
Reform should include some re-thinking the concept of limited liability when it comes to company directors and executive management.
November 13th, 2009 at 9:23 am
you have one consolation. we have all learned our lesson, we know that such a thing can never happen again http://bit.ly/A3P3t
November 13th, 2009 at 9:25 am
“Reform should include some re-thinking the concept of limited liability when it comes to company directors and executive management.’
good point
November 13th, 2009 at 9:40 am
Compensation consultant are a joke, just like rating agencies for bonds and house inspectors. They are not going to bite the hand that feeds them.
We need very stringent rules on conflicts of interest. We need rules on direct elections only of candidates nominated from the floor. And we need to prohibit any shareholder with a confilict of interest from voting on board membership. Finally, we need to give boards performance based compensation and hold them legally accountable for their oversight. Being asleep at the wheel should not just be an “oh-well” event neither for management nor for the board.
November 13th, 2009 at 9:44 am
Wasn’t SOX supposed to take care of these issues of corporate governance and fiduciary duty? Are you telling me it was a (another) red herring?
That’s OK, because this new, improved 1,100+ page piece of legislation will do the trick
~~~
BR: No, SOX was supposed to take care of accounting fraud — and it more or less did.
Please try to keep your ideological blinders on corrrectly
November 13th, 2009 at 9:49 am
Soon to be known as the Ken Langone Shareholder Protection Act.
November 13th, 2009 at 11:39 am
Will never happen. And from Dodd?!?! Mr. Crony himself?!?! HA!
Simplest solution….vote with your dollars. If you’re sick of the big boardrooms, find a smaller equity opportunity. Dinosaurs, without food (capital), will perish.
Directors, CEOs, all the usual suspects move around within the S&P 100. Few new ideas, other than a variety of entrees on the clubs’ lunch menus.
Come to think of it, maybe we’ll get hit by a financial asteroid, the dinosaurs will ebb, and a more vigorous species will flow.
November 13th, 2009 at 12:53 pm
Book Recommendation:
BATTLE FOR THE SOUL OF CAPITALISM by John Bogle (founder of Vanguard)
A good read. Bogle says we have moved from ownership capitalism to managerial capitalism where companies are managed for the benefit of management not the owners. Can you believe it. He also gives his recommendations on what can be done to fix this cockeyed system.
Until this changes insiders (boards, upper management etc) will continue to make hundreds of millions (like the CEO of Lehman did) all the while managing the company into the ground. What a system, what a country.
November 13th, 2009 at 1:02 pm
DeDude,
I believe most comp consultants use performance (ROIC, ROE, ROA, etc.), intermediate (2-3 years) as well as long term (5+ years) payouts as the proper way to pay management, but most management teams & boards don’t pay attention to their findings/suggestions.
On another note. I am pretty certain an 1100+ page piece of legislation (as the one proposed by Dodd) will only exacerbate the current problems; how heavily gamed is the magnus opus?
I believe that some major culprits, that have so far gone unmolested in this ongoing crisis, are institutional shareholders (Mutual Funds, Pension Funds, etc.) These “professional” money managers (maybe if we started calling them asset aggregators I would be willing to remove the quotes from professional) rarely raise any objections to how management/boards run a company. Look at any component of the Dow 30 and you will see the major holders (i.e. Mutual Funds & other institutional players) hold 65%+ of these companies. The Mutual Funds, particularly, have been able to sneak through this crisis with very little criticism, yet they have completely dropped the ball when it comes to the due diligence they are supposed to perform.
Lastly, Carl Icahn has simple solution that could help. Icahn’s solution seems as though it could be a one line law (not hard to game that.) He is calling for a federal law that allows a simple majority to move a company’s incorporation to another state (i.e. a shareholder friendly state.) This makes some sense and it’s easily repealed if creates any real chaos.
Regards,
TDL
Icahn’s editorial from February.
http://online.wsj.com/article/SB123396742337359087.html
November 13th, 2009 at 1:35 pm
@call me ahab
“….except for maybe big institutional investors- i don’t think most shareholders care- they are just “renting” the stock anyway-
no long term concern or vision of the company if you just hold a stock a few minutes, a few days or a few months…”
And how did that situation come about? Not thru the actions of shareholders, for sure. It was the dereliction of the Boards that has caused the mess for nearly every company in dire straits in the past and currently. When we see how a company with $260,000,000,000 in sales like GM can go belly up, and the Polaroids, Florsheim, and hundreds if not thousands of companies falling out of bed due to management that sucks beyond belief what incentive is there to now hold them for very long?
My dad used to hold stocks for decades and they did well. Until they didn’t. One I tried to talk him into selling back in the early 80s, when “the Board” passed a poison pill clause, ostensibly to protect the shareholders from a hostile takeover. I told him this was being done to protect the CEO solely. After that the stock languished for 10 years and fell to nearly what he paid for it in 1969 in last year’s crash.
Icahn may be a lot of things but he knows the shenanigans in upper management like the back of his hand.
November 13th, 2009 at 2:36 pm
“Please try to keep your ideological blinders on correctly”
Agreed, mixing up two issues (financial reporting vs. voting rights) in a rather poor effort to prove a point.
Simply put, board members and senior officers of public firms should be accountable for their actions and especially to shareholders. Good ol’ boy networks obviously get exploited potentially at a cost of shareholder value. It doesn’t seem that it would take much to make the case that there was a lack of governance and a even breach of fiduciary duty. Until officers and senior execs are criminally negligent and actually tried and convicted, I’m not sure much will change.
November 13th, 2009 at 2:38 pm
Jessica6,
Thank you for sussing this: Adam Smith pointed out the critical flaw in ‘joint-stock’ companies over two hundred years ago:
The directors of such companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master’s honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.
that is the underlying Thesis/Point v. Disintermediation.
crosey , adds: “Simplest solution….vote with your dollars. If you’re sick of the big boardrooms, find a smaller equity opportunity. Dinosaurs, without food (capital), will perish.”
It’s exactly Correct, There’s an Election — Every Day — that shapes You, and the World you live in..and We, each, and every, conduct it–by our conduct.
November 13th, 2009 at 7:37 pm
“Dodd: Shareholders Should Nominate Boards Directly”
Ha ha ha, ROFLOL! Good luck with that one fellas!
November 14th, 2009 at 9:03 am
[...] Corporate board rules under the new Dodd finance reform bill. Important read for investors. (TBP) [...]
November 16th, 2009 at 2:52 am
“Or the lack there of.”
This minor grammatical faux pas is the worst thing about the article. The lack of over-the-top stridency is the second: a legitimate choice while highlighting the issue sharply.
Boards of Directors ultimately have responsibility for Corporate Governance — compensation, business strategies, financial profile, ….
Wittingly or otherwise, these gentlepeople have allowed big banks and other firms to lever up risks to the moon, knowing that all they, and shareholders can lose is 100% of the money still in the firm — and a Too Big To Fail institution won’t lose that. I know it’s easier to look at the monster bonuses in the ranks, but here are the people who thought it in shareholders’ best interest to pay them.
In other words, here is ground zero of the breakdown, in the Boardroom. These guys get big insurance policies covering their being sued for malfeasance, and yet such suits almost never happen. Nobody looks at the “take the money and run” terms on Directors’ comp.
December 18th, 2009 at 2:45 pm
[...] Corporate board rules under the new Dodd finance reform bill. Important read for investors. (TBP) [...]