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Getting the Board out of Management’s Pocket

Posted by Larry Doyle on August 26, 2009 11:42 AM |

I strongly believe the failures in our economy are often the result of failed management. Who is charged with overseeing management? The board of directors. If management has failed, then certainly the boards have also failed.

I addressed this point in my commentary this morning, “Sarkozy Ups the Ante on Banker Compensation.” I wrote:

I am definitely not for strict government control of private enterprise compensation; however, if the boards of these private enterprises are not performing to protect the industry, the franchises, and the shareholders, then those boards need to be exposed. From my standpoint, the boards are a large part of the problem. Why? The boards are in the pocket of the senior executives. The senior executives have shown themselves to be excessively greedy and disinterested in protecting the industry and, in turn, our country.

How have boards become so deeply entrenched with management? Is there anything that can truly be done to address this enormous problem? Continuing on this theme of the corporate governance responsibilities of boards of directors, The Wall Street Journal addresses the topic in writing, Fight Brews as Proxy Access Nears:

The largest U.S. businesses, law firms and business groups have stepped up their challenge to the “proxy access” rule, which would let certain shareholders use a company’s board-election process to nominate directors opposed to management.

Why would management fight this? Control and power. New board members not aligned with current management will likely ask for increased exposure and transparency. What a novel concept.

The campaign has ramped into high gear in recent weeks because the measure looks like it will be passed by the Securities and Exchange Commission in November. In a last-minute bid to derail or weaken the measure, opposing groups have dispatched both Washington lobbyists and grass-roots letter-writers.

We can always count on the heavy lobbying powers to weigh in to protect the status quo. A lot of good that has done us within our financial industry as I highlighted last March in writing, “How Wall Street Bought Washington.” The WSJ continues:

“It’s the biggest change relating to corporate governance ever proposed by the SEC. Period. It gives activists the ultimate vehicle to express dissatisfaction with a board, the ability to replace board members at the company’s expense,” said John Finley, partner at Simpson Thacher & Bartlett, which has urged the SEC to drop the proposal.

Some of the nation’s largest pension funds, mutual funds, unions and shareholder activists are arrayed on the opposite side. More than 500 letters have been filed for or against the proposal so far, including many from small-business owners not directly affected by the change.

Proxy access, or Rule 14a-11, would allow stockholder groups, be it activist hedge funds or institutional investors, to place candidates on a company’s proxy materials — at the company’s expense. All of the candidates would be mixed on the same ballot. The company wouldn’t be allowed to ask shareholders to check a single box to vote for a slate — today’s standard.

Why has it taken the SEC and our government so long to address this glaring problem?

The current system requires that dissenting shareholders pay up for mailing and publicity costs, sometimes in the millions of dollars, necessary to unseat a standing board. That has historically discouraged competing director slates. Those that are launched succeed about 40% of the time, according to data service FactSet SharkWatch. It noted that just five out of the 4,000 public companies it tracks currently allow proxy access.

SEC Chairman Mary Schapiro has said the financial crisis raised questions about directors’ responsibility and accountability. Proxy access can give shareholders a credible path for ousting boards, which they can then use to push for mergers, asset sales, larger dividends or other measures to boost share prices. If the access rule is adopted, Ms. Schapiro said, it has a “real chance of holding boards of directors accountable to company owners.”

I have to admit, I find it particularly uncanny that Ms. Schapiro as head of the SEC is leading this charge for increased board responsibility and accountability.

Do you think Ms. Schapiro will apply this responsibility and accountability standard to her former employer, that being FINRA, and support the complaint filed by Amerivet Securities requiring FINRA to open its books?


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