Out with the old, in with the new. Call it the Arnold Schwarzenegger effect.
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There’s as much dissatisfaction with many company boards of directors as there ever was with ousted California Gov. Gray Davis, who lost out to Schwarzenegger in the state’s recent recall election.
That’s why the Securities and Exchange Commission wants to give angry shareholders the ability to shake up boards in much the same way the California political process was unceremoniously upended.
Too many corporate board members have been clueless, haven’t owned the company’s stock themselves, ignore shareholder interests or care only about amassing money for themselves and the CEOs who nominated them.
Consider these items:
– O.J. Simpson, with no particular financial acumen, was once a member of the two-person audit committee of Infinity Broadcasting. And Priscilla Presley is on the board of Metro-Goldwyn-Mayer.
– The year before the WorldCom blowup, its executive compensation committee met 17 times and its audit committee met only once. The audit committee of HealthSouth met only twice the year before its giant accounting scandal hit.
– The wildly extravagant spending of Tyco International Ltd. money on yachts and artwork is being defended by former top executives L. Dennis Kozlowski and Mark Swartz before the New York State Supreme Court.
– Although New York Stock Exchange Chairman Richard Grasso was sent packing after a furor over his enormous retirement package, there remains growing shareholder anger with many CEOs whose pay and bonuses wildly exceed company earnings.
“The storm that continues to blow has caused directors to realize that theirs is not just an honorary position that allows them three trips in the corporate jet,” said Robert Bennett, a governance consultant with Lens Governance Advisors in Portland, Maine.
The widespread generosity with investors’ money prompted the SEC to propose rules to give shareholders power to nominate directors when they can show widespread dissatisfaction with either corporate management or the proxy process.
The “trigger” would be if more than 35 percent of shareholders withhold votes for one or more board candidates, or if more than 50 percent of shareholders approve a proposal to gain access to the proxy process. In either case, companies would have to start listing independent shareholder nominees in their official proxy material the following year.
“This will give shareholders a more important voice,” said SEC Chairman William Donaldson.
Critics of the measure contend that boards were greatly improved by Congress’ adoption of the Sarbanes-Oxley Act in 2002 that includes an independent audit committee. The NYSE’s proposed listing standards should also make a difference. Furthermore, some precipitous board changeovers might not be the most informed or well-intended. But while critics contend that enacting additional measures so soon is overkill, it would be difficult to go overboard in an area that’s so polluted with problems.
A separate concern is that many shareholders themselves are asleep at the wheel, never bothering to check out board members. Always go online to read the company proxy statement to determine exactly who corporate directors are and to scrutinize executive compensation and important committee meetings.
“At one point, we owned shares of Enron because it was a good place to work, but we sold two years before the trouble started because its accounting was so complicated to us,” recalled Jerome Dodson, portfolio manager of the socially conscious Parnassus Fund (PARNX) in San Francisco.
“The keys to corporate governance are independence and equity ownership of public company directors,” believes Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware. “Independence from management gives you objectivity, while substantial equity ownership gives you an incentive to exercise your objectivity appropriately.”
Whether the issue is compensation or those who get onto the board, it all comes down to effective oversight by the board itself. All the embarrassing corporate blow-ups of recent years can be traced to a lack of independence or equity ownership, said Elson.
“The more that directors have at risk in terms of owning the company’s stock, the more attention they’re going to pay,” said Nell Minow, editor of The Corporate Library, which analyzes corporate boards.