Daniel O'Connor | Integral Ventures, LLC
In a recent article, The Economist highlights the latest wave of high-profile CEO shufflings in US firms--from AIG to Morgan Stanley to Boeing to HP to WorldCom--and suggests that it may not represent the return to good corporate governance that many imagine it to be.
In different ways, each of these examples appears to point to the same, welcome conclusion: that the imbalance in corporate power of the late 1990s, when many bosses were allowed to behave like absolute monarchs, has been corrected. Alas, appearances can be deceptive. While each of these recent tales of chief-executive woe is a sign of progress, none provides much evidence that the crisis in American corporate governance is yet over. In fact, each of these cases is an example of failed, not successful, governance.
At the very least, the boards of both Morgan Stanley and HP were far too slow to address their bosses' inadequacies. The record of the Boeing board in picking chiefs prone to ethical lapses is too long to be dismissed as mere bad luck. The fall of Messrs Greenberg and Ebbers, meanwhile, highlights the growing role of government—and, in particular, of criminal prosecutors—in holding bosses to account: a development that is, at best, a mixed blessing. The Sarbanes-Oxley act, passed in haste following the Enron and WorldCom scandals, is imposing heavy costs on American companies; whether these are exceeded by any benefits is the subject of fierce debate and may not be known for years.
Eliot Spitzer, New York's attorney-general, is the leading advocate and practitioner of an energetic “law enforcement” approach. He may be right that the recent burst of punitive actions has been good for the economy, even if (as is surely the case) some of his own decisions have been open to question. Where he is undoubtedly right is in arguing that corporate America has done a lamentable job of governing itself. As he says in an article in the Wall Street Journal this week: “The honour code among CEOs didn't work. Board oversight didn't work. Self-regulation was a complete failure.” AIG's board, for example, did nothing about Mr Greenberg's use of murky accounting, or the conflicts posed by his use of offshore vehicles, or his constant bullying of his critics—let alone the firm's alleged participation in bid-rigging—until Mr Spitzer threatened a criminal prosecution that might have destroyed the firm.
How much better it would be, then, if the owners of corporate America were to play a more active role in policing the bosses who run their firms. Alas, the institutional shareholders which, on paper, are big enough to do this job are rarely inclined to do so. On the face of it, this looks like just the kind of failure of fiduciary responsibility that Mr Spitzer likes to pursue. But there is one big problem with demanding more activism from shareholders: their votes in America are still largely worthless, as this season's proxy season, which has just begun, will show once again.
Despite all the talk in America about shareholder democracy and ownership, shareholder resolutions, even if backed by a majority, are rarely binding on management. In many cases, managers can even stop a resolution from being put to a vote. The Securities and Exchange Commission recently proposed a tiny rule change to make it slightly easier for shareholders to nominate candidates for election to boards of directors. Lobbyists representing America's top bosses easily and unceremoniously killed the proposal. Look no further to see where the real power still resides in corporate America.
In my opinion, the most direct way to resolve the decades-long debate between the traditional model of stockholder governance and the progressive model of stakeholder governance is for corporate executives and directors to treat stockholders just like any other stakeholder. As more and more stockholders come to realize that they have no more say in the governance of the corporation than customers, employees, and other stakeholders have always had, they will gradually come to the conclusion that a new perspective is required. Perhaps then the advocates for each opposing model will stop arguing about Milton Friedman and the like and start a more constructive dialogue about how to increase transparency, choice, and accountability in business.
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