Corporate Accountability

In my commentary entitled, "Economic Dilemmas", I talked about the A.I. G. bonuses but asserted that they were the tip of the iceberg (a mere distraction) and that the problem of excessive compensation in corporate America was systemic, and was the result of shareholders having very little say in the governance of corporations. I urge you to reread it. I said in part:

"These abuses occur not because competition of the market requires it, but because of a system where neither the public nor even shareholders have any say, and when execs destroy a company it is the shareholders and innocent employees who bear the burden. Unfortunately, it is not shareholders who decide on compensation. It is the Board of Directors! And who chooses the Board of Directors? Usually the CEOs. To be sure Shareholders get a chance to vote at shareholder meetings for the Board, and whatever issues are placed before them, but the only choices they really have is to vote yes or no on whatever the management chooses to let them vote on. And increasingly, shareholder meetings are held at out of the way places so as to discourage shareholders from attending. God forbid, they might ask embarrassing questions. They are asked to send in their proxies to confirm what has already been decided. The Chinese communist voting system is not much different."

I now revert to this subject because not only do I believe it to be of paramount importance, but also because to my surprise nine days after I published my piece, on March 28, 2009, the NY Times awoke to the problem, with Carl Icahn, the well known investor, writing an OP-ED piece, in which he wrote that one silver lining from the A.I.G. debacle:

"is that it will finally alert Washington to the lamentable state of corporate governance in America. Our legislators will find — as I have as a shareholder who has waged many battles to get on corporate boards — that the rights of the shareholders are quite circumscribed.

"... typically even a large shareholder must conduct an expensive proxy contest to elect its nominees — that is, he needs to solicit enough votes from other shareholders. This is accomplished by mailing a statement describing the shareholder’s positions, and a card on which to vote. At a large public company, mailing, printing and other costs can run into the millions of dollars."

The article also points out that the law that applies in the governance of corporations is the one in which they choose to be incorporated, which is usually Delaware, where more than 50 percent of publicly traded American companies are incorporated. Under Delaware law, a shareholder vote is merely advisory. This means that the board is legally entitled to ignore shareholder wishes regarding compensation of corporate executives.

Some additional research reveals that the problem has been addressed earlier in academic papers but so far has gotten little attention from our legislators. I have not seen the Obama Administration address this vital problem, though in its defense its plate is more than full.

But a blog named the "Accountable Strategies blog", referring to an article written at Harvard law School in 2007 quotes the author as saying "the number of challenges mounted by shareholders to replace boards of directors between 1996 and 2006 was very low: There were only 118 challenges mounted of incumbent board members during the 1996–2005 decade, or an average of about 12 per year. The number of challenges was even less for the largest corporations. What’s more, those challenges were successful in only 45 cases in the entire decade."

"... Looking at the matter purely from the point of view of the shareholders and directors, Bebchuk notes that under the rules of corporate law, the power to run corporations is vested in the boards of directors, under whose direction the business and affairs of the corporations are supposed to be managed.

"The importance of having directors held accountable to the shareholders is enhanced because directors are largely insulated from legal liability for their decisions. Yet, Bebchuk notes that the mailing, legal and other costs of mounting shareholder challenges to boards of directors is very high. Moreover, challengers cannot seek reimbursement for those costs if they lose a challenge, whereas incumbent board members can charge the company for their expenses regardless of the outcome. ...Bebchuk proposes that companies hold elections for the entire board every two to three years; that shareholders be allowed to select directors via secret ballots and majority votes; and that those candidates that receive at least one third of the votes cast would be able to get their campaign expenses reimbursed."

There are more and greater problems in our Capitalist system than is generally appreciated. Major reform is way overdue.