Last week, I did a blog entry condemning Robert Rubin's self serving claim that Citigroup's woes had absolutely nothing to do with its board directors. Not their fault at all, he said, especially not his, despite his $115 million fee. Yeah right!
The global recession raises questions of whether company directors are really up to the job. Consider, for example, the Lehman Brothers 2007 annual report. Go to the section on corporate governance, then read it and weep. "Lehman Brothers continues to be committed to industry best practices with respect to corporate governance. Below you will find links to the Firm's corporate governance guidelines and code of ethics, as well as charters for the Audit, Compensation and Benefits, and Nominating and Corporate Governance Committees of the Firm's Board of Directors."
Or go to AIG's 2007 annual report. "Integrity means conducting every aspect of AIG's business with honesty – meeting our commitments to our customers, colleagues, business partners and shareholders. Our emphasis on improving compliance demonstrates our dedication to integrity and enhances our reputation for strong corporate governance. Integrity is not only a core belief, but a competitive necessity in today's marketplace."
Indeed, AIG's performance demonstrated its directors had no integrity.
The purpose of any board is to provide oversight and guidance for managers. Instead, the directors became cheer leaders and looked the other way.
Clearly, we are in need of some radical solutions. I recently interviewed KPMG's Lord Michael Hastings on this subject. He said what was needed was to change who gets into the boardroom. According to Lord Hastings, regulators should appoint independent directors on to boards. These directors would not be paid by the companies but by taxpayers. They would provide insights, ideas and oversight without being compromised. You can read that interview here.
In England, the Relationships Foundation has come up with a unique proposal that actually puts the onus on shareholders. The problem, according to the foundation, is that they have the rights of ownership but none of the responsibilities. Similarly, directors share some of the reward but don't carry much risk.
According to their paper, The Relational Company: Exploring a New Business Vehicle, the company's owners, that is the shareholders, would accept responsibility as well as risk. Shareholders would be located in the region where the company operates and their number would be limited. In an insolvency, shareholders would be obliged to make a limited contribution to the creditors' losses. Shareholders would be required to attend a minimum number of meetings, and to encourage long-term involvement, shares could be only be bought and sold at a defined period. Furthermore, the highest paid employees, including directors, could not be paid remuneration greater than 10
times that paid to the lowest paid employee in the company. Any rights to shares or the grant of share options would be given to all employees.
To those who think this sounds prescriptive and too radical, we might be heading in this direction. Writing in The Wall Street Journal, Malcolm salter and Bill George argue that public companies should select only directors who have the time to devote to the company and the directors should have more skin in the game. And they warn that if companies don't fix it, the Government will fix it for them with a new version of Sarbanes-Oxley. "The Enron case resulted in the rushed passage of Sarbanes-Oxley legislation, a process that took just 31 days and considered only limited input from the business community. Unless boards of directors act immediately to adhere to their fiduciary responsibilities, this could happen again in 2009. In our opinion, this would not be in the best interests of free-market capitalism and the growth of the U.S. economy, but it may happen unless boards take their responsibilities very seriously."
no comment untill now