Fixing Corporate Governance

no-sec.jpgSome weeks ago, I wrote Corporate Governance is a Myth, an insider's take on why our system of corporate governance doesn't do what it's supposed to do. Now comes the hard part: figuring out what to do about it.

Now, I didn't just fall off the turnip truck and land on this subject. I've been a corporate officer of private companies, public companies, pre and post Sarbanes-Oxley. I've been involved with countless board meetings, SEC filings, and investor calls, not to mention a couple of IPOs and mergers.

After all that I asked myself and a handful of others why, with all the efforts to counter fraud and corruption, has corporate governance become ever more laborious and expensive while somehow managing to have virtually no effect on the problem?

The answer isn't pretty. It's got a lot to do with politics, federal agencies, lawyers, and bureaucracy - the tetrahedron of pain and frustration for all good business folks like you and me.

Not to dump the whole problem on someone else, it's just that corporate officers and directors are somewhat hamstrung in the current environment. That doesn't mean we can't affect change, but first we have to identify what we're dealing with.

Five ways to fix corporate governance:

  1. Repeal or reform Sarbanes-Oxley. As a knee-jerk reaction to Enron and WorldCom that punishes every public company, taxes every shareholder, diminishes our global competitiveness, distracts our management teams, and employs hordes of consultants, accountants and lawyers, SOX excels. At preventing accounting fraud, who knows? It's not all bad, but goes way overboard.
  2. Overhaul the SEC and its regulations. The 10K and 10Q processes are laborious and legal-intensive. The reports are watered down and incomprehensible. Risk factors are generic. For all the talk about transparency, the status quo taxes the good guys while failing to stop the bad guys from cleverly hiding their machinations. Enforcement's a good thing, but ineffective at deterring fraud.
  3. Give boards open access. Of course directors should be predominantly outsiders, but if you don't give them access, how do they know what's really going on? Oh, right, there are the sanitized and sterilized presentations by the management team. What was I thinking? Every board needs an active director - a paid consultant accountable only to the board - with carte blanche access.
  4. Hold directors accountable to shareholders. Granted, these days companies are mostly owned by institutional investors like Fidelity, Barclays and State Street whose sole strategy is to spread their capital around. That said, directors still need to be accountable to shareholders and just throwing a slate of directors and a handful of other issues up for a rubber-stamp proxy vote is not my idea of accountability.
  5. Tort reform. Officers and directors are justifiably preoccupied with shareholder litigation. The result is hordes of attorneys, incomprehensible legalize, and loss of precious management bandwidth. The previously defeated and newly reintroduced Securities Litigation Attorney Accountability and Transparency Act, or something like it, would be a good start.
I know; these are all big deals that involve legislation, federal agencies, and the like. What can I say, it is what it is. But if we don't start here and now, things will only get worse.

At least that's what I think. Now let's hear from you. What changes do you think will facilitate effective corporate governance?