How to Make Corporate America Behave Itself
We've somehow managed to become a society that just hops from one crisis to the next. The only things that get our attention are bubbles, scandals, and environmental disasters. In between, we FB and Tweet like everything's just peachy keen. Well, it's not.
Executive compensation is out of control. Boards are rife with cronyism. Institutional investors make money whether stocks go up or down. And there are so many CEOs in federal prison they're thinking of starting an MBA program there.
And here we sit; a nation with trillions of dollars invested in the public markets, watching our precious returns slowly but steadily erode while corporate officers and directors get rich no matter how their companies perform. It's enough to make you sick.
But guess what? It only takes a few simple rules to improve our system of corporate governance and get things moving in the right direction. Companies can easily enact these changes themselves, but you and I both know that's not going to happen. So I guess it'll have to be legislation.
Now, you know I despise the idea of a big bloated federal bureaucracy riding herd over the engine that drives our precious economy. And, time and again, the SEC has proved to be a completely useless regulatory agency. But hey, one miracle at a time, right? So let's start with some low-hanging fruit that even a politician can understand, or at least copy-and-paste, if nothing else.
5 Simple Rules to Make Corporate America Behave Itself
- Simplified executive compensation. The more transparency we want, the more convoluted executive comp schemes get. I counted 22 pages of completely unreadable nonsense in GE's proxy statement, and that's not even the worst of them. Executive comp should consist of 4 simple components: annual salary, annual bonus, stock or stock options, and maybe some miscellaneous stuff that's less than 10% of the total. That's it.
- All board directors will be independent (except for the CEO). This is so obvious it's hard to believe we haven't done this already. Look, executives run companies and boards oversee executives. That's called checks and balances, folks. So, the more overlap between the two, the fewer checks and balances and the higher the risk of dysfunctional corporate behavior. Ergo, boards should be entirely composed of outside directors, plus the CEO. Duh.
- Separate CEO from chairman of the board. This is the king of all no-brainers, no explanation necessary. Yeah, I know, the studies show that in smaller companies it's not such a big deal when the CEO is also chairman. Well, I don't give a flying you-know-what about the dumb studies. Separate them anyway. No single executive should have that much power. Again, checks and balances.
- All board directors will be active. You may not know this, but in corporate mucky-muck speak, board directors that actually do something are called "active" directors. Well, call me crazy, but why the hell do companies need directors that aren't active? It's dysfunctional to have directors sitting around quietly rubber stamping everything. They should all be active and we should pay them accordingly, as in the next rule ...
- Pay fewer directors more to do more. The whole concept of preventing directors of public companies from being paid consultants so they won't become tainted is a complete bunch of crap. Instead of the sanitized BS that management teams present at board meetings, we should be paying directors reasonable consulting fees to actually walk among the living and get a real sense for what's going on inside the company.
Image courtesy CC 2.0 via Flickr user Seattle Municipal Archives