The Problem With Corporate Governance: Follow the Money

Last Updated Apr 30, 2009 3:11 PM EDT

One of the best things about our system of government is the checks and balances between branches. Wouldn't it be great if corporate America had that - checks and balances within the corporate structure?

Instead, CEOs choose their own slate of directors - mostly former executives themselves - and shareholders rubber-stamp it in a proxy vote. With no checks and balances, there's no accountability and everybody loses ... except officers and directors. That's why executive pay (in some sectors) is out of control and rewards failure.

You've got to wonder why it's so hard to improve the system so it functions better. Simple things like giving shareholders more than just a rubber-stamp vote for directors, independent director searches, SEC reporting that's transparent and in plain English, that sort of thing. It doesn't seem like rocket science.

Here's the problem. Stocks used to be owned primarily by individuals; now they're owned primarily by financial institutions. If you look at the top shareholders of just about any publicly-traded company you'll find all the same names: Barclays, State Street, Vanguard, Fidelity Mutual (FMR), Capital World Investors, and the like.

Smaller institutions are part of a nonprofit called the Council of Institutional Investors that represents $3 trillion of investment capital. The organization's tag line is "The Voice of Corporate Governance." Sounds impressive, doesn't it?

You'd think these huge institutions - acting independently or collectively - could lobby Congress to introduce legislation and regulations that will hold boards and officers more accountable to shareholders. So why doesn't that happen?

First, all those institutions that own corporate America are essentially banks, and they're all public companies themselves. The last thing they want is stringent governance laws to cramp their style. They have their own way of mitigating the effects of individual corporate or sector failure.

They simply buy a chunk of every company so their portfolios are diversified. Problem solved. What do they care if crises, fraud, cronyism, bursting bubbles, and incompetence cost their portfolios a few percentage points? They just pass it along to their investors. It's no skin off their backs.

What about the politicians? Well, not to sound cynical or anything, but the banks have more clout in Washington than everyone else combined. Our current economic crisis is proof of that. And that's not a partisan thing, either. It's always been that way. The foxes are guarding the henhouse.

So here we are. Bubbles grow and burst, crises come and go, fraud happens, everybody points fingers, and nothing changes. That's how the system works, and it's a very big system, so its inertia is considerable. The only thing that can change it is an outside force. And the only one I can think of is the American people.