As seen in the Washington Post.
The entirely preventable financial catastrophe we have watched unfold over the past 18 months has many culprits: reckless executives who gambled with their company’s futures, feckless regulators and somnambulant boards of directors.
But while executives and regulators have justifiably taken heat for this multifaceted debacle, board members have largely been let off the hook. Why?
It is a board’s responsibility to oversee management and to ensure a company’s long-term survival. Its job, in short, is to represent the owners — the shareholders.
With the tumbling and collapse of dozens of major financial and other institutions, can we draw any conclusion other than that those directors utterly failed in this regard?
Yet, increasingly, we are hearing apologists rise to the defense of boards, evidence that the process of obfuscation of the boards’ guilt has begun. This is dangerous.
Evidence of this trend includes a recent Business Week article, “How Much Blame Do Boards Deserve?” by Jack Welch, the former chairman and CEO of General Electric, and his wife. Now, I have a great deal of respect for Jack Welch. But this defense of boards was wrong.
Non-executive directors at our battered and bankrupt financial institutions could not have been expected to understand the risks of complex, highly leveraged derivatives that brought about our financial crisis, the Welches wrote. That is nonsense. A board member should be able to understand when a company is leveraged up to 40 times the value of its assets, as some were. In my view, many were just not doing their jobs.
Jack Welch believes that some boards’ members should have pressed managements more on their risk strategies. Chances are that some directors did take this approach. But did they demand any change of course? Or did they just accept the management line that certain risks are necessary to generate returns?
I think we have a right to expect more from directors. The system of checks and balances between boards and executive teams has, in too many cases, disintegrated. In this global meltdown we are seeing that many board members were demonstrably unqualified, abjectly remiss or simply too cozy with management.
Clearly, we must strengthen boards at public companies. Some measures must include splitting the role of chairman and chief executive; eliminating “staggered” boards, which allow for only a minority of members to be elected in any one year; and giving shareholders the right to propose board members and resolutions on company proxy statements.
Non-executive board members are fiduciaries to shareholders who choose and oversee managements, and the chairman is the main shareholder representative. How can the chairman oversee the CEO if the job is one and the same, as it is at a majority of Fortune 500 companies? Splitting these roles would eliminate this inherent conflict.
Similarly, how can shareholders exercise greater power if managements are allowed to thwart them from being nominated to company boards? In many states, provisions such as staggered boards, which are meant to prevent a full board takeover in any one year, and “poison pills,” which effectively block takeovers by new managements, are perfectly legal.
The dictum of the new White House chief of staff Rahm Emanuel, “You never want a serious crisis to go to waste,” applies to our financial and economic situation. Inept — and often very well-paid — managements and boards got us into this mess. Let’s respond by making lasting changes to make them more accountable to stakeholders, which includes everyone in this country.
Corporate law is largely the province of states, which to varying degrees protect flawed governance models. What is needed is a superceding federal law that gives shareholders the right to vote by simple majority to move their company’s legal incorporation to states that uphold greater shareholder rights.
North Dakota, for example, is recognized as having the most shareholder-friendly corporate laws in the nation, thanks to recent legislative action. By incorporating in the state and adopting its provisions, a public company would in one easy step improve rights for its shareholders and eliminate the often too-cozy relations between managements and boards.
I want to be clear: Jack Welch did a masterful job as the chairman and chief executive of GE for two decades, until 2001. But with GE Capital soaking up $139 billion in government loan guarantees, it’s fair to ask whether the board demanded answers from its current CEO and chairman, Jeffrey Immelt, about the risks embedded in that critical division. Alarm bells should have gone off in the boardroom long before this blue-chip company sought taxpayer help.
Our disastrous market meltdown makes clear that it is high time for shareholders to demand and receive more accountability from the boards and managements of their companies. I have created the United Shareholders of America campaign to focus on just these issues. Only by concerted action can we make changes to how our companies are managed.
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