Democratize The Lords Of the Boards
By Steven Pearlstein
Friday, June 25, 2004; Page E01
Reluctantly, begrudgingly, Corporate America has come to acknowledge that it created the environment that made the scandals at Enron, WorldCom and Adelphia possible.
And reluctantly, begrudgingly, Corporate America has accepted reforms that have modestly shifted power from top executives to boards of directors.
What Corporate America is not willing to accept is any reform that would force directors and executives to cede power to the owners of the company.
The two Democrats on the Securities and Exchange Commission want to give major shareholders the right to nominate a couple of alternative directors at companies where the company nominees fail to get two-thirds of the vote in the traditional uncontested elections, or where directors choose to ignore the majority vote on a shareholder resolution. Two Republican members see little need to do anything. Caught in the middle is the Republican chairman, William Donaldson, whose desire to build a reformist legacy now clashes with opposition from his political patrons in the Bush administration.
As Donaldson complained in a speech last weekend, shrill rhetoric and inflexible positions have thwarted his efforts to find a common ground.
To hear it from business types, any modest step in the direction of real corporate democracy would jeopardize the competitiveness of U.S. companies and hand control of corporations over to unions and special-interest groups. Their basic view, expressed in a moment of candor by Bruce Josten, executive vice president at the U.S. Chamber of Commerce, is that investors who don't like how a company is run should simply sell their shares rather than be "distracting" busy executives with their concerns.
Reformers, meanwhile, are quick to dismiss the idea that corporations will be subjected to an endless stream of challenges by groups with narrow agendas -- but then remain silent when their ally at the California state pension fund launches a campaign to challenge directors at 2,400 companies, Warren Buffett among them, simply because they think it okay for their auditors to do a bit of routine tax consulting.
The truth is that the corporate reforms adopted in the past two years have already made corporate boards more independent and more responsive to major shareholders.
But at the same time, it's unlikely that directors at companies that have seriously underperformed (Disney), or overpaid for acquisitions (Time Warner), or gotten into a heap of legal trouble (Citigroup), are suddenly going to respond by dismissing colleagues and bringing in new directors who are likely to challenge them on their own past performance. That's simply not human nature -- particularly when these directors know there is no way for unhappy shareholders to challenge them short of spending millions of dollars of their own money to wage a proxy fight.
That's why, when push comes to shove, unhappy shareholders need to have the option of electing directors of their own choosing.
Yes, it may get in the way of the harmony one normally prefers on a corporate board -- but that's often part of the process of putting things right.
And, yes, it will certainly invite a few union-dominated pension funds to try to leverage the threat of a "withhold" campaign to win concessions from companies -- but only until experience reveals that shareholders are smart enough to vote down ill-conceived initiatives.
The trick will be figuring when shareholders are unhappy enough to trigger a contested election. At this point, the important thing is to establish the principle of ballot access and a relatively simple, legally enforceable mechanism for implementing it.
So how's this for a Donaldson-like compromise: Any board-nominated director who can't get 50 percent of all votes affirmatively cast in an uncontested election has to stand for reelection the next year against the nominee put up by a sizable block of shareholders.
It's not perfect, but it's better than we have now. And it has the exquisite advantage of appealing to a concept most Americans already support and understand:
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