1. Separation of the CEO and Chairman positions: This immediately removes a conflict of interest and allows the holders of each position to concentrate on their job. For the CEO, that means running the firm. For the Chairman, that means looking out for the interests of the shareholders.
I'd also go farther and stipulate that the Chairman be truly independent and not be the ex-CEO of the firm.
2. Allow shareholders to approve the compensation packages of senior management: If you accept that aligning the interests of senior management toward the long-term growth and profitability of a firm is in the best interests of the shareholders of that firm, then allowing shareholders to approve the compensation packages of senior management serves as a means of insuring that the compensation incentives of senior management are structured to best reflect shareholder's interests.
3. All Members of the Board should be elected annually (or some other shareholder approved term that could be longer) and must win over 50% of the votes of shares outstanding: If a director knows that they must win over 50% of the shares outstanding, then their interests would most likely be aligned with the interests of a majority of the share outstanding. Please note that I'm not pitching for approval by a majority of the shareholders themselves. One shareholder may own 100 shares and another may own 1000 shares. They don't have an equal vote. Please note that I'm also not pitching for a threshold of 50% of the votes cast. I advocate the threshold be over 50% of all shares outstanding. I also prefer to have all Director's elected at the same time to prevent the staggering of terms that can often prevent a change in the Board's behavior.
4. Shares without a formal proxy given to the Board cannot be voted by the Board or shares not voted cannot be assumed to be in favor of the Board's recommendations: It is fairly common practice for shares that are not voted to be counted by Boards as shares in favor of whatever the Board recommends. Please see my prior post on this matter.
5. Allow nominations of Directors to be made by groups of longtime shareholders representing an agreed upon percentage of all shares outstanding to using the firm's own proxy material: If you take a look at the Boards of many companies, you'll notice that the same names seem to come up over and over. This is because of the tendency for senior management and Boards to nominate Directors based on criteria which has nothing to do with the expertise of that individual in the business of the firm or how that Director could best serve the interests of the shareholders. By making it easier for established groups of long term shareholders to nominate Directors, then it levels the playing field and could result in a Board that is more closely aligned with the interests of the shareholders. Of course, the length of time and amount of shares that a group holds that is putting up Directors for nomination should be established to prevent short-term interests from infecting the process. Furthermore, these groups must make a full disclosure of who they are and what are their short-term and long-term positions are in terms of shares, derivatives, options and other financial connections with the firm in question.
6. Members of the Board must meet minimum requirements including limiting the number of other Board positions or other jobs they hold and they must have a credible amount of their wealth invested in the firm on whose Board they sit: The danger of not requiring Directors to at least fulfill these requirements are best illustrated with the example of recent corporate implosions including Lehman Brothers, AIG, etc. Boards at these companies were stuffed with people whose time and attention were divided between their day jobs or other Boards that they served on and had little or none of their personal wealth associated with the firm on whose Board they sat. Directors must put their money and time where their mouths are. In doing so, then they would most likely align their personal interests more closely to the interests of a majority of all shares outstanding.
7. Independent or outside Directors would lead or chair the Compensation, Audit and Risk Management Committees of the Board: If a fundamental duty of a Board is to manage risk, then it is crucial that the rewards of senior management, the reporting of financial results and the assessment of the risks of the business be overseen by members of the Board not closely associated with the senior management of the firm. This could prevent situations where long shot bets are placed with shareholder's money with no consequences to the people placing those bets without prior knowledge of the risks of placing those bets. Some would argue that this would stifle innovation and recruitment. But I counter: wouldn't this encourage a more open appreciation of the risks senior management takes with the shareholder's money?
How would these provisions be enforced? Because they would need to be enforced to achieve the aim of more open governance of a firm. Depending on a government agency such as the SEC or the Fed enforcing laws subject to the whims of the political winds blowing through Congress would certainly be a part of this scheme. However, ultimately, it would be each shareholder's responsibility to actively exercise their own oversight of the firms they have invested in.
No comments:
Post a Comment