Idea 10 - Corporate governance
America was
treated to a peep at the CEO's expense account recently, to discover, among
other things, that the boss of American Express was paid $132,000 for personal
use of company cars and reimbursed for snacks from the company dining room.
Some people were more upset by the snacks than by the car. More of this kind of
information is being made public because the US Securities & Exchange
Commission has lowered the threshold for disclosure of perks. But executive pay
and disclosure are only two of an increasing number of management activities
subject to the stern eye of 'corporate governance'
Because of the agency problem, shareholders have fretted
over good governance for many years. They want to be fairly treated and given a
hearing, particularly where there is a big majority shareholder that doesn't
always listen to what the 'minorities' want. Ruling cliques or family interests
sometimes give themselves more voting power by issuing different classes of
shares - where A shares have two votes for every B share, for example, and
guess who's got the A shares? Shareholders want to know what's going on inside
the company, how management is spending 'their' money and how reckless or wise
its plans may be. So they are always pushing for more disclosure. The ultimate
cockpit of decision-making is the boardroom, so shareholders also take a keen
interest in how boards are structured, who the directors are and how trammelled
or otherwise is the CEO's power.
Governments have traditionally taken less interest in the
minutiae of corporate governance, apart from ensuring that directors didn't
break the law and companies didn't behave in a monopolistic fashion. In the UK
it was private-sector concerns about corporate governance, fuelled by the BCCI
and Robert Maxwell fraud cases, that prompted a series of investigations into
financial reporting, director's pay, governance and the role of non-executive
directors. Most of the important recommendations were bundled into the Combined
Code in 1998. Though government commissioned the last report, the Code remains
voluntary. About half of the companies listed on the London Stock Exchange
comply, though the exchange insists that those who don't must explain why in
their annual reports.
Better
boards One of the Code's recommendations is that the chairman should
be 'independent', not from within the company and certainly not the ex-CEO. Nor
should the chairman and the CEO be the same person, because that's too much
concentration of power. The board should be evenly balanced between
non-executives - who are less under the CEO's sway and more likely to ask the
searching questions - and executives, who know the business. A remuneration
committee should decide on directors' pay, an audit committee should deal with
the auditors, and only non-executives should sit on both. The Code has served
as a model for similar codes in a number of continental European countries.
The outbreak of corporate scandal disease - Enron, WorldCom,
Tyco et al. - that tore through corporate America in 2002, made the US
government finally sit bolt upright. Its response was swift and uncompromising
- the Sarbanes-Oxley Act. This set up the Public Company Accounting Oversight
Board to keep a beady eye on auditors, and made independent audit committees
compulsory for listed firms. It obliged CEOs and chief financial officers to
certify the company's accounts and promised to send them to jail if these
proved false. UK boards have been moving towards the Combined Code model for
some years, with some notable exceptions, such as HSBC. In America, the
absolute monarchy of the CEO (usually the chairman as well) remains in relative
good health though there is an observable shift in power towards the directors.
There is also less 'I serve on your board and you serve on mine'. Indeed, as
compliance burdens rise, the dwindling number of CEOs and executive directors
willing to serve on other companies' boards is noticeable on both sides of the
Atlantic. In the UK, serving directors are more inclined to accept
directorships in private-equity-owned companies, away from the spotlight.
Change in
Japan Corporate governance is overwhelmingly an Anglo-American
preoccupation, though one that is spreading across the rest of Europe. Some
change is taking place in the Japanese system, as firms respond to pressures
from foreign investors. Japanese boards have always been big, and closed to
anything resembling an independent director. Some are now taking on one or two
outside directors and shrinking in size. Western thinking is that smaller
boards allow serious discussion but, if there are many more than a dozen
members, matters tend to get waved through.
Economic Cooperation and Development (OECD) has laid down
corporate governance principles for its member states. As it points out, good
practice nowadays will boost a company's share price and, by leading to better
credit ratings, can mean cheaper debt. A Harvard/Wharton study showed that US
firms with better governance had faster sales growth and were more profitable
than their peer groups. But most agree that there is no single model for good corporate
governance. Even in a world dominated by multinationals, it is difficult to
export a corporate governance system, rooted as they are in domestic laws and
habits.
So things have swung the shareholder's way in
recent years. Investors have more influence over management than they have ever
had. Of course, it's never quite enough for them. They still think CEOs get
paid too much, even though a good one will repay his package many times over.
And they would just love to have more say in the selection of directors who,
they believe, should be able to hire and fire management. So far, management
has held them off on that one.
Reference: 50 Management Ideas You Really Need to Know
Book by Edward Russell-Walling
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