검색버튼 메뉴버튼


DBR | 1호 (2008년 1월)
A version of this article was originally published by Knowledge at Wharton
From Wall Street to Detroit, chief executives are losing their bonuses, agreeing to work for a dollar a year and in many cases losing their jobs. Congress is invading the executive suite, demanding veto power over management decisions as a price for tax-funded rescues.
And, of course, stock prices have plummeted.
It all looks like a sweeping vote of no confidence, as if the world thinks America's executives and boards of directors are beset with an epidemic of incompetence, self-dealing or both. Many shareholder advocates see the financial collapse and economic woes as stunning proof of their long-held claim that too often the wrong people are in charge -- and that attacking this problem demands an overhaul in corporate governance regulations.
They propose a range of measures to encourage chief executives to focus on the long term rather than the next quarter, to give shareholders a "say on pay" and to make it easier for them to field their own candidates for directorships.
Not everyone sees governance as the culprit, and some warn that a kneejerk attack on established corporate practices could backfire. But many experts expect that regulators, Congress and the incoming Obama administration will take a hard look at whether rule changes could improve the management of public companies.
The main exhibits for reform advocates: First, the near collapse of the three U.S. automakers, while foreign competitors thrived in the same market conditions; and, second, the extraordinary level of borrowing and risk-taking that sank major investment banks.
For many experts, the common thread was a focus on short-term results that endangered firms' long-term health. The car makers promoted profitable SUVs and trucks, failing to develop enough fuel-efficient vehicles or upgrade plants so they could swiftly produce different vehicles as consumer demand changed. Investment banks and mortgage lenders soaked up profits on high-risk loans and securities tied to mortgages, ignoring the damage that must eventually come when the home-price bubble burst.
Washington is already addressing governance issues, and most experts think more will come. Banks that take federal rescue money have to agree to executive-pay restrictions, such as a loss of tax deduction on pay exceeding $500,000 a year and a ban on big paydays for departing executives, called "golden parachutes."
For the moment, pay restrictions may be necessary to get support for rescue measures from an angry public and Congress who resent big pay for those who presided over disaster.
Some experts say the breadth of the problems shows the crisis was unpredictable, noting that not many regulators or academics saw it coming either.
Some critics argue that stock and stock options give top executives an incentive to manipulate results or take excessive risks to boost stock prices over the short term, and they suggest that executive performance should be judged according to different gauges, such as revenue growth, earnings measures or other data calculated by corporate accountants.
Shareholder groups have been pushing "say on pay" initiatives that would require companies to put executive-pay issues to shareholder votes. While such votes probably would be non-binding, the idea is that the prospect of an embarrassing "no" vote would prod directors out of paying too much and compel them to justify pay packages publicly.
That begs another question raised by the crisis: If directors are there to make tough decisions and oversee executives, why did they allow so much risk taking?
Nell Minow, editor and co-founder of The Corporate Library, a research firm that presses for better governance practices, and other critics say directors are too cozy with the executives to oversee them adequately. In many cases, the CEO is the chairman of the board, giving him significant say over who is offered a board seat, which can be worth hundreds of thousands of dollars a year at a major corporation. Although directors must be elected by shareholders, critics note that traditionally a candidate needs only a plurality of votes to win an election. Reformers want to require that candidates receive at least 50 percent of votes cast to win. Indeed, this requirement has been adopted fairly widely in the past few years.
The effect of such "majority voting" is dampened, however, by the fact that there typically is only one candidate on the ballot for each board opening -- a candidate nominated by the board itself. Critics liken this to elections in the Soviet Union, complaining it is just too hard for challengers to get board approval to be placed on ballots, and they seek regulatory reform to open up the process. Most proposals would require candidates to be listed if they produce petitions representing a significant portion of shareholders, such as 3 percent or 5 percent. Business groups oppose the idea, arguing it would allow unions, environmentalists or minority shareholders to foment destructive turmoil.
Obama has supported say on pay and other governance reforms, and most experts expect the Democratic-controlled Congress to push these issues next year.
Any analysis of successful companies shows there is no single governance style that guarantees success, says Wharton management professor, Michael Useem. Nonetheless, he believes that moves to make directors more responsive to shareholders and to open board elections to challengers could be helpful. It also can be useful to better tie executive compensation to long-term results by parceling out compensation over a number of years, with provisions for withholding portions if performance fades.
More important than regulatory change is the need for a cultural shift to better emphasize long-term issues, Useem says. Ultimately, he notes, Americans may adopt a disdain for short-term risk taking similar to the disgust they have developed for smokers who light up in crowded rooms. A new risk-consciousness held by the public should work its way into the boardroom and executive suite, he says. "Rebuilding the national culture becomes absolutely vital."