A New Agenda for Boards of Directors

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The regulation which has followed each crisis could have been avoided: Boards of directors would have needed to be attuned to, or at least just aware of, the temper of the times and perhaps, simply, a common sense of right and wrong.

Examples abound, but I will mention just two. The Foreign Corrupt Practices Act of 1977 was enacted following an SEC investigation and subsequent public disclosures of bribery. Was a statute carrying criminal penalties needed to convince boards that bribing was not an acceptable method of doing business? More recently, the regulatory response to crisis included passage of the Sarbanes-Oxley Act in 2002, an event which is particularly painful to me. Just a few years before Enron, John Whitehead and I chaired a Blue Ribbon Committee on "Improving the Effectiveness of Corporate Audit Committees." The Committee unanimously recommended improvements in audit committee practices to reform the growing bookkeeping gyrations that were in use at the time. The recommendations were not generally adopted. Then came Enron and the congressional hearings that ensued. What began as our suggested voluntary practices quickly became legislated "musts" for board audit committees.

And here we are again. Who didn't know that compensation practices had grown out of hand? Certainly the public did and complained, to no avail, as did a number of major shareholders often derided as "activist" troublemakers who were essentially ignored. Meanwhile, all forms of compensation in and beyond the financial sector continued to grow, as did the distance in compensation between executive management and the factory floor.

Why did so many boards fail to respond? Principally because, I believe, they chose to be tone deaf and paid little attention to the too-quiet voice of shareholders. Instead, they were complicit, relying on the easy "everyone else is doing it" excuse during the high-flying era, which has just collapsed.

Now the new crisis, and the bonus practices of some top-drawer bankers have brought in a troubled President ready to act on our behalf. The President, quite understandably, set forth new regulation containing direct-compensation caps and related restrictions for bailed-out corporations.

Moving forward, it would be useful for us to remember that the end of the ownership chain is the board of directors, the ultimate fiduciary for shareholders of every stripe. Compensation has always been the board's responsibility. If they cease to be tone deaf, boards across the corporate spectrum will pick up the challenge and voluntarily bring compensation back to earth, before Congress, which isn't tone deaf on this issue, moves in with broader "reforms."

What will it take to develop a spine in the boardroom on the compensation issue? First and foremost, pressure from the institutions that represent all of us as their beneficiaries. Those institutions, individually and as a group, generally own enough stock, directly or indirectly, to be "heard" by their investees. And we, the provider of savings to the institutions, have the voice and legs to encourage them to be heard.

Communication with boards is available to the institutions informally and through more formal means such as proxy resolutions. Majority voting is available to shareholders of many corporations to remove compensation committee members. Public bullhorns are effective. A nudge from government may come in legislated rights for shareholders to have a "say on pay" which I believe is useful, but not critical, for those institutions that seriously want to communicate with a board. Those institutions need not await legislated "access" to place their own directors on a board, if they are serious about protecting us, their beneficiaries, rather than the boards and managements of their investees.

We know that all shareholders and taxpayers have the voice to act on compensation now.

Do they have the will?

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