No thoughtful observer of the corporate scene could conclude otherwise than that it is time for a new model of corporate governance.
We need to move swiftly and decisively to restore badly shaken confidence in corporations and financial markets in the United States. Reforms on several fronts have been suggested - for example, better oversight of the accounting profession, separation of audit work from consulting services in accounting firms, elimination of perceived conflicts of interest in investment banking firms, and a requirement that companies charge the cost of stock options against current earnings. All these have a great deal of appeal.
My focus is on corporate governance. The current system is broken in too many places and needs to be overhauled.
The simple truth is that part-time directors of a major company cannot really know and understand what is going on in the company, no matter how intelligent and diligent they might be. They are almost wholly dependent on the good faith and integrity of management, from the chief executive on down.
One solution is fairly obvious: more full-time, highly qualified, independent directors. Indeed, publicly traded companies should create an office of the chairman headed by a full-time chairman of the board.
The chairman, who would not be a member of line management at the company, would have full and direct responsibility, subject to oversight from the entire board and its committees, for internal and external audit and possibly other control functions. Ideally, the chairman would have extensive experience in the businesses in which the company is engaged and possibly be a recently retired member of management of either the company or a competitor.
The office of the chairman would have access to whatever funding and resources the board of directors believes appropriate. The chairman should be well compensated, but should not participate in stock option or bonus plans.
Indeed, it would reduce the potential for conflicts of interest if no board members received compensation based on the company's performance or stock price. It should be sufficient that management has appropriate incentive pay plans. A board overseeing management on behalf of the shareholders does not need such incentives.
These reforms should be accompanied by an examination of director liability issues. We need to encourage the best and brightest people to oversee our nation's corporations. Attracting quality people who have accumulated experience and, presumably, wealth, will be very difficult (if not impossible) if we do not insulate them from shareholder suits and other potential liability, except in egregious circumstances.
I have tested these ideas during the past several months on chief executives of several large financial institutions and have found a fair degree of receptivity. They know the current system is not working well, and they know the markets are demanding significant reforms.
My suggestions do not require new legislation or regulations (with the exception of better insulating directors from liability).
They simply require enlightened management and boards of directors of companies to realize it is in their best interest, and the nation's, to implement serious structural reforms.
My hunch is that a few companies will take the lead and investors will quickly require others to follow suit. If I were the CEO of a major company I would rather take the initiative than be dragged into making desperately needed improvements in corporate governance.
