Ditching Dysfunction in Corporate America

As the last several years have made all too clear, our free market suffers from serious problems. In Corporate America, too many management cultures function like a collection of fiefdoms, with little or no accountability to shareholders. To correct this, we need an investor insurrection.

Years of greed and apathy have endangered not only individual investors' personal portfolios, but also the overall health of our economy. We could fix a lot of these problems if more companies adopted solid corporate governance policies. To give them a nudge -- or occasionally a shove -- in the right direction, this biweekly column aims to cover these issues and others of vital importance to individual investors.

Had enough yet?
The business world's epic fails and flameouts provide a striking sign that our apathy toward corporate and financial responsibility must end. Look no further than tax-dollar money pits such as GM, failures like Lehman Brothers, or wards of the state like AIG (NYSE: AIG  ) , Fannie Mae (NYSE: FNM  ) , or Freddie Mac. We literally can't afford to clean up after more calamities like these.

Those disasters may be recent, but they're hardly isolated. You'd think we would all have learned from the hard lessons of Enron, WorldCom, and Long-Term Capital Management -- but those fiascoes have too quickly faded from our collective memory.

We need to evolve beyond our recent era of speculative excess, and learn instead to emphasize responsible business practices. We need to take responsibility as owners of the companies in which we invest. Otherwise, we may be doomed to repeat the past few years' race to the bottom, over and over again.

Among the issues we desperately need to confront:

Parasite CEOs. Too many top executives receive lucrative salaries for terrible performance. As a shareholder, excessive pay for underperforming CEOs drains your profits. Say-on-pay policies make much more sense, especially as we emerge from an era in which many CEOs seemed to feel entitled to money and power without first proving their real worth.

Flaccid boards. Whether our nation's boards of directors are asleep at the wheel, incompetent, lazy, or self-serving (or all of the above), they must wake up. It's their job to advocate for shareholders, not pal around with management or pad their own pockets.

Something rotten in Delaware. Why are more than 60% of Fortune 500 companies (and 50% of U.S. public companies overall) incorporated in Delaware? Go figure -- the state's laws go unusually easy on companies, contributing to some of corporate America's biggest problems. (North Dakota sounds pretty good, in contrast.)

Too many hats on just one head. Last time I checked, the United States wasn't big on monarchies. However, when CEOs also bear the title of chairman of the board, that concentration of power can too often foster in them a kingly attitude -- and open the door for truly royal conflicts of interest.

A more shareholder-friendly future
Happily, these concerns are increasingly gaining traction among companies and shareholders alike. Hewlett-Packard (NYSE: HPQ  ) and General Mills (NYSE: GIS  ) rank among the companies whose shareholders have approved say-on-pay proposals. Whole Foods Market's (Nasdaq: WFMI  ) CEO and founder, John Mackey, recently decided to shed his chairman role.

Meanwhile, individual investors like us should remember that many of the best minds in the investing world -- luminaries like Berkshire Hathaway's (NYSE: BRK-A  ) (NYSE: BRK-B  ) Warren Buffett and Vanguard founder John Bogle -- have often written or spoken out against excessive executive compensation, reckless and greedy management, and apathetic, short-term-driven institutional investors. (True, Warren Buffett does serve as both chairman and CEO of Berkshire Hathaway, but he may be the relatively rare individual with the reasonable temperament to handle that power wisely.)

Our current business world, full of myopically self-interested behavior and back-slapping, good-old-boy-and-girl networks, often hinders the creative elements of a robust capitalistic system. It's high time we all listen and take note when investing sages warn us about real problems. High-profile efforts such as the Shareholder Bill of Rights Act also help bring these issues into the spotlight.

We can't afford to sustain our status quo. The time is ripe to contemplate real change in shareholder roles and rights. Companies willing to listen to their stakeholders make sounder and far less risky investments. And that means a more shareholder-friendly future will be much better for all of us.

Let's make that future happen. If we don't, who will?

Check back at Fool.com every Wednesday and Friday for Alyce Lomax's columns on this topic.

Berkshire Hathaway and Whole Foods Market are Motley Fool Stock Advisor recommendations. Berkshire Hathaway is also a Motley Fool Inside Value selection. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletters free for 30 days.

Alyce Lomax owns shares of Whole Foods Market. The Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (19)

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  • Report this Comment On March 19, 2010, at 9:49 PM, Elconkwistador wrote:

    It's Ironic that the "bad guys" here -AIG and FNM- are in the green here today and the rest of the stocks are in red for today.

  • Report this Comment On March 20, 2010, at 10:48 AM, Atrossity wrote:

    Brilliant! Thank you so much for writing this. Someone I grew up with is leaving a top position for just this, collusion between the board and the highest executives that serve them both well and rot the company. We all know the line about power corrupting, but absolute corruption in business seems most likely to go absolutely unnoticed. I feel like I just wrote a vodka add.

    On a side note, it strikes me that Americans gave up it's monarch two hundred years ago only to be turning our power over to corporate interests, as I read the latest Supreme Court ruling.. It's an old joke that we have the best government money can buy, and now we have the best boards that money can buy as well.

    If we're going to be ruled by corporate interests, doesn't it make sense that we guard against letting ourselves become yoked peons, whether we're a taxpayer and/or stockholder?

    I diverged from the sharp edge of this article and want to get back to saying that I hope as many people with unglazed eyes as possible, read it.

  • Report this Comment On March 20, 2010, at 11:40 AM, starbucks4ever wrote:

    Nothing can be done while the Fed continues QE. As long as you have trillions of dollars of liquidity available at 0% and people continue to buy crappy stocks just to get rid of money burning a hole in their pocket, there will never be a serious demand for honesty, and so the corporate market will not produce this product while there is no demand for it. A year ago people were just beginning to pay attention to what kind of company they were buying...

  • Report this Comment On March 20, 2010, at 9:56 PM, idduck wrote:

    Good start to an important investor subject. Your second point is the key. How much longer do CEO's get to continue selecting the people who's job it is to monitor their performance and compensation. For starters, how about limiting the number of boards on which a person may sit. When boards are truly independent, I believe the other points will no longer be a problem.

  • Report this Comment On March 22, 2010, at 2:46 PM, mowris wrote:

    The board is supposed to represent the shareholders and the chairman is supposed to represent the most shareholders. Since Buffet is the biggest shareholder his Chairmanship is right on. The CEO is supposed to be the most capable individual available ergo Buffet again. But by comparison what in the heck is going on in those other companies?

  • Report this Comment On May 16, 2010, at 12:53 AM, gabankruptcy wrote:

    These are interesting comments.

    <a href="http://www.georgia-ga-bankruptcy.com">Georgia Bankruptcy Lawyers</a>

    Thank you for the information. It will help me with my investing career. I appreciate it.

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