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Should We Be Like Britain?

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So much for anarchy in the U.K. Britain has adopted tough corporate governance policies, forcing FTSE 350 companies to arguably be friendlier to shareholders than to the entrenched interests of corporate managements and boards.

American shareholders should ponder the ramifications of these rules, and ask whether adopting similar policies here might actually help foster more robust, lower-risk corporations -- and safer, sturdier investments.

The British invade the boardroom
Britain now requires that directors stand for reelection every year. They also provide guidelines on director selection, stating that directors should be chosen "on merit, against objective criteria, and with due regard for the benefits of diversity, including gender diversity." In addition, the code also has rules designed to more closely link pay to performance.

The new rules are Britain's reaction to the same financial crisis that battered the U.S. After Britain's credit crunch, it became apparent that their bankers and financial companies hadn't fully comprehended their own risks, and that boards weren't holding executives' feet to the fire for their mistakes.

Meanwhile, U.S. financial companies that took government bailouts after wreaking economic havoc still seem to feel entitled to lavish bonuses and perks. Recent reports indicate that Wall Street CEOS continued to receive over-the-top extras in their compensation packages last year, including country club memberships, chauffeured rides, and personal finance planning. JPMorgan Chase (NYSE: JPM  ) , Goldman Sachs (NYSE: GS  ) , and Capital One Financial (NYSE: COF  ) are among the companies where some perks increased.

Food for thought?
In contrast to this continued recklessness, Britain's ideas look downright thought-provoking. Here in the U.S., we absolutely have problems with complacent boards. I recently asked corporate governance expert Nell Minow about red flags investors should look for on their companies' boards. Among other warning signs, she said that investors should be wary of companies with more than three directors who have racked up more than 10 years of tenure, an indicator correlated with increased investment risk.

Meanwhile, my Foolish colleague Selena Maranjian recently covered a new SEC directive that requires companies to disclose how they considered gender diversity when nominating directors. Although some companies have good representation of women in their executive suite and boardroom, they are few and far between. Selena noted that both DuPont (NYSE: DD  ) and PepsiCo (NYSE: PEP  ) have female CEOs and four women each on their boards. However, only 19% of S&P 500 companies have more than two women on their boards.

Greater diversity and more independent thinking on boards certainly could make for more robust proceedings, and better stewardship of shareholder interests.

Global reform fever
Like Britain, our own lawmakers are hammering out a financial reform bill in reaction to the recent fiscal calamity. Though the bill does contain corporate governance positions, those initiatives have drawn the ire of many U.S. CEOs.

According to The Washington Post, more than 40 CEOs, included the heads of Office Depot, Verizon (NYSE: VZ  ) , and Boeing (NYSE: BA  ) , descended on Washington recently to fight a proxy access provision, which makes it easier for shareholders to nominate directors. This is no new issue; in fact, it's been a long-standing debate.

In 2007, the Securities & Exchange Commission under Christopher Cox caved to big corporate interests and supported regulations that effectively block proxy access, making it harder for shareholders to put their own nominees on ballots. It was outrageous then, and it's frankly shocking that many investors don't see how violently corporate managements balk at giving shareholders -- their actual owners -- any say on what they do.

The corporate governance section of the financial overhaul bill would give shareholders a non-binding vote on executive pay -- a major step in the right direction for shareholder rights. Let's hope our legislators can resist CEO pressure on that clause.

Keep calm and carry on
Whether or not our own U.S. financial reform bill still includes the corporate governance provisions when all is said and done, shareholders should stand firm on addressing such ideas. There's no good reason for corporations to reject shareholder-friendly policies like say-on-pay provisions, proxy access, or majority voting.

Should we be like Britain, and force certain tough corporate governance principles down CEOs' throats? It certainly would have been nice if corporate managers had displayed more respect to all stakeholders here in America over the past few years. Then, perhaps, we wouldn't even have to ask the question.

Check back at every Wednesday and Friday for Alyce Lomax's columns on corporate governance.

PepsiCo is a Motley Fool Income Investor recommendation. Motley Fool Options has recommended a diagonal call position on PepsiCo. Try any of our Foolish newsletters free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.

Read/Post Comments (7) | Recommend This Article (14)

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  • Report this Comment On June 04, 2010, at 10:12 PM, prginww wrote:

    Inept, pompous corporate management and the U.S Government - see any correlation? I say you're out of your mind especially under this administration and congress.....

    If you are a shareholder you should rely on yourself to stay abreast of what's going on inside the companies you own. That being said, we as a society ARE becoming more and more like the whiney British wanting to be wet and nursed for everything so I guess we get what we, like more and more articles outlining how government needs to come to our rescue......sheesh.

  • Report this Comment On June 05, 2010, at 1:30 PM, prginww wrote:

    "Greater diversity and more independent thinking on boards certainly could make for more robust proceedings, and better stewardship of shareholder interests"

    What evidence do you have for that statement?

    It could be worse stewardship.

    Boards should seek quality minds and be race, gender blind.


  • Report this Comment On June 05, 2010, at 9:09 PM, prginww wrote:

    I tend to agree with Susan. I don't see that diversity has much of anything to do with the effectiveness of corporate boards. You simply need smart people that are willing and able to do the job they should be doing. I don't care if they are white, black, or purple. Nor do I care which side of the gender fence they fall on.

  • Report this Comment On June 06, 2010, at 2:39 PM, prginww wrote:

    I agree with the above. Choosing CEO's or board members "....with due regard for the benefits of diversity, including gender diversity." is nothing more or less than a system of quotas which I have never seen to work in any business or political model. Giving someone a job over someone else simply because of racial or gender preferences mandated by the government is every bit as bad as denying qualified individuals on the basis of personal biases.

    That having been said, I do agree that selection should be merit based. I also think that proxy access is a big deal; however, it should be limited to major stockholders only (those who individually hold greater than 1%) as they are the ones most likely to be educated in the business while most smaller investors aren't competent to evaluate any CEO or board member's qualifications. There also would exist the possibility of smaller stockholders "ganging up" and forming blocks to elect board members according to populist sentiment, rather than business acumen.

  • Report this Comment On June 07, 2010, at 7:53 PM, prginww wrote:

    Thanks for the feedback, all... I agree with some of the feedback here in that I do believe in merit, absolutely, but I think the questions are good to ask right now since there are reasons to wonder how much real merit is really taken into account in some of these situations as opposed to simply the same types of people being selected for boards (not to mention, in some cases, the EXACT same people, some individuals serve on so many boards there's good question how well they could even keep up with those duties plus their regular jobs). Sometimes some of these individuals even land in new high-ranking jobs or on boards after having failed or been disgraced at previous jobs, too. That never sounds too much like "merit-based" decision-making to me.

    As for the idea of diversity, well there are studies that cognitive diversity makes for a more robust market and I would argue also in a boardroom or business. I talked a bit about that in this article:

    Of course people would define diversity or diverse viewpoints in many different ways, but given some of the things that have transpired, like I said, I think there are some good questions to be asked about how to get more robust boards and more independent thinking and less status quo behavior. At the very least it's food for thought.

    Thanks for the thoughts.



  • Report this Comment On June 08, 2010, at 10:38 AM, prginww wrote:

    Even if you could prove that a gender diverse board improves results, it's not up to the SEC to help companies succeed or fail. The only thing thing they should be concerned about is whether companies are providing true, accurate, and complete information so that investors have the data they need to make investment decisions.

    You could make a compelling argument - at least as compelling as the more women = better companies argument - that dilution of the SEC's mission leads to less effective enforcement. When he was with the NY Fed, Geithner tried and failed to get the banks to re-evaluate their risk assessment models. I'm not his biggest fan, but at least he was looking at the right thing. It'd be great if the SEC could demonstrate similar focus.



  • Report this Comment On June 08, 2010, at 10:38 AM, prginww wrote:

    Isn't it easier and more logical to invest in companies that elect board members based on merit, than have our government mandate that board members be elected on merit. Having a strong board is what makes some companies a stronger investment than others. Maybe we should research the companies that we invest in a little more, and stop asking our government to do that for us.

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