Putting Real Teeth and Claws Into Corporate Governance

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There's a little more accountability in the business world now that executive pay cuts are becoming more fashionable, but we're still in the "cosmetic" phase that hints at real change but ultimately falls short. Corporate boards of directors are still experiencing difficulties summoning the courage to make chief executive officers fully accountable for their job performance and behavior at the helm.

Strong boards -- and strong corporate governance policies -- are still the exception to the rule. It's something to remember ahead of proxy season as we investors contemplate our votes. More shareholder voting and activism will hopefully encourage more real accountability -- and truly meaningful consequences -- when corporate managements fail at doing their jobs responsibly and for the good of their companies, not just themselves.

Shareholders get stung by semantics
Last week's big news about Chesapeake Energy (NYSE: CHK  ) CEO Aubrey McClendon's "retirement" is a perfect case in point. Somebody should have remembered to put real claws in the clawback provisions out there in wildcatting territory.

I put "retirement" in quotes because Chesapeake shareholders face an infuriating outcome after all the indignities they have already suffered. The company has been steeped in controversy due to McClendon's behavior at the helm, and while his departure is a good sign for better governance, it doesn't appear he's truly going to be held responsible for anything as he steps down.

The company's most recent proxy statement outlined the stipulation that should McClendon "retire" before December 2013, he would be entitled to $0 severance and even face a potential $30 million clawback.

Of course, that did sound too good to be true.

Even though the company's press release clearly says McClendon "agreed to retire," the board will treat McClendon's departure as "termination without cause" and -- surprise -- that's a horse of another color. The color green, actually.

According to the same proxy statement, termination without cause entitles McClendon to about $47 million. Clawbacks? None.

Although McClendon recently voluntarily gave up his bonus, we now know that bowing to the pressure to leave his job ensures a handsome payday anyway. This is despite the fact that myriad corporate governance problems at the company over the years -- including excessive pay for McClendon -- are just the tip of the iceberg. Although the board has found "no wrongdoing" on McClendon's part at the helm, the company is still being investigated by the SEC.

Although many people are pointing to McClendon's decision as a Carl Icahn victory given his stake in the company and subsequent board shake-up, McClendon's cushy "retirement" package isn't a massive victory for shareholders.

AIG: Always Infinitely Galling
Obviously, we shareholders continue to be aware that if we don't look out for our own interests, nobody else will, either.

Case in point: Last week, news broke that the U.S. Treasury allowed big pay raises at bailed-out financial companies like AIG (NYSE: AIG  ) , despite its own supposed restrictive pay guidelines for companies that had received government funds. The report from the special inspector general of the Troubled Assets Relief Program alleges that the Treasury fell down on oversight and supervision and deferred to the companies' pay schemes. Allegedly, these companies weren't even required to link compensation to performance.

The AIG example is particularly galling, since that company was criticized following the financial crisis for considering giant bonuses appropriate under the circumstances. More recently, the company's management and former CEO Hank Greenberg had the mind-blowing audacity to consider suing the government over the bailout, even though without it, AIG would have purportedly failed. Apparently there are no stand-up good guys in this scenario, either.

More major issues for shareholders
Situations like these are why shareholder-friendly policies are important, and the issue goes deeper than the compensation issues most of the public seems to focus on.

Shareholders should also vote in favor of strong corporate governance policies such as majority voting, which allows a simple majority vote to elect directors, and proxy access, which allows shareholders to nominate their own directors to boards.

Coming up in February, Apple (NASDAQ: AAPL  ) shareholders will be able to exercise their privileges to vote on a proposal to change the company's articles of incorporation to allow for majority voting after CalPERS' successful majority voting campaign last year. James McRitchie has also submitted a shareholder proposal requiring Apple management to hold significant shareholdings until retirement age, and John Harrington is pushing for a human rights proposal to address controversies like Foxconn labor problems.

Another controversial but much-needed corporate governance policy is proxy access. Basically, such a provision allows shareholders with a minimum percentage of shares and a specific long-term holding period to nominate directors. However, some headway is being made. For example, Disney's (NYSE: DIS  ) recent efforts to block a proxy access proposal didn't pass muster with the SEC, so that proposal will go to a shareholder vote this year. (A proxy access mandate has been a battleground at the SEC for years, with corporations pushing back hard, and has since fallen by the wayside.)

Putting accountability back into the boardroom
While it's nice to hear that some corporate managers are at least taking some hits to paychecks (see high-profile executive like JPMorganChase's Jamie Dimon, who's taking some accountability for the London Whale trading debacle), it won't really be enough until financial punishments really hurt, such as is the case with clawbacks.

The Chesapeake situation is just one more example of why business as usual isn't good business. Stronger corporate governance policies will ensure that managements and boards are truly held accountable, and investors shouldn't rest until their companies have adopted policies with real teeth. Policies like "clawbacks" -- and some real firings, not arguments in semantics -- would help build better companies for the long haul.

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Check back at for more of Alyce Lomax's columns on environmental, social, and governance issues.

Read/Post Comments (5) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 04, 2013, at 5:07 PM, XMFSMurph wrote:

    Always Infinitely Gaining. Nice one, Alyce. Thanks for the chortle. :) This is a great article.

  • Report this Comment On February 04, 2013, at 9:23 PM, matthewluke wrote:

    I miss when you would write articles about companies you actually liked. These articles about bad corporate governance are interesting reads, but I really liked the articles about good companies doing good things for shareholders/customers/community/environment/etc. I really enjoyed those articles that informed readers about companies that were possible buys (as opposed to articles telling us which companies to avoid). We still get those articles, but they seem to be few and far between. Those articles were one of the reasons why I began to follow you and your writing (and why I continue to follow your writing).

  • Report this Comment On February 05, 2013, at 8:43 AM, TMFLomax wrote:

    Thanks TMFSMurph!

    And WhichStocksWork, some more positive articles on stocks to buy for those reasons are in the works. Sorry if my articles have seemed more negative than positive these days.



  • Report this Comment On February 06, 2013, at 11:20 PM, smartmuffin wrote:


    Your article seems to imply that the decision of the CHK board to grant McClendon a severance and not attempt to clawback his salary is bad for shareholders. Let’s look at some of the numbers…

    With the $47 million in severance and the potential $30 million in clawbacks, we are talking about a total of $77 million, which was basically given as (for lack of a better word) a bribe to McClendon to just go away without incident. While this may be a moral outrage, it may also have enhanced shareholder value. Once they announced McClendon was leaving, the stock surged, rising over 10% in after hours trading following the announcement, representing an increase of over $1 billion in market cap for CHK. Seems like a good deal to me, especially considering that the $77 million given to McClendon represents just over 1% of CHK’s annual SG&A expenses.

    While it may stink to high heaven that McClendon was essentially awarded for bad behavior, I think the shareholders still come out on top in this one. They are far better off sacrificing a small amount of money to get McClendon out of the way so the company can attempt to recover than they would be wrangling with him in court in a long, drawn-out process that would surely ensue if he attempted to resist being removed.

  • Report this Comment On February 06, 2013, at 11:48 PM, NOTvuffett wrote:

    When Icahn made a substantial stake in CHK, I was hoping McClendon's day at the helm were numbered. Honestly, I would be hard-pressed to imagine how to make worse decisions than he has. To add insult to injury, I think he was the highest paid CEO in the US one year.

    CHK could be a great company with the right team in place.

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