"Destructive" Changes That Could Help Your Investments

There are many reasons corporations deteriorate over the long haul, taking shareholder value and stakeholder well-being down with them. When it comes to true business health and fixing structural problems, many issues could be alleviated by focusing on a factor that is too often overlooked or underestimated: shaking up boards of directors.

Great work if you can get it
The spotlight's seldom focused squarely on directors' role in business decisions, from CEO pay to business-killing initiatives and short-term thinking. Let's change that.

Exactly who these people are and what they're doing should be of utmost concern to investors. Too often, boards are manned by long-standing directors who happen to be highly paid CEOs of other companies. Just for starters, those who head up compensation committees easily have a conflict of interest, since using peer groups tends to float all CEO compensation boats higher.

In recent years, directors have rarely taken a stand against managements' decisions. They have little incentive to do so, given the benefits and even psychology of remaining friendly. Who wants to fight all the time, after all? It's a hard road to walk, even if it's the right thing to do.

The tragedy is that these directors have been charged to look out for shareholder interests; in essence, that's what we shareholders are paying them for.

Take a New York Times piece earlier this week. Wall Street companies have conducted some pay cuts and layoffs that have made headlines, but big banks' boards of directors are still doing quite well.

The Times used Goldman Sachs (NYSE: GS  ) as a particular example, citing it as topping data firm Equilar's list of well-compensated boards. The annual average pay for its directors was an astounding $488,709 in 2011. Several directors' compensation for the job exceeded a half million dollars.

To give a little context, the median U.S. household income near the end of 2011 was between $49,434 and $51,413. That's for entire households, not for one part-time job that isn't usually even the individual's core, most pressing career responsibility.

Think outside the check box
Do directors even have to fit into the current definition of a board member? These "highly qualified" individuals often boast Ivy League, "impressive" educations on their resumes, not to mention CEO jobs at other public companies or major positions in the government sector, but think about it. Most are white, male, older, wealthy -- in other words, many of them probably don't walk in the real world with most of us Americans.

From an investing and business standpoint, we face a very real risk of lacking diverse thinkers with robust insight and perspective. That's a major disservice to long-term stockholdings and company strength.

The dearth of women and minorities in corporate boardrooms underlines these failings. For example, women are making progress, but still have a very long way to go. These walls and ceilings are utterly illogical. For example, Urban Outfitters (NASDAQ: URBN  ) currently has no women on its board, despite the fact that women actually make up a huge part of its target demographic.

Facebook (NASDAQ: FB  ) went public with much fanfare and no female directors, although thankfully, it did bring Sheryl Sandberg on board. Data showing the significant number of female "power users" of social media makes you wonder why on earth this need was overlooked to begin with. Unfortunately, since Sandberg has a high-ranking position at the company already, her appointment isn't even a 100% satisfactory move.

Disrupt this
Let's ponder some crazy, disruptive ideas. Can we change how supposedly "strong" and "competent" boards are defined in the first place?

One "crazy" idea is to simply be more flexible about what types of people are appropriate for boardrooms. Bloomberg recently reported that more companies are open to having women on their boards who aren't already CEOs. These fresh candidates have relevant experience in other areas, but the stifling "CEO" check box isn't checked. That's an excellent start.

Could other stakeholders serve on boards with more traditional directors? Rank-and-file employees who actually see the front lines of the business could have incredibly desirable perspectives on what really goes on beyond management's possibly skewed outlook and PowerPoint presentations.

Representatives of communities could give valuable insight into how companies are faring with surrounding factors and human cause-and-effect. Even a trusted customer or two could help raise the bar on the quality of boardroom conversation.

Take a sledgehammer to walls and ceilings
Granted, some shareholder activists already do find different ways to push for change on corporate boards. Take Carl Icahn, who has been agitating like mad recently, scaring some managements and boards to attention. Chesapeake Energy (NYSE: CHK  ) is a great recent example of a  well-deserved company in Icahn's crosshairs; Icahn got representatives on its board, and ultimately, CEO Aubrey McClendon left his post.

Icahn has even more recently taken a stake in Dell (NASDAQ: DELL  ) , raising interest in what could come next and making insiders stand up and take notice, even founder Michael Dell himself.

Going forward, though, nobody ever said the world has to adhere to the mythical motto "That always worked before." Oftentimes, these protected ideas actually aren't working, but for some, they are awfully comforting.

We individual investors can start by more closely scrutinizing directors' bios in our stocks' proxy statements. Who are they? What have they done? Are they a diverse group? Have they been serving forever? How much are they compensated for their troubles? Do they attend board meetings the majority of the time, as they should? If they fall short, we can withhold votes for these individuals. You do not have to vote for everything management recommends. In many cases, you're better off voting against.

We need to have more discussions about major changes, and vote our proxies to help nudge corporate America into less stagnant, more robust directions. Hopefully, corporate managements and boards are listening.

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


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  • Report this Comment On April 08, 2013, at 2:51 PM, Darwood11 wrote:

    One of the overlooked aspects of this corporate quid pro quo is how upper management in one corporation becomes a member of the board in another, vice versa.

    This kind of "I scratch your back, and you will scratch mine" is one of the things I look for as an avoidance signal as an investor.

    Nothing worse than a bunch of blind sided, arrogant, egotistical and let's go over the cliff together lemmings in charge. Of course when things do get bad, they take the investors over that cliff. but usually escape the ravages with a "golden parachute," chums on another board waiting to hire them, and politicians who owe favors to shield their backs.

    And so it goes on.

  • Report this Comment On April 09, 2013, at 3:23 PM, TMFLomax wrote:

    Darwood11, so true. Investors are the ones who get dashed on the rocks when things get bad, for sure! I'd really like to see some changes so that boards act like they're supposed to... not this kind of behavior (with such bad effects) that we have now!

    Alyce

  • Report this Comment On April 09, 2013, at 8:25 PM, Darwood11 wrote:

    "I'd really like to see some changes so that boards act like they're supposed to... not this kind of behavior (with such bad effects) that we have now!"

    I second that, and I'm sure a lot of investors are too. So keep "fighting the good fight."

  • Report this Comment On April 30, 2013, at 1:35 PM, Apollotrader wrote:

    Diversity is no guarantee of excellence. This is a free society where companies can do what they wish to advance their business. If you don't like the make up of a board please stop whining about it. Vote with your feet, don't buy the stock, don't buy their products. Quit complaining.

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