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 Fool.com every Wednesday and Friday for Alyce Lomax's columns on corporate governance.
