The ongoing News Corp. wire-tapping debacle has highlighted the importance of having accountable and responsible leadership at the helm of any organization. Nick Summers of Newsweek and The Daily Beast explains how "lax oversight" by the News Corp. board allowed James Murdoch and News of the World to insulate its heinous activities from shareholders.
"But News Corp. is not a typical corporation. It employs a dual-class stock structure that concentrates voting rights and accountability in the hands of a few, namely Rupert Murdoch and a family trust he controls. Murdoch selects and discards his board members, and if Class A shareholders don't like them, they cannot vote, only sell," writes Summers.
The board is the highest governing authority within a company's management structure, charged with a number of important tasks like selecting CEOs, voting on executive pay packages, overseeing the preparation of financial statements, and evaluating mergers and acquisitions. Essentially, corporate board members are the protectors of shareholder rights.
Unfortunately, corporate boards can't always be trusted.
To summarize, here are five main reasons why corporate boards fail:
1. No Repercussions: Shareholder lawsuits don't pose much of a threat to an incompetent board. Most U.S. companies incorporate in Delaware, where state laws exempt board members from financial liability for their actions.
2. Poor Data: Some boards receive too little or too much information -- or just plain bad information. This often occurs when a company's management is trying to manipulate the board.
3. Lack of Time: It's actually quite common for members to sit on the boards of several companies -- which means they don't have the time to properly fulfill their fiduciary duties.
4. Lack of Expertise: Board members don't always have the same level of expertise as management, especially in highly specialized industries, making effective government all but impossible.
5. Dual CEO / Chairman Role: It's actually quite common for CEOs to act as the chairmen of their boards -- but this gross imbalance of power also puts the company at risk.
When it comes to separating the good from bad among corporate boards, to whom do you turn? For today's post, we're listing the ratings of the MSCI RiskMetrics Group.
To help you with your own research, here is a list of S&P 500 companies with top-ranked corporate boards in addition to positive audit, compensation, and shareholder rights metrics. Do you think these boards have shareholders’ interests as a top priority?
List sorted by market cap. (Click here to access free, interactive tools to analyze these ideas.)
1. Exxon Mobil
4. International Business Machines
6. General Electric
7. Wal-Mart Stores
8. Johnson & Johnson
10. Procter & Gamble
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Andrew Dominguez and Eben Esterhuizen does not own any of the shares mentioned above. Data sourced from Finviz and Yahoo! Finance.)