Wednesday, March 19, 2008

New Rules for Corporate Boards Needed

New Rules for Corporate Boards Needed

The people representing the stockholders in the corporate setting are each of the Board of Directors at each corporation. The stockholders invested in the company and hopefully they expect their rights to be observed. Most stockholders want the stock to appreciate due to corporate success in growing especially with profits each year. Many stockholders also want their investment to not only be worth more over time but they do not think highly of management of the Board when the stock price depreciates. In fact they are more displeased as the stock price depreciates even more. Additionally, they want to pay the executives fairly but not excessively.

The biggest joke is that the executive management picks each Director filling their slate of Directors that the stockholders approve or disapprove as a whole usually. The exception is when one or more stockholders have enough stock to add their own Directors to the slate of Directors. Read the biographies of the people on the Boards of Directors at each corporation when you receive the Annual Report and proxy statement for each stock you may own and think whether or not you are satisfied that each of these individuals represent you. Look at the biographies of the stocks held by the mutual funds you may own directly or held for you and make the same judgement.

Most people would like the Board to be arms length away from executive management to represent the stockholders and to set goals, frameworks, fire or otherwise punish executive when they do not perform well, specify direction, establish salary and bonus of the executives, and be another source of skills, wisdom and experience leading the corporation through current and future problems and successes.

If a corporation performs badly, stockholders cannot directly fire board members or executives directly unless they are big holders of the stock. Even mutual funds that may be big holders seem not interested in getting involved. One pension fund does seem to actively voice their opinion (Calpers) that I usually admire, but most others do not.

The link discusses WaMu Board of Directors granting excessive salaries and bonuses to a failed executive staff.

There should be new rules about Boards of Directors for corporations big enough to be listed on any American exchange.

An extreme example is an executive having a job as an executive manager of one corporation and also a member of the Board of Directors of several other corporations. How can this individual find the time to adequately perform all of his or her duties at each institution? It also seems funny that when this occurs, that there is a common group of these same type of individuals on several corporate boards together. If you let me be on your board, I'll let you on my board. These intertwined boards cannot be good for the stockholders, mutual fund owners, or America.

The WAMu board even when the stock lost 80% of its value recently, literally cannot be fired by the corporate owners: the stockholders. Stockholders cannot select the personnel to run on the Board of Directors. Whoever heard of owners of a business not being able to pick and choose members of the board? The Board of WaMu is as guilty as management for running the company onto the rocks.

The same factors are in play with the current financial mess with the Banks and Brokers. The Boards are just as guilty as the executive management for not being prudent with the dealings of the sub prime mortgages.

Most Boards deserve to be fired right now for enabling excessive salaries and other packages for themselves and the senior executives. A health insurance company Board enabled its CEO to accumulate a billion dollars worth of stock. Most Boards of large corporations pay their executives in the millions of dollars each year like rock or movie stars. The Boards have widened the gap of loaded pay of the lowest paid employees to the senior level employees to widen excessively.

The pay, perks, benefits, and stock options have risen excessively for most members of the boards of directors at major corporations. These part time jobs pay more than 80 percent of the salaries of full time workers across America. Usually these same board members also are on the boards of several other corporations as well as having full time jobs. The members of the boards determine their salary levels.

There should be new rules governing Boards of Directors. Most of the time they look like pushovers (pawns) to the dictator leadership of the executive management. The stockholders really have no say in the selection of members to the board. The stockholders cannot throw out members of a board for bad performance. There is not even much that the stockholder can vote on.

Maybe if we had the new rules, the current economic problems would not be as severe.