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Forced to Behave
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13 October 2004
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US Corporate Governance Improves in 2004
A quick read of the headlines about corporate governance would lead one to believe that American companies are riddled with strife bordering on civil war in the boardroom. And in the more extreme cases like the Walt Disney Company, MCI and MBIA, that isn’t far from the truth. However, a recent report from the advisory group Institutional Shareholders Services says that those cases were the exception not the rule. In general, top management in the US is doing a better job when it comes to corporate governance. Nothing like being forced to behave.
The ISS advises, on occasion, that shareholders withhold their support from certain board members when reappointment time comes along. Since the vote is either a “yea” or “nay” to a question like “Shall John Doe be reappointed to the board for another year?" withholding support is a protest that falls short of outright opposition. The figures tell the story, bearing in mind the limitations on quantifying something as amorphous as corporate governance. This year, the ISS recommended such protests at around 3,200 of the 10,000 public companies in question. That’s about 32% and down from 38% last year, and from 52% two years ago.
Another measure of corporate boardroom harmony is the proxy fight. In such a case, rival slates of board members fight over who shall govern. While this healthy form of democratic interplay is all the rage in political governance, the corporate world doesn’t view it that way. The incumbents usually have the consent, grudging or otherwise, of the shareholders unless things are really going badly. Then, and only then, is there a proxy fight. This year, there have been 13 such fights. Last year, the Financial Times reports that there were 30.
Why has this happened? In almost every case, the directors on the board of any company have started to be more engaging. That is to say, they deal with shareholder discontent before it comes to a vote. In politics, that is called being a good legislator and administrator – responsive government is the least bad government. In business, many directors have discovered that it is a sound way to keep a job.
However, this greater concern for shareholders did not spring up in a vacuum. The Sarbanes-Oxley Act as well as new listing requirements at the New York and Nasdaq stock exchanges were the catalysts for this move. Directors and top management were told to shape up, and on the NYSE, listed firms have until October 31 to certify that a majority of the board members are outside directors. Sometimes market forces need a jump start -- or kick in the pants.
© Copyright 2004 by
The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without
written consent.
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