In his inaugural address, US President Barack Obama said, “Our economy is badly weakened, a consequence of greed and irresponsibility on the part of some,” and due in part to “our collective failure to make hard choices”.
He’s offered few policy specifics other than saying we need to undertake massive new infrastructure and education programmes. But he is right, there are a lot of hard choices we need to make. And one of them is the decision to fix the way public companies are managed.
Private enterprise forms the basis for our economy. It provides most of the jobs we enjoy and creates the wealth that raises living standards. New government spending can only do so much to repair the economy. Reshaping corporate management can do much more. The problem with doing nothing is obvious. Faltering companies are now soaking up hundreds of billions of tax dollars, and they are not substantially changing their management structures as a price for taking this money.
How does it serve the economy when we subsidize managements that got their companies into trouble? Where is the accountability? More importantly, where are the results?
The economy continues to sink, jobs are being lost, the markets continue on a downward course. Changes are needed and can come if Congress insists on reforms that make corporate boards and managers more accountable to stakeholders.
First, Congress needs to pass legislation giving shareholders enhanced rights to elect new boards, submit resolutions for stockholder votes, and have more input on executive compensation and other issues. As companion to these reforms, Congress needs to pass legislation that prevents managers from making it more difficult for shareholders to exercise their ownership rights.
Managers often come up with creative ways to perpetuate their reigns of error. These include myriad takeover obstacles such as poison pills, bylaw provisions and other devices that thwart shareholder efforts to hold managers accountable.
If Congress is reluctant to make wholesale changes at the federal level, it can enact one simple provision that would allow many of the needed changes to take place on the state level: It can give shareholders the right to vote to move a company’s legal jurisdiction to a more shareholder-friendly state such as North Dakota. Currently, that decision is in the hands of company boards.
It is not reasonable to expect managers with failing track records to improve their performance on their own. They will only improve if they are placed under greater pressure by shareholders empowered to exert more influence on management decisions. Nothing will do more to improve our economy than corporate governance changes.
What we need are measures that let the capitalist system produce jobs and economic activity, with minimal but effective government oversight. Government spending is an important catalyst to economic gains, but we need to focus on improving the way companies are managed so private capital can flow into them.
The US private sector is the greatest wealth creation machine ever devised, far outperforming other economic models. Still, major improvements could do a lot to mitigate what Obama calls “the sapping of confidence across our land”. Lax and ineffective boards, self-serving managements and failed short-term strategies all contributed to the financial meltdown. It is time for battered shareholders to fight back.
It is time for change and the place to start is in the corporate boardrooms of America.
THE WALL STREET JOURNAL