The Hindu Business Line : Management myths of Corporate America

The US is rather ambivalent towards corporate governance. It is a basic dislike for what is seen as governmental interference in what should remain a private corporate matter. It also reveals the enormous power of corporate lobbying that moves quickly to squash many moves that would rationalise the present system and make it more effective.

IT IS that time of the year when American corporations mail out their annual reports. Accompanying the report is the proxy statement that includes the invitation to the annual meeting and gives details of the various resolutions that will be put to vote.

I have seven reports lying in front of me and this (unrepresentative) sample reveals some interesting insights about concerns of shareholders and their efforts to make the company act. It also enables us to challenge several myths about management and business in Corporate America.

One myth is that shareholders are the owners of the companies. Well, in theory, you could make a claim that shareholders collectively contribute the equity of the company and, hence, together own the assets and that this gives them the right to decide who will be their directors charged with governing the company.

Each share represents a piece of the company but with over 50 per cent of the shares of most companies in the US reportedly owned by institutions, individual shareholders have little power. They really can claim to own a piece of the cash flow of the company and not its assets.

One study reports that about 70 per cent of American companies listed in 1999 had never paid a dividend. So much for claiming a piece of the cash flow; any return can only come from share value appreciation.

The ownership myth is completely shattered when it comes to electing the directors. The company provides a list of people and you can decide whether you support their election by voting for them, or you can `withhold' your vote.

In this land of democracy, there is no alternative list from which you can select a director to vote for. Moreover, withholding your vote means you are displeased with the person. It does not prevent that person from becoming a director. If 99 per cent of the vote is `withheld' and only 1 per cent votes for the candidate, he or she is still declared elected. This is hardly democratic and resembles the elections in places like Egypt where the President has been decided and then the public is allowed to express their support for him.

Small shareholders have been taking aim at this. Resolutions proposed at two of the companies are calling for a change from this `plurality' to require that the majority of votes cast is needed for a director to be elected. Of course, the directors recommend a vote against this resolution because they feel it is unnecessary.

Another popular resolution is to seek a limit on executive compensation. In Citigroup, activists are seeking the CEO compensation to be limited to a multiple of 100 times the average compensation paid to the company's non-managerial workers. Other resolutions at other companies are calling for the company to limit compensation to that which is allowed as deductible by the Federal tax authorities.

At one time, tying pay with performance was touted as the way to align the interests of the shareholders with those of the, um, owners. That is a solution that has caused more problems. The deviant behaviour of major corporate leaders of companies such as Enron and Tyco was attributed by their desire to somehow show a profit, or impact share price and protect their compensation. The basic fault is the assumption that pay is the only motivator for all kinds of managers.

Other resolutions are calling for eliminating or putting a limit on stock options allotted to top managers. And the stock response from the directors is a recommendation to vote against these resolutions because, and they all say the same thing, that they fear this will `restrict their ability to attract and retain executive talent.'

In short, these otherwise brilliant minds continue to believe that $20 million will make a CEO work 20 times harder than $1 million.

Other shareholder resolutions proposed reveal concern on other governance issues. These include the desire to separate the offices of CEO and Chairman so that one person does not hold both executive and governance responsibility, setting limits on the term directors serve so they donot become tenured beyond their capacity to contribute, making companies reveal details of political contributions, and allowing a simple majority vote (instead of a 75 per cent vote) for approval.

The directors have, in each case and in all the companies recommended, a vote against these proposals. The usual justification for this position is that it would be too expensive for the company or that the company is already concerned about the issue and achieves the objective through other means.

Shareholders of pharmaceutical companies have proposed resolutions that address recent concerns about the rising cost of healthcare. Some resolutions seek limits on the increasing cost of medicines and urge the company not to block the import of medicines from Canada where the same medicines are much cheaper.

Every time there is a big scandal, there is a lot of huffing and puffing but little of structural significance gets accomplished. Sometimes, a bit of regulation does get by.

An example is the recently implemented Sarbanes-Oxley Act that requires, among other things, the CEO to be personally liable for the statement of accounts.

This Act was an attempt to make it personally very expensive for CEOs to aid and abet fudging of accounts, which seem to be occurring quite regularly among the companies that were till not too recently the darlings of the market, and stock examples in textbooks. In the absence of a federal law, there appears to be only two sources of pressure for action in the area of corporate governance.

One is when the New York attorney general, Elliot Spitzer, charges in like a white knight and drags away errant corporate leaders to the courts. It sends a shiver down the spine of others who have not yet been found out and who then, perhaps, try to clean house.

The other source of pressure is the multitude of individuals and groups of small shareholders who propose resolutions in major companies repeatedly, year after year, in the hope of making an impact on the corporate moghuls.

Ultimately, it is hoped that both of these would result in the companies regulating themselves better.

(The author is a professor of international business and strategic management at Suffolk University, Boston, US. His Internet address is cgopinat@suffolk.edu)

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