America Needs Corporate Governance Reform

Read the daily newspaper or watch any mainstream news show on television and it seems clear that America’s concept of the corporation is under attack. In April this year much was made about reports that a majority of corporations are not paying taxes and everyone is familiar about the scandals of stratospheric executive salaries and bonuses of those who work for companies now asking for government bailout.

Following the scandals of Enron,Tyco, and Adelphia among others, the Congress passed a law called the Sarbanes-Oxley Act in 2002 which was supposed to prevent corporate mismanagement.  The main problem at that time was that the record keeping of corporations  was not objective or transparent even when done by separate companies. Conflicts of interests were occurring between accounting firms who edited the corporations, corporation executives, corporate board members, and sometimes even stockholders in an unbalanced way.  This measure was designed to combat outright fraud accomplished by falsification or obscuration of records from principle players in corporations that would negatively affect the stockholder. However, the Sarbanes-Oxley Act did not address problems in corporate governance.

Americans wonder how graduates of great business schools like Wharton and Harvard have remained at the helm of multinational corporations and remained silent while the corporations in their charge were like a train in old movie about to run off the cliff.  Booz & Company just completed an annual study that looked at why CEOs at major corporations are performing so badly. They looked at 10 years worth of data from the largest 2,500 companies.

They identified a disturbing growing trend that is contrary to commonly held beliefs. Many in the business world and general public have heard that CEOs are immediately expected to improve a corporation’s stock price and get short time gains with about 2 years. Failure to get quarterly gains within that 48 month period so the urban legend states will result in a CEOs quick exit. In fact, quite the opposite is the case.  CEOs from failing companies have only a 2% chance of losing their jobs if they are losing ground and even for those with 25% losses the risk of being fired was only increased to5%. Asia and Europe did much better jobs at preparing corporations for successions in leadership than the United States. America’s system punishes innovation and change and instead inspires new executives to follow the path of failure.

The Booz & Company researchers found that companies plan poorly for succession. They often hire a new CEO who has no previous experience from the company to act as an “apprentice” to the old CEO for awhile before he is allowed to take the reins.  Better preparation of lower executives for succession and promotion within the company usually resulted in greater corporate success. They also said the common American practice of making the CEO and Chairman of the Board of the Directors , the same person, also was more often associated with business failure than success.

At the same time, many are questioning the common practice of giving high level executives exclusive and exorbitant stock options.  Research by several authorities has shown that when they control more than 20% of the stock of a company the chance they will act against the interests of the stockholders in general for the long term is significantly increased.  Corporate executives have been gradually getting more power over stockholders  as well. Federal and state courts have upheld the rights of executives to keep information to minority stockholders. Since most stocks in mutual funds held by retirement accounts the distance of stockholders to management in modern corporations is more than the original concept many believe was the intent in making corporations. Despite attempts by the SEC and others to organize shareholders for the most part small shareholders in most American companies have no real say in corporate governance.

Conservative political thinkers need to address the current corporate governance problem which has contributed so heavily to our current economic downturn.  The Constitution clearly gives the Federal government to responsibility to affect Commerce.  Those who run publicly traded corporations have a legal responsibility to run those corporations competently, fairly, and in the interest of the stockholders.  Private property rights of stock holders need to be as avidly guarded as those of ranchers and farmers.  Corporations need to develop much more transparency in their functions and Congress must act to improve the right of stockholders to not only become more knowledgeable in what is happening with their property but also in being able to address the boards of directors and management.  Empowering stockholders will help the American public who feels so alienated from the current economic system once again be the active participants in corporate governance that is intended in the publicly traded corporation. Failure to do so will foster further mistrust and likely lead to even more corporate mischief and collapse. Corporate boards and executives must be accountable to the stockholders.

Tony Magaña grew up in McAllen Texas, attended Texas A&M University, holds a doctorate from Harvard University. The co-founder of Contempo Magazine has participated in Valley business for over 20 years.He is a member of the National Association of Hispanic Journalists.

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