Does Cororate Governance Still Exist?

 Corporate Governance is often defined as “the system of rules, practices, and processes by which a firm is directed and controlled.

The media does not appear to spend a great deal of time on the topic anymore. When I ask people about it, most shrug. A few have said there is little need for oversight since the Sarbanes-Oxley bill was passed in 2002 that laid out new, stricter standards for US boardrooms. 

Well, Don Cole, crusty curmudgeon that he is, does not see things that way.

If you go back to the era of the Robber Barons, large companies were largely controlled by their founders—Rockefeller, Carnegie, Vanderbilt, J.P. Morgan and his senior partners. They owned the bulk of their businesses. In the 20th century, professional managers took over the running of the very large firms. Slowly, things changed.

The management were significant but not large shareholders (over 5%) of the companies that they were running. They were said to answer to their shareholders of their common stock plus stakeholders such as employees, suppliers, lenders, customers, government regulators, even the local communities in which they operated. That all sounds great but on paper it is the board of directors that should play the defining role in setting, accountability, long term strategy and oversight. 

Having the board oversee things sounds great BUT who is on the board? Generally, it is senior or retired executives of other corporations. Sometimes a board member has the CEO of their directorship company serve on their board. The board of directors has a sub-group generally known as the Remuneration Committee. The members of this group as generally quite wealthy and owe their directorship to the CEO on the company. In many, if not most cases, the remuneration team looks at industry averages for similar companies or competitors and assign a compensation package for the CEO and a few fellow travelers. What galls shareholders is that often, large raises or bonuses are awarded to the management team even when sales or profits decline. 

Why don’t shareholders complain? Well, today many people own shares via mutual funds so they do not even see the annual report. Others, especially the young upscales, keep a large amount of money in low fee index funds that may own shares in 500 or more companies. Direct shareholders are often small investors who own 100-1000 shares. They can complain to shareholder relations but are usually dismissed as noisy gadflies. Getting thousands of small shareholders to unite is a herculean task. Sometimes a large shareholder gets a CEO to shape up with a shareholder proposal that is presented to all “owners”, no matter how small. Many fail but sometimes the activist gets a set on the board and can help prevent overreach. 

Over the years, I have asked many people, all small shareholders, about this topic. Most are apathetic. A typical response is, “Yes, with my 300 shares, I am technically an owner. But, I have had the shares for years and they always raise the dividend. I really don’t care if they are feathering their own nests. I am not going to waste time plowing through the annual reports as you do.” 

Let me be clear that all companies are not managed by leaderships that go for their own enrichments and keep piling on the perks. The best example may have been the dynamic duo of Warren Buffett and Charlie Munger at Berkshire Hathaway. They each only too $100,000 in salary, did not give stock options to managers and rarely bought back stock unlike some companies that do it constantly regardless of price. When Warren broke down and arranged for a corporate jet, he jokingly dubbed it “The Indefensible.” Buffett and Munger were laser focused on enhancing shareholder value and their “owners” loved them for it and profited handsomely. 

You may think my rant in this post is something relatively new. Not so. There is a wonderful but long out of print book entitled, THE MODERN CORPORATION AND PRIVATE PROPERTY by Adolf Berle and Gardner Means. It talked about how boards and managers were responsible for risk management, fairness, and transparency. They said that it was not being executed well. That book was published way back in 1932 at the bottom of the Great Depression.

So, things have not really improved in the last 94 years. Many would say that it has gotten worse. With market averages at record levels as I type, it does not appear that many media outlets will address this issue.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com or leave a message on the blog.