MSC: Corporate Governance Reform (Download PDF)

2.0 Main Street Capitalism (MSC) Corporate Governance

2.1 Global Cries for Corporate Governance Reform

Main Street Capitalism corporate governance practices must offset managers’ capitalism malpractice's. "There was massive regulatory failure, massive supervisory failure, and massive corporate governance
failures," agreed Angel Gurría, secretary-general of the Organization for Economic Cooperation and Development, World Economic Forum January 2009 annual meeting.

Canada`s Claude Lamoureux, former president and CEO of the Ontario Teachers' Pension Plan, on our current economic debacle: “Nobody wanted to stop it. A lot of it was driven by greed, the greed of
management who wanted a huge payout. They were gambling with shareholders' money. They got paid out and the shareholders got nothing ... and the board [of directors] didn't ask enough questions. There should be laws against that.” December 2008 “We have to design a system where participants cannot threaten the safety of the American economy,” says University of Pennsylvania Wharton finance Professor Richard Marston. “There’s a better chance of doing something right than there has been for decades.” June 2008

2.2 MSC Corporate Governance Practices

a) new job description, director qualifications and board structure

The objective of effective MSC corporate governance is for the board of directors to supervise management’s performance in creating financial and non-financial wealth for their stakeholders.

MSC corporate governance ‘best practice’ would required board directorships, for all mid cap ($300 million +) and larger listed companies, to become a full-time job. Corporate board should be made up of
professional directors who have added a Corporate Governance designation from a recognized School of Business / Law School rigorous program to their relevant business acumen.

“Growing complexity of board decision-making requires a higher standard of qualification generally. The result is a shrinking supply of qualified potential directors, and the increasing use of ‘professional directors’ –
knowledgeable hired guns who make directorship their profession. Emphasis will shift from compatibility to competence and contribution.” Dr's. Leighton and Thain, Ivey School of Business, University of Western
Ontario, Making Boards Work. January 1997

“Why is board membership the only professional task for which no formal training seems required?”, Sir Adrian Cadbury, Chair, UK Committee of Corporate Governance. December 1997

“The pace of change is so rapid, and the complexities of modern business are increasing so quickly, that continuing education and lifelong learning are as critical for directors as they are for anyone. The 2000
Saucier Report Beyond Compliance: Building a Governance Culture.
“Unless boards devote enough time to their responsibilities, the financial industry will suffer more and more upheavals, forcing government to clean up the mess --- and increasingly, to regulate and control, the
industry.” Dr. Kaufman, chairman of Henry Kaufman & Co, New York, November 2002

Seventy-five percent of a MSC board of directors would be independent professional directors nominated and elected by the shareholders. The balance of board members would be the CEO and one or two other
company executives or “Shot Gun” directors. Where a company has received taxpayer bail-out/ stimulus monies and, until that money has been repaid, twenty percent (two+ seats) of the board would be allocated to “Shot Gun” directors appointed by the country’s principal exchange and securities commission. “Shot Gun” directors are to protect the taxpayer stakeholder interests. Managers capitalism interests be damned.

Our present day, part-time, independent directors are passé. Most of independent directors do not have time to ask enough right questions nor the technical knowledge required to supervise the management of a 21st century mega business. Most Canadian and American corporate boards have a majority of “independent”, directors, a governance best practice that has received valid criticisms:

▪ There is too little contribution from outside directors as their role is limited by their lack of relevant information about company activities.

▪ The use of independent outside persons on a Board is a cultural privacy taboo for Asian corporations.

▪ Research has shown that corporations with non-independent boards have outperformed the financial returns of ‘independent boards.

▪ It is hard for a director who lives thousand miles away to really appreciate risk management issues.

▪ Grateful and loyal for being appointed, independent directors are reluctant to question executive decisions and the need to replace the CEO and senior executives.

b) shareholder`s new legal powers and responsibility

Main Street capitalism corporate laws would allow shareholders to nominate and elect their own board of directors. Pension fund managers must step up and walk their trustee talk. Pensioners should revolt and
kick out indifferent pension managers. All they have to lose is their, hard earned, pensions.

Power to the shareholder is an ancient cry. The 1932 landmark book The Modern Corporation and Private Property by Adolf Berle and Gardiner Means:”It has often been said that the owner of a horse is responsible
to feed it. If the horse dies, he must bury it. No such responsibility attaches to a share of stock. The owner is practically powerless through his own efforts to affect the underlying property. The responsibility has been transferred to a separate group in whose hands lie control.”
Shareholder capitalism has failed. The November 2002 prophesy Capitalism without owners will fail: A policymaker’s guide to reform by shareholder activists Robert Monk and Allen Sykes has come true.

That consistently passionate voice of the free enterprise system, the (February 24, 2004) editorial page of The Wall Street Journal, hit the proverbial nail on the head: “The constant tension at the heart of corporate life: ensuring that the managers serve the shareholders and not themselves.” During the recent era, that constant tension has, far too often, been resolved in favor of the managers, the diametrical opposite of the cause that the Journal champions. “It is high time that we return capitalism to its owners,” John C. Bogle, Founder & Former CEO The Vanguard Group.

c) Regulated and capped CEO and executive compensation

Executive compensation is a major arena for managers’ capitalism self-serving excesses. Main Street capitalism corporate laws would allow shareholders to manage the regulated ratio of CEO's annual
compensation to the average annual employee’s wages as shown in Insert 2-2 on the below.

Main Street capitalism professional directorships would be very well-paid work but they would not receive stock options.

The security commission regulated CEO ratio would be based on a company’s market capitalization.

Shareholders could either maintain, increase or decrease this regulated ratio at the annual general meeting.

If a company’s market cap goes up, the CEOs compensation will automatically increase and will decrease when the market cap comes tumbling down.

Insert 2-2: CEO compensation ratio based on stock market capitalization

1. Executive Committee;

2. Auditing & Compliance Committee;

3. Finance Committee;

4. Compensation Committee;

5. Nomination Committee

Robert H. Campbell, former chairman and CEO of Sunoco, the Philadelphia-based energy company said Enron’s board behaviour confirmed the stereotypical view of boards, a view that is much less true today than years ago. "People used to be on numerous boards," he says. "Being on a board was like having a merit badge. You’d fly in for dinner, pat the CEO on the butt and fly out."

Enron’s board had the bad luck of being the board that got caught!

2.4 State-of-the Art of Corporate Governance

Different cultural values and national business laws mean there will never be a global, one-size-fits-all, set of corporate governance practices. During the 1990s, a number of reports on corporate governance were published in the different countries, accompanied by recommended guidelines and codes of best practices in the United States, Canada, Britain, France, Hong Kong and South Africa.


All formal corporate governance code “best practices” were put forward as guidelines, not as mandatory rules.

Maximizing shareholder market value is a board’s sole fiduciary responsibility. In all codes, stakeholders are mentioned as being important players in creating shareholder value. Neither the board nor management are ever accountable to any stakeholder entity. Every country’s “best practice” governance code is to ensure that shareholders’ capital is preserved and enhanced.

The creation of stakeholder value is still not a rewarded priority for publicly-traded companies. Jobs will be sacrificed to increase annual earnings per share and market value, even when a company is not short of cash..

In Canada and the United States, board of directors are primarily responsibilities for:

a) the adoption of a strategic planning process;

b) the identification of the principal risks of the corporation’s business and ensuring the implementation of appropriate systems to manage these risks;

c) succession planning, including appointing, training and monitoring senior management;

d) a communication policy for the corporation;

e) the integrity of the corporation’s international control and management information system;

f) the audit, the compensation and the nomination mandatory board committees;

The Board’s specific responsibility for effective environmental management practices is seldom stated.

Denzil Doyle, Ottawa, Ontario’s successful technology guru has served on more than two dozen boards. Mr. Doyle says the failure of companies can always be traced back to the makeup of the board and the competence and degree of engagement of the individual directors.
In Canada, the 1994 the Peter Dey Committee’s “Where are the Directors? ‘report did set down a strong foundation for effective corporate governance in Canada but it has had mixed results.

A 1999 survey of Toronto Stock Exchange-listed companies revealed that almost 30% of boards had no input or involvement in strategic planning (other than formal approval of a plan) and almost 40% of boards had no formal process for oversight of risk management. The survey found that 51 % of the companies did not report their practices against all fourteen Dey Report guidelines. Their corporate governance practices claims were never verified.

The 2002 Sarbanes-Oxley Act stiffened the spine of many board members in the United States and Canada.

By 2007, Dey was recanting the merits of having independent directors, a best practice which his report had previously fostered.

The Province of Québec Finance Minister Monique Jérôme-Forget said directors at the Caisse de dépôt et placement du Qubec didn't fully understand what they were getting into when they believed they could make huge profits on a multibillion-dollar stake in commercial paper. La Caisse, Quebec’s pension fund, is saddled with $12.7 billion in toxic assets. January 2009.

Manulife Financial Corp., a Canadian global insurance giant, board Chair Gail Cook-Bennett: “We will have a turnover of board members during my tenure for the next 4½ years and we have to manage that process.
What you are going to require in 2008, going forward for the next decade, may well be different than the backgrounds you've had in the past. Although you don't want a group of technicians sitting around the
board, it may be that it is appropriate to have questions coming that are a little deeper in some areas.” January 2009.


2.5 The Imperial CEOs and The Tone at the Top

The tone at the top that is set by CEOs is the foundation for all components of business practices and it provides operational discipline and structure. Tone at the top includes the integrity, ethical values and
competence of the entity's people; management's philosophy and operating style; the way management assigns authority and responsibility, and the attention and direction provided by the board of directors.

Manager’s capitalism high-risk merger projects and personal greed is the tone at the top played at many American and European financial houses. Jeremy Siegel, a professor of finance at Wharton argues that ultimately, the buck stops with corporate CEOs of financial institutions. They didn't ask hard enough questions about the risks posed by mortgage-backed assets.

AIG has 125,000 employees," Siegel noted. "Basically, 80 of them tanked the firm. It was the New Products Division, which had an office in London and a small branch office in Connecticut. They came up with the idea of insuring mortgage-backed assets, and nobody at the top decided it wasn't a good idea. So they bet the house -- and the company went under." It was the CEO’s fault.

Unethical CEOs will always breed bad losses. Prior to the 2001 Enron bankruptcy, bank CEOs performance bonuses reflected fees earned from their dubious Enron dealings. Prior to and including 2008, the CEOs
performance bonuses now reflected the higher earnings from those toxic subprime mortgage assets.

Eight years after the Enron fiasco, those very same American and European banks that were heavily fined for having abetted the Enron fraud also had major subprime assets write-off losses. JP Morgan Chase
(TARP bail-out), Citigroup (TARP bail-out), Merrill Lynch (TARP bail-out with BofA), Credit Suisse First Boston (Swiss parent company had record $17 billion annual loss), Canadian Imperial Bank of Commerce
(CIBC) (not affected because of strong Canadian banking regulations), Bank America (TARP bail-out), Barclays Bank PLC (U.K. Government bail-out), Deutsche Bank AG (record losses, rejected German bailout
money) and Lehman Brothers (went bankrupt) were all key players in the 2001 Enron fraud.

Managers’ capitalism financial institutions CEOs with their executives cohorts have commandeered Main Street’s wealth and lives with impunity, like marauding Somali pirates. The U.S. Navy, with 14 other
nations’ navies is to lead a new international force to battle pirates off the coast of Somalia. The U.S. SEC should lead the same 14 countries’ national securities commissions to stop the business practices of
marauding managers’ capitalists that ruin the lives of Main Street stakeholders, Under the U.S. government's no-strings-attached bailout plan, taxpayers must take it on faith that bank executives will make better decisions this time around, said Jamie Court, president of the California-based group Consumer Watchdog. “When you deal with the same dogs, you're going to end up with the same fleas,” Mr. Court said.