Corporate governance has increasingly come to be associated with the benefits of transparency and disclosure. Common sense is also an important component in preserving confidence and accountability in the conduct of publicly traded corporations and fostering a culture where directors actually assume the responsibility of directing. Those charged with assisting them, such as auditors and lawyers, also fulfill vital functions in the protection of investors and the integrity of the capital markets. All of that would take a sharp turn downward if the Committee on Capital Markets Regulation has its way. The report of this so called “blue ribbon” panel was released this week and has the support of Treasury Secretary Henry M. Paulson, Jr., who also thinks that loosening regulation on Wall Street and in the boardrooms is just what America needs.
Now, if I were attempting to bring about changes in corporate governance where openness is crucial and in a world still sensitive to the abuses and excesses of the Enron-era scandals, would I form a committee behind closed doors, draft its mandate in private and then come forward with recommendations to reduce enforcement? Could I argue with any credibility that what is needed is more protection for directors and auditors and less power on the part of state officials to prosecute? Would I think that a committee composed of those who would benefit from these changes and paid for, in part, by the recent subject of a major regulatory investigation, would be the best means of getting my message across? Would I have a committee comprised of 21 men and one woman, giving it a gender proportion that is even worse than most top companies? And if I did, who on earth would take it seriously?
Maurice Greenberg, former CEO of AIG Insurance, left that company under a cloud after an encounter with New York State Attorney General Eliot Spitzer. He is reported to have financed half of the committee’s million dollar costs. Earlier this year, AIG paid $1.64 billion to settle charges brought by Mr. Spitzer relating to improper business practices. A civil suit by the state of New York against Mr. Greenberg remains outstanding. There is another major contributor which the committee refuses to identify. You might wonder why.
Nobody appointed these people but themselves. They held no public hearings and listened to no ordinary employees or investors. While the process they adopted in drafting their report shows a stunning disregard for the principle of openness that is one of the hallmarks of modern corporate governance, they couldn’t be more obvious in their true objectives. It’s called self-service. This is precisely the same elites-looking-after-themselves approach that an outraged American public rebelled against at the ballot box last month.
Investors and the stakeholders who rely upon America’s capital markets, which is just about everyone in the world, need an open, full service approach to any proposed changes in corporate governance legislation. Fortunately, a new Democrat-controlled Congress is unlikely to roll back reforms and enforcement vigor to pre-Enron days
And don’t for one minute buy into this idea that the changes urged by this group are designed to improve the competitiveness of American business. American business competes best with high quality products, an engaged workforce and a climate of integrity that strengthens confidence in American capitalism. Overpaid CEOs, who receive a king’s ransom that allows them to become insulated from the consequences of their folly and even a small fortune when they preside over losses in shareholder wealth and worse, are a far greater threat to American competitiveness than anything contained in the Sarbanes-Oxley Act of 2002 or any lawsuit against slumbering directors, of which there has been a train load. But since competitiveness is always a flash point, this committee evidently believes it can use that as a pretext to advance its agenda. I don’t recall anyone suggesting that the weaknesses in governance and oversight that failed to prevent the epidemic of scandals and abuses of a few years ago improved America’s ability to attract capital or that recent prosecutions of high profile CEOs made listing on stock markets in Moscow, London or Paris more attractive. There are many people on this committee with illustrious resumés in finance, law and business. I have followed the writings of several of them with considerable interest over the years. But it would seem from both the process the committee followed and the outcome of its deliberations that a few more minds schooled in logic and reason would have been a good idea.
Oh yes, and on the subject of executive compensation, which continues to be the mad cow disease of the North American boardroom as every recent scandal and the current wave of stock option backdating fully confirms, the committee had nothing to say.
Protect auditors? Yes. Make it more difficult to sue directors? Absolutely. Stop Eliot Spitzer look alikes from going after the Hank Greenbergs of the world? You bet. But do something to restore sanity to an area that continues to prove corrosive to business and demeans its reputation –that’s someone else’s department.
This shameful effort to rewrite American laws with an entirely new version of history has prompted Finlay ON Governance to inaugurate a new category. It’s called the Certified Outrage of the Week. It’s your proof —not that you really needed it— of genuine folly, gold-plated aggrandizement and reliable stupidity at the top. It starts today and will appear each Friday, covering both corporate governance and governance in the public arena. I don’t think we should have a shortage of candidates if this is what passes for “blue ribbon” thinking.