Corporate Governance and Carly Fiorina

Corporate governance got a bit of a plug from an unexpected source, Carly Fiorina, the former CEO of HP who was rumored to be one of the people considered as a possible running mate for John McCain.  For one thing, she called for an increased role by shareholders in the compensation process.

• Business has an important role to play in rebuilding confidence and restoring credibility. To strengthen accountability, boards should put all aspects of CEO pay up for shareholder vote on an annual basis. Clawback provisions, which require a CEO to return compensation to shareholders if promised results aren't delivered following their departure, should be included.

Classified boards, she indicated, should be eliminated.  "Every board seat should be voted on annually and board membership should be regularly refreshed to ensure that tough questions continue to be asked."  As for bailouts, CEOs should be prepared to give up their job in return for government money.  

• And when CEOs go to Washington and ask for taxpayer money, they should also be prepared to submit their resignations and those of their boards. To earn a bailout, a CEO and board should be held accountable for the decisions they've made -- or perhaps the actions they've failed to take.

Finally, she called on companies to increase transparency, particularly in the area of risk disclosure.

• To strengthen transparency, companies should provide far more than quarterly earnings projections and annual profit targets. Important strategic issues and operational considerations should be reported consistently. Risks and assumptions should be spelled out rather than buried in the fine print. Employees bet on a company when they show up at work. Shareholders bet when they put their money to work. Customers bet when they buy a product. And now we're asking taxpayers to bet. It's reasonable that we all know what the company is betting on.

She rightfully pointed out that without movement from business, the consequences in the form of increased regulation could result in even greater burdens imposed on business. 

• After the dot-com bust, technology companies lost real political clout and could not persuade Congress to vote against the expensing of stock options. The onerous regulations of Sarbanes-Oxley and mark-to-market accounting grew out of Enron's fall. Now, as the economy deteriorates and bailouts continue, a justifiably angry Congress will demand a stiff political price be paid by business. Business leaders must step forward and be part of the solution by volunteering greater disclosure and accepting responsibilities. Otherwise we will be treated as the source of the problem.

Certainly, the recent behavior of the CEOs of the auto companies demonstrated the consequences of not taking a more responsible approach towards governance.  As we have noted, the drive for increased governance regulation arises out of anemic standards at state law (read Delaware) and boards more concerned with engaging in the legal minimum than actually protecting shareholders by overseeing management.  Accepting the approach suggested by Fiorina would go a long way to sedating the calls for increased regulation.

Comments

[Andy]

I am from India and yout post makes so much sense at this time as are witnessing one of the worst corporate governance pratices by an Indian firm. I am refering to Satyam deal with Maytas that was dropped after investor outrage.

The reputaion of not just Satyam but India Inc is at stake because of this act. WSJ affiliate in India, Mint Newspaper has story that tells how Satyam can bounce back (http://www.livemint.com/2008/12/18221653/What-should-Satyam-and-Raju-do.html

Hope Satyam has learnt its lessons and does not indulge in any more misadventures