Yet More Ideas For Corporate Board Reform

There's not much new under the sun.


Earlier this week, the Wall Street Journal published a review of a book purporting to offer solutions for what is ailing today's American corporations' boards of directors. The review mentioned several ideas, but there was only one which gained any positive attention. It involved making directors take a substantial stake in a firm on the board of which they sit.


It's not a bad idea. It's also an old idea. I wrote, in this post nearly three years ago,

"Here's another insight. If, as I wrote last summer as a solution to America's corporate governance problems, board members were required to "run" for the post, and invest significant assets of their own in the company, thus clearly aligning their financial interests with those of shareholders, it might improve corporate board oversight and involvement in the operation of companies.



Suppose private equity firm partners offered their services to a publicly-held company. Would they not, in effect, take board positions, in exchange for options to own much of the firm, or be paid a percentage of the value they created over, say, a function of the firm's prior total returns, relative to the S&P500? In effect, like my idea, they'd commit their financial fortunes to, and align them with those of the firm's. But what mechanism exists for shareholders to do this? None.


It would, in fact, be a sort of return to the days of the original form of shareholder capitalism. A few wealthy, skilled owners running the boards of large companies. Since, instead, many boards are infested with lesser lights, faded failures of other boards (look at Microsoft for a great example of this tendency), or "politically correct" members with absolutely no business skills, corporate performances are often appallingly bad, while CEOs and board members are still handsomely compensated."

I do honestly mean it when I write that I can't recall any other idea these two authors had.

For me, they join a long list of politicians, union leaders and so-called shareholders' rights champions who fail, in my opinion, to understand the fundamental structure and bargain struck by those selling common equity shares in an enterprise to the public.

Those owners want the public's money, nothing more. Buying a share entitles the public owner to a vote on the board and a share of dividends, plus the ability to sell a share whose value has risen.

That's it.

In an ideal world, board members would, in fact, be so because they had the opportunity to help a company make much more money, and, thus, would invest their own capital. A board like this would not be pawns of the CEO. They'd be actively involved and, if necessary, firing the CEO much sooner than is now the custom.

It's not an entirely new idea. But it actually would require moving backward in time to when public corporations were more often run by genuinely gifted businessmen and their competent colleagues, rather than boards stuffed with politically correct members, often with no business acumen whatsoever.