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Issue: Corporate Governance Corporate Governance Issue: Corporate Governance Corporate Governance By: David Milstead Pub. Date: July 3, 2017 Access Date: October 1, 2021 DOI: 10.1177/237455680320.n1 Source URL: http://businessresearcher.sagepub.com/sbr-1863-103327-2814396/20170703/corporate-governance ©2021 SAGE Publishing, Inc. All Rights Reserved. ©2021 SAGE Publishing, Inc. All Rights Reserved. Will shareholder pressure reshape company policies? Executive Summary The governing structure of major U.S. corporations has undergone profound changes in recent decades, due to pressure from government regulators, outside activists and restive shareholders. Boards once dominated by company insiders have been reshaped, and companies have been forced to confront a host of issues that were once peripheral questions, such as how much executives should be paid and the ethical impact of corporate behavior. But the resulting policies haven’t always satisfied company critics, and some skeptics on the other side argue that the federal government’s efforts to compel better governance have been misguided. With the Trump administration more likely to roll back business regulations than to impose new ones, fresh efforts to change corporate governance will likely come from institutional and activist investors. Among the key takeaways: The shares of companies with “good governance” have outperformed peers by a few percentage points, according to Credit Suisse research, but the effect wasn’t present in all industries. Executive compensation has increased significantly in the last 20 years, even as some shareholders have called for more restraint and companies have instituted “say-on-pay” stockholder votes. In many corporations, the rules for selecting boards allow directors to be re-elected even if a majority of shareholders do not vote in favor of retaining them. Overview Wells Fargo CEO John Stumpf testifies to Congress about the bank’s bogus-accounts scandal. The affair cost Stumpf his job and triggered a shareholder backlash. (Andrew Harrer/Bloomberg via Getty Images) The annual meeting of Wells Fargo shareholders in April capped an extraordinary and tumultuous year for the banking company. Wells Fargo had once been regarded as one of the best-managed big banks and most-admired companies in America, one that emerged from Page 2 of 21 Corporate Governance SAGE Business Researcher ©2021 SAGE Publishing, Inc. All Rights Reserved. the financial crisis with hardly a blemish. But in 2016, it was laid low by revelations that thousands of employees, pressured to make sales goals, had opened accounts without their customers’ permission, resulting in millions of dollars in unauthorized fees and dented credit scores. 1 It figured that shareholders unhappy with the company’s behavior, and the resulting decline in the stock price, would let the Wells Fargo board of directors know what they thought, both in their comments and in the election for the board. Indeed, the meeting stretched to nearly three hours, with some disruptive shareholders escorted out. 2 Then, the votes were tallied. Every director got at least 50 percent and nine of 15 got two-thirds of the vote or more, results that would delight any politician running for office. 3 Yet the outcome was described by the media as a “black eye” for the board, because the typical vote for a corporate director is close to 100 percent “yes” votes. Company Chairman Stephen Sanger said the shareholders “sent the entire board a clear message of dissatisfaction.… Let me assure you that the board has heard that message, and we recognize there is still a great deal of work to do to rebuild the trust of stockholders, customers and employees.” 4 The vote “says that the large [investment] funds aren’t going to tolerate these kinds of problems, and they’re going to react,” says Charles M. Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware and a longtime expert in the field. “A company with as large and diverse a shareholding as Wells Fargo having an almost 50 percent ‘no’ vote against a director signals a) they are unhappy with what happened and b) they are willing to make that unhappiness known by withholding a vote. Which I think from a Wells Fargo standpoint is a disaster.… They’ve really got to rethink a lot; they need to refresh the board.” This intense reaction by Wells Fargo shareholders reflects the profound changes that have taken place in recent years in the governance structure of major U.S. corporations. Boards once dominated by inside players have been reshaped by a combination of government, shareholder and activist pressure. These changes have in turn forced corporations to grapple with new issues, such as executive pay levels, the environmental impact of company behavior and the ethical implications of its business practices. The questions going forward are how much these governance changes will actually influence corporate policy – and how well they will stand up under a Republican administration committed to easing business regulation. The quest for improved governance has not been limited to public companies with thousands of shareholders. In June 2017, major institutional investors in the privately held ride-sharing company Uber demanded, and received, the resignation of founder/CEO Travis Kalanick after a series of problems, including accusations of a sexist corporate culture and the revelation that Uber used software to actively evade law enforcement. The shareholders also asked for “truly independent directors” to fill two of the company’s three empty board seats. 5 The concept of corporate governance, if not the phrase, emerged over the last century as the U.S. economy evolved from an era of individual proprietors to one dominated by larger enterprises with multiple owners. The corporation became the form of business organization that accommodated this transition. But because many of these new owners had little or no role in running the business on a day-to-day basis, new questions emerged: How would the owners’ interests be represented, and who would monitor the employees who managed the corporation’s affairs? The favored structure became a board of directors, a group of individuals who were not necessarily employees but who would watch over a business’ overarching strategy and the employees who were to execute it. Corporate governance is the philosophy of ensuring that this system works. It is “the structure that is intended (1) to make sure that the right questions get asked and (2) that checks and balances are in place to make sure that the answers reflect what is best for the creation of long-term sustainable, renewable value,” wrote shareholder activists Robert A.G. Monks and Nell Minow in the fifth edition of “Corporate Governance,” a classic textbook in the field. 6 Good corporate governance “requires a complex system of checks and balances. One might say that it takes a village to make it work.” 7 Governance has come a long way in three decades. Corporate boards were often composed entirely of white males with direct ties to the company, meaning they were rarely independent of management and able to offer a detached, dispassionate critique of the company’s performance. Many were men of prominence, but they lacked specific business experience or financial expertise. “When I first started practicing in the 1960s, I was in boardrooms, [and] they were almost entirely middle-aged males and they very typically included the company’s investment banker, commercial banker and lawyer, none of whom were independent,” says John F. Olson, a partner at the law firm Gibson Dunn & Crutcher and the board chairman of the American College of Governance Counsel, a legal group of longtime practitioners of corporate governance law. “That world is long gone … some of it was brought about by advocacy groups and some of it brought about by academics and some of it was brought about by just practical experience.” Now, Minow says in an interview, “Boards are vastly more independent. When I first got into this field, O.J. Simpson was on five boards and a CEO’s father was on the [board] compensation committee. I mean, it was craziness going on. So a lot of things are much, much better, boards are much, much better, much stronger, much more independent than they were.” However, Minow adds, that doesn’t always result in what she would call more responsible policies. For example, she says, “CEOs are much more outrageously overpaid” now than they were before. “The first pay package I ever complained about was $11 million. That’s Page 3 of 21 Corporate Governance SAGE Business Researcher ©2021 SAGE Publishing, Inc. All Rights Reserved. chump change now.” There have been two major market meltdowns in the last 15 years – the 2001-2002 market crash after the accounting scandals at Enron Corp. and WorldCom Inc. and the 2008–2009 financial crisis – and Minow argues that poor governance has played a large role in both of them. “In the last decade, we have seen a perfect storm of failures, negligence and corruption in every single category of principal and gatekeeper: managers, directors, shareholders, securities analysts, lawyers, accountants, compensation consultants, investment bankers, journalists and politicians,” Minow and Monks wrote in their 2011 book. 8 CEO Salary Soared in 1990s Pay resumed rise after drop during recession Note: Based on analysis of data from Compustat’s ExecuComp database, Federal Reserve Economic Data (FRED) from the Federal Reserve Bank of St. Louis, the Current Employment Statistics program and the Bureau of Economic Analysis NIPA tables. According to the source, CEO annual compensation is calculated using salary, bonus, restricted stock grants, options exercised and long-term incentive payouts for CEOs at the top 350 U.S. firms ranked by sales. Source: Lawrence Mishel and Jessica Schieder, “Stock market headwinds meant less generous year for some CEOs,” Economic Policy Institute, Ju1y 12, 2016, http://tinyurl.com/y8yuasd5 Executive compensation grew exponentially between 1965 and 2000, declined sharply during the 2007-09 recession and then began rising again.
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