CEOs of financial services firms are deeply conflicted when it comes to corporate governance. On one hand, like most CEOs, they resist having anyone look over their shoulders. On the other hand, as sophisticated investors they know that effective and empowered boards usually elicit better financial performance. The tension leads to some strangely conflicted behavior.
The conflict manifested itself two weeks ago when a small group of CEOs leading financial and industrial firms proposed principles for better corporate governance. Legendary investor Warren Buffet (head of Berkshire Hathaway) joined Jamie Dimon (head of JPMorgan Chase), and CEOs of General Motors, General Electric, Verizon and others to release an "open letter" and a report called "Commonsense Principles of Corporate Governance," which offers nine pages of detailed recommendations. If implemented broadly, these recommendations would make boards of directors more effective, more responsive to investors and less subject to capture by insiders. Its recommendations would spur corporations to perform better and make them more sustainable in the face of economic turmoil.
The authors didn't say why they chose this particular moment to speak up, but we can speculate. Perhaps it's because corporations are now held in extremely low regard by the public and that makes greater regulation a possibility. In a recently Gallup poll on American's confidence in major institutions, only Congress is held in lower esteem than big corporations.
Perhaps it's because major investors are giving up on the very idea of public companies. The number of public companies has declined by 50 percent in the past 20 years. Investors have shifted towards private equity, which gives them more control over how management spends their money. The shift to private equity is faster among high-growth companies that create the most jobs: From 1995 through 2013, U.S. private equity backed companies grew jobs by 83.7 percent, while all other U.S. companies grew jobs by 27 percent.
It may seem remarkable that corporate titans would call for stronger governance of corporations, but in fact these proposals are quite inadequate compared to the challenge at hand. A lot of the recommendations cover ground that has been well trod by management consultants and business academics over the years. Some of it is blindingly obvious: "The board should minimize the amount of time it spends on frivolous or non-essential matters". Who knew?
To its credit, the report provides some useful tips to promote board engagement and accountability. It emphasizes that a board needs to be able to collect relevant information without filtering everything through senior management. It recommends that board members have skin-in-the-game so their fees depend on the company's long term financial performance. And it condemns the practice of using non-GAAP financial measures to obscure the true cost of doing business.
However, the big problem with governance is not lack of awareness of good practices; it is lack of will: Some CEOs simply don't want their boards to be this empowered. They take deliberate steps to prevent boards from gathering information and prevent them from meeting without the CEO present to steer the discussion. The report fails to explore how corporations could be incentivized or required to adopt better governance practices. For example, the SEC could have a role. Accounting rules could be tightened. Legally, a safe harbor could be created for companies follow governance best-practices. These questions need to be on the table.
Other countries do more than the U.S. does to promote sound corporate governance. The U.K., for example, does more to separate the role of chair and president. But even this watered down, nonbinding and somewhat self-evident statement of principles was too much for some of the companies that were original involved. Two participants reportedly backed out of signing the final report. The loss of nerve is not surprising: Any company that sells services to big corporations must worry about offending potential customers.
It's a testament to the sorry state of corporate responsibility that even this toothless call to apply common sense garners headlines. The CEOs who led this effort deserve kudos for trying. But if we want to have corporations people respect, corporations that consistently create value for stakeholders, we'll have to do better than this.
David Brodwin is a co-founder and board member of American Sustainable Business Council. This blog is adapted from a column recently published in U.S. News & World Report August 8, 2016.