A Progress Check on Governance Reform

I have been giving a lot of thought to how the much-touted Sarbanes-Oxley Act is working in practice. Here are a few questions I have been asked lately and my answers, based on my experience on four public boardsu00e2u20ac”two listed on the New York Stock Exchange and two listed on NASDAQu00e2u20ac”and on several private company boards. Here is how I believe things are working in the “new and improved” environment.

What are the most significant changes you’ve seen in the boardrooms in which you have served during the past three years?

The biggest change I have seen is that the board meetings take more time, more paper, and more staff-briefing effort. Unfortunately, all this effort has resulted in a mere 10% improvement in corporate governance for a 50% increase in the cost of operations.

Investor Warren Buffett has stated that it is “absolutely silly” that he is not suited to sit on the boards of such companies as Coca Cola Co. because of what some shareholders say are potential conflicts of interest. What do you think of CalPERS’ ill-fated opposition to Warren Buffett’s reelection to the Coke board?

As you know, CalPERS, as the giant pension fund is known, targeted numerous directors last spring at several big-name companies for business relationships they have with the companies and also for allowing outside auditors to perform nonaudit services. My view is that CalPERS made a farce out of the whole system. In the end, most of Coke’s shareholders ignored the institutional shareholders’ group recommendation, which garnered it less, not more support.

Do you think Warren Buffet qualifies as an independent director?
Of course!

Would you like him on your board?
Yes!

There is currently a heated political debate in the United States over domestic job losses to low-cost countries such as India. Do you believe that the bottom line should be the main consideration in regard to offshoring, or are there other factors that should come first?

Offshoring is no different than any other decision that requires consideration of efficiency, political effect, employee response, etc., and of course, most importantly, the bottom line.

What bothers you about corporate governance in the U.S.?

The main thing I am upset about is that new and improved corporate governance practices under Sarbanes-Oxley have not really resulted in taking control of top officers’ compensation. In many companies, (the ones where I’m not a director, of course) pay is out of control. The differential in compensation between top employees and the lowest-paid employees should be the same as 20 years ago. Today’s compensation still reflects the bubble economy of the late 90s, in which corporate executives got caught thinking a couple of kids could make a billion with an IPO. That’s just not reality. The real test of corporate governance effectiveness will be whether the compensation excesses at some companies are brought under control. So far, the results are not encouraging.

In summary, Sarbanes-Oxley is improving corporate governance of public companies at considerable cost (particularly for 404 requiring certification of internal controls). This provision has increased the costs for small public companies disproportionately and may force some to go private. Sarbanes-Oxley has positively influenced many private companies to implement better governance practices, even though they are not technically subject to the new law. But practically speaking, banksu00e2u20ac”whether public or privateu00e2u20ac”must adhere to the new rules by regulatory pronouncement and because investors expect them to now that the bar has been raised.