Poor corporate governance at U.S. companies is like resistant bacteria: attempts at eradication only strengthen the disease. Despite a few steps in the right direction, the current climate isn't much better than when Tyco's Dennis Kozlowski pickpocketed shareholders to buy his overpriced floral-patterned shower curtain.
The losers are the shareholders, the true owners who are strangely powerless to stop the over-reaching by their employee-executives. At the heart of this tragedy are ineffectual boards, who continue to oppose proposals such as poison pill prohibition and advisory votes on compensation. But the true culprits are the institutional owners like the fund behemoths, who continue to condone, indulge and coddle their portfolio companies. Whether due to fear of losing pension contracts or a sad type of institutional laziness, the executive gravy train rolls on -- as unhitched to the engine of performance as ever.
Of course, as a shareholder of a public corporation, you can vote "with your feet" as the saying goes, selling shares and moving on. But the pool of companies with shareholder-friendly practices is limited and the search ever harder. Morningstar grants an "A" for corporate stewardship to only 93 out of 7,646 businesses. This implies that nearly 99% of public companies have sub-optimal governance -- really no surprise to shareholders who notice their wallet feels a little light after the board convenes.
And not much has changed since Tyco and Enron. Long after Kozlowski went to jail for squandering corporate loot on toga parties and Jeff Skilling played it loose with the balance sheet, executive nonsense goes unpunished.
Robert Nardelli was booted by Home Depot for excessive compensation on the back of lackluster performance, but his severance package of $210 million was an unmitigated disgrace. We'd all love to receive an amount equal to the GDP of the Kingdom of Tonga in exchange for being fired, but most of us can't find someone dumb or silly enough to offer us the deal. The failure of Home Depot's board to attend their own shareholders' meeting may be the most cowardly display of fiduciary irresponsibility ever.
There's no problem with hefty compensation -- as long as that pay is actually tied to cash flow performance, and given in restricted stock, not in some different currency from shareholders. Compensation should be tied tightly to long-term cash flow generation and return on investment, not short-term earnings -- and executives should be forced to hold vast quantities of stock for long periods of time. Good corporate governance is good business -- and good business is good investment. According to a study by GovernanceMetric International, companies with top governance scores have significantly higher investment returns.
But until companies pay for performance instead of palatial powder rooms, we can expect more of the distressing same.