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Lapdog directors

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Lapdog directors

Stephen Jarislowsky has every reason to be outraged by the actions of the board of directors of Magna. Not only have they given Frank Stronach, the founder of the company, a sweet-heart deal to give up his control of the company – paying him $1 billion for shares with a market value of around $60 million (it’s only the shareholders’ money); but they also have approved outrageous compensation for him during the past decade.

Terry Corcoran used Jarislowsky’s justified outrage to criticize outside directors for being lapdogs to the CEOs who likely played a major role in influencing their original appointments. Corcoran also referred to a National Bureau of Economic Research study (“The Dark Side of Outside Directors: Do The Quit When They are Most Needed?”) to further challenge the value of outside directors. While he concluded in his May 13 column in the Financial Post that “the outside-director theory doesn’t look good”, he did not offer any alternatives.

It should come as no surprise that directors quit before bad news is made public. Under the current rules, they can be subject to enormous personal liability, which may exceed their companies’ insurance coverage.

I have suggested in past blogs solutions to these various problems and the means to make corporate governance work.

First, it must be perfectly clear that the roles of directors are the following: hire and when necessary fire the CEO; set his/her compensation; continually monitor the performance of the CEO and the company; oversee, modify and approve the strategic plans submitted by the CEO, including contingency plans and execution plans; and oversee and modify the hiring by the CEO of the other key members of the senior management team and their compensation.

Next, a pool of potential directors should be created, possibly by a regulatory agency such as the SEC in the U.S. or the OSC in Canada, or by the central banks. There should be two criteria for selection: a candidate should have no full-time job and should display good common sense.

Many may be tempted to add business experience and technical skills such as being able to read financial statements and/or understand modern finance. However, I am a firm believer in the smell and sound tests. If something doesn’t smell or sound right, most likely it is not right. Anyone with good common sense should be able to apply these tests with a high degree of success, especially if they are not expected to be a lapdog.

All public companies with sales or assets in excess of $250 million should be required to randomly select their directors from this pool. No one selected could serve on more than three public boards, and perhaps one not-for-profit board. Being a director should be viewed as a full-time job.

Random selection would destroy the value of multiple voting shares. While this might be generally applauded, critics of my proposals will argue that they violate the principal of owners (shareholders) choosing their representatives (directors). Superficially, this sounds like a good argument. But by and large this is a myth. Yes, shareholders do have the legal right to elect the directors. However, the current system favors incumbents and manipulation by CEOs.

Furthermore, the CEO of a company should not be a director. CEOs are employees, and as such they should report to their boards at the direction and invitation of the boards. This would eliminate the idiotic controversy over whether a CEO also can be the chair of the board.

Finally, directors should be exempt from personal liability. The quid pro quo would be that they cannot retain outside consultants to make decisions on their behalf – the current practice so that directors have a defense whenever something goes wrong. There should be no need to hire compensation consultants, executive search consultants, financial advisors, management consultants, etc. No individual should be part of the pool unless s/he is willing to do the work required and make the key decisions without relying on outside advisors.

Herein lies the second major source of opposition to my proposals. Large numbers of “experts” have had a free ride on the corporate governance gravy train. They will not give up their gravy train, a very lucrative one funded by shareholders, without a fight.

The major source of opposition will come from CEOs who will object to being treated as common employees. They will not like reporting to boards with real powers and autonomy. As well, they will object to the inevitable reductions in their compensation and the loss of “walking away” money when they are terminated.

The opposition to real reform of corporate governance and doing away with lapdog directors and widespread incompetence, comes from all of the current members of the club – the ones who have profited immensely from being members of this club.

The opinions expressed in this blog are personal and do not reflect the views of either Global Brief or the Glendon School of Public and International Affairs.


1 Comment

  1. Peter Stone May 14, 2010

    Would it be too much to ask for the idiots who design blogs like this to make them printer-friendly? I occasionally would like to save an article, but the printout is always utterly unreadable, and in the end I lose any interest in the original article because I’m too annoyed by the whole stupid thing.

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