HAS CORPORATE GOVERNANCE LOST ITS WAY?

There are two important roles in corporations: the Chief Executive Officer, who is appointed by the Board of Directors to manage the company, and the Chairman of the Board who plays s lead role in insuring that the company is being run in the best interest of the shareholders.  But, in just about every American corporation, the two roles are combined.  So, how does the CEO, in effect, supervise himself?

In corporate America today, and perhaps elsewhere, there have been numerous instances of companies being caught doing the wrong thing.  Faulty ignition switches, toxic waste run-off into lakes and rivers, deadly auto airbags and, for the financial services industry. the list just goes on and on.  So, who’s responsible?  And, who pays?  That’s where the sad part comes in: the shareholders are the ones ho pay the very substantial fines.

In late 2008, at the beginning of the Great Recession, the Federal Government deemed that the banking system, in general, needed to be propped-up.  Besides infusing cash into the system, there were a number of bank mergers, supposedly with good banks buying those in trouble.  During those hectic days, Bank of America CEO, Ken Lewis, announced that it had purchased Merrill Lynch for $50 billion, in a hurried transaction.

Just a few weeks later, however, it was announced that Merrill had lost more than $15 billion during the fourth quarter of 2008.  Apparently, in the rush to close the deal, proper “due diligence” (financial and legal vetting of Merrill”s books and records) had not been performed.  B of A also asked the government to guarantee $118 billion of Merrill’s toxic assets and to provide it with an additional $20 billion in capital. Remember those shareholders?  Well, they then saw the price of the bank’s stock drop from $33 to $7.00.

A group of shareholders–mostly institutional ones–forced the Board to dismiss Mr. Lewis and to separate the two roles of CEO and Chairman.  All has gone well, that is, until last October when the Bank of America Board sent a filing to the Securities and Exchange Commission (SEC), proposing that it change the corporate bylaws to provide the Board with the “flexibility” to either combine these two rolls or split them, as it sees fit in the future.  But, wouldn’t that be going back to where this saga initially began?

It is important to remember that the corporate boards really control shareholder votes; because, most people do not attend the meetings, many hardly even read the proxy statements and mostly just approve the Board’s recommendations.  The current situation with Bank of America is nicely written in the linked column, by Joe Nocera, in the NY Times, as follows: http://www.nytimes.com/2015/08/15/opinion/joe-nocera-bank-of-america-stiffs-shareholders.html.

An underlying problem, not just with B of A; but, mostly all American corporations, is the a majority of the Board of Directors is usually made up of corporate executives, who work for the CEO, or people who are corporate CEO’s/Chairman of of other corporations themselves.  These close inter-locking board member relationships seem to, once again, run counter to the best interests of the shareholders.  Oh, the poor shareholders!

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