"The greatness and the genuine trait of your thought and writings lie on the fact that you positively and interestingly make use of philosophical thoughts and thoughtfulness in order to deeply and concretely cogitate about America's social issues. . . . This does not mean that your thought is reducible to your era: your thought, being inspired by issues characterizing your era . . . , overcomes your era and will still likely be up to date even after your era, for future generations." Bruno Valentin

Thursday, April 27, 2017

Stockholders Retain Wells Fargo’s Board: A Low Bar for Corporate Governance

Corporate governance is supposed to hold management accountable. Slack in the mechanism enables not only a lack of managerial competence or ethics, but also an ineffectual board. Unfortunately, whether by proxies or connections—or just sheer power—a board’s chair and other directors can remain in place in spite of having failed to hold a management accountable. Put another way, it is not necessarily enough that an incompetent or unethical management (and other employees) is removed; replacing the derelict board may be more crucial and yet even more difficult.

 On April 25, 2017, the stockholders of Wells Fargo voted to retain the board that had oversight-responsibility while the management created millions of fake accounts. Even though 5,300 employees and the CEO, John Stumpf, lost their jobs due to the systemic fraud, 56% of the stockholder vote went in favor of retaining Stephen Sanger, the board’s chairman. Even though press referred to that as “a stinging rebuke for his failure as lead director,” the fact that he won re-election would hardly be felt by him as a rebuke.[1] That the perception would be otherwise signals just how low the bar had dropped on corporate governance. That the entire board survived intact is more important than that five of its directors failed to clear “the 70 percent threshold that typically denotes a serious protest vote.”[2] Clearly a “protest vote” is not worth much if the entire membership of such a negligent board is retained.

On account of the collusion that can occur between a management and the board tasked with overseeing that management, combined with the existing low bar in corporate governance generally, the system can ill-afford the proxy mechanism; the system is too tilted in favor of even sordid managements and board directors. Additionally, corporate social responsibility could be widened to include stockholder voting. At the Wells Fargo vote, Warren Buffett’s Berkshire Hathaway voted its 10 percent stake in favor of retaining the entire board. Even if retaining it was in Buffett’s company’s best financial interest going forward, there would be value societally and even in terms of fortifying corporate governance, which I submit would be good for business, were investors such as Warren Buffett willing to vote in favor of cleaning a sordid or ineffectual slate even if its members promise to do better. In other words, stockholders would strengthen corporate governance itself, as well as the particular companies even financially—and thus the stockholders themselves!—were they to vote to hold derelict boards accountable for bad oversight even if said boards convince stockholders of better financials ahead. Resisting such a narrow impetus can be said to be within the realm of corporate social responsibility because it is in the public interest and in line with societal norms that corporate boards actively hold their respective managements accountable even for past behavior or performance. Giving boards a pass is just as bad as a board giving its management a pass. If a narrow pursuit of financial gain comes at the expense of fortifying governance systems, then such gain is likely to be short-lived anyway because defective systems enable bad management with ineffective oversight. Fiduciary duty suffers. So, ironically, it is a matter of social responsibility that managements are held accountable, as are their respective boards themselves. Hence public policy toward reducing the power of board-management collusion is in the public interest, and corporate social responsibility should be expanded to include stockholder activism with an eye toward reforming corporate governance itself.   



[1] Antony Currie, “Wells Fargo Should Listen to Investors and Step Down,” The New York Times, April 26, 2017.
[2] Ibid.