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.
