Future of company citizenship and governance efforts take shape in tumultuous times

By James Hyatt

Financial meltdown. Corporate Collapse. Recession. New President.

Where to start? Where to stop?

The “once in a century credit tsunami,” in Alan Greenspan’s words, is crushing old attitudes toward corporate governance while a second tidal wave of reform builds momentum.

The nature and depth of the crisis means “a new set of checks and balances,” particularly on financial institutions, “are desperately needed,” observes Tim Smith, Director of socially responsive investment at Walden Asset Management.

Conclusions are still tentative, but there is much room for speculation on what’s ahead.

Regulatory Changes

Chairman Christopher Cox at the SEC will be leaving at the end of the Bush administration and activists are hoping for a stronger regulatory approach.  One idea gaining momentum: for the SEC to take over the functions of the Commodity Futures Trading Commission.

President-elect Barack Obama has named former Commissioner Mary Shapiro, CEO of the Financial Industry Regulatory Authority, to replace Cox, in a move intended to “crack down on the culture of greed and scheming that’s led us to this day of reckoning,” he said in a press conference.

It’s possible, of course, that an entirely new regulatory body might be created that would replace the SEC and other existing agencies.  As far back as March, the Treasury Department issued a “Blueprint for a Modernized Financial Regulatory Structure.” It called for the Federal Reserve to become the “market stability regulator,” for a new “prudential regulator” to focus on the safety and soundness of firms with federal guarantees, and for a new “business conduct regulator” combining most roles of the SEC and the CFTC.

House Financial Services Committee Chairman Barney Frank says that his panel will “thoroughly review the regulations that did and didn't work,” and “take whatever steps are necessary to put in place in the future the regulatory structure we need to prevent this from happening again.”

Shareholder Issues

“With the election of Barack Obama, investor activists are hopeful that his administration will open the door to advisory votes on executive pay, proxy access, broker voting reform, and greater attention to environmental and social issues,” declares Ted Allen, writing in the risk and governance blog of RiskMetrics Group.

He notes that as a senator, Obama had sponsored “say on pay” legislation.

The Council of Institutional Investors, an association of public, union and corporate pension funds with combined assets exceeding $3 trillion, in October adopted new corporate governance policies.  Among their proposals:

• shareowners should have the right to call special meetings
• corporate rules governing proxy solicitations by shareholders “beyond those required by law should not be so onerous as to deny sufficient time or otherwise make it impractical for shareholders to submit nominations or proposals and distribute support proxy materials”

Corporate heavyweights have launched their own efforts to address proxy and shareholder voting issues, calling the SEC’s proxy voting and shareholder communications rules “antiquated and in need of reform.” The Shareholder Communications Coalition is composed of the Business Roundtable, the National Association of Corporate Directors, the National Investor Relations Institute, the Securities Transfer Association and the Society of Corporate Secretaries & Governance Professionals.

Among other issues, the group takes aim at the proxy advisory services, arguing they “wield enormous influence in corporate elections, but they are not subject to any disclosures or oversight with respect to their ability to control the outcome of a vote.”  

Executive Compensation

Outrage over executive compensation is widespread.

Investor Carl Icahn, a frequent thorn in the side of companies where he has purchased shares, says “boards have a responsibility to shareholders— not just to senior managers. Rather than allowing managements be paid huge bonuses, they should make senior managements accountable for their performances…It is extremely detrimental to our economy when executives bail out of their companies with millions of dollars in payouts for failed leadership.”

He says of “clawback provisions” that permit recovery of bonuses and other payments made to executives: “Why should shareholders pay bonuses to executives who drove their institutions off cliffs?”

The new TARP (Troubled Assets Relief Program) takes some steps toward limiting executive pay at firms that receive funds under the program.

The Council of Institutional Investors’ new governance policies say that “executives should not be entitled to severance payments in the event of termination for poor performance, resignation under pressure, or failure to renew an employment contract. Company payments awarded upon death or disability should be limited to compensation already earned or vested.”

And the SEC has been warning companies that they need to be more forthcoming in explaining how they’ve gone about setting executive pay, and how they’ve linked pay to actual performance goals.

Corporate Ethics

“Despite six years of the toughest legislation since the Great Depression—the Sarbanes-Oxley Act of 2002—misconduct, ethical lapses, and moral hazards have never been greater,” declares Keith T. Darcy, Executive Director of the Ethics and Compliance Officer Association.

Writing in his Oct. 15 newsletter, Darcy said “ethics and compliance executives must be empowered to challenge strategy and policy decisions, and the starting point for this is giving ethics and compliance professionals a ‘seat at the table.’ ”

He expects significant re-regulation, particularly in the financial industry and “resounding intolerance—indeed anger—by lawmakers, regulators, prosecutors and the courts for anyone who betrays the public trust in the days ahead.”

ESG Issues

Work on corporate responsibility issues “does not stop just because we’re in a financial crisis,” says Tim Smith of Walden Asset Management.  “More attention is being paid to the fact that social, environmental and ethical issues have an impact on financial value.”

He expects more say-on-pay proposals in the 2009 proxy season, as well as shareholder efforts to address alleged consumer abuses by credit card companies.

The Investor Network on Climate Risk has called on the SEC to require companies to disclose climate risks and other environmental, social and governance risks in their filings.

Outlook for MBA Students

These days for many jobseekers, MBA stands for Might Be an Alternative.

In pact recessions, enrollment in MBA programs has risen and this economic rough patch appears to be following the same pattern.  The Graduate Management Admission Council says that this year “interest in full-time MBA programs increased sharply as the economy slid downward,” while testing and registration volume for the GMAT “are both steaming along at a record pace, suggesting that heavy application levels are in store for the months to come.”

The Council in August reported that 77 percent of full-time MBA programs received more applications in 2008 than the previous year.

Through October this year, the number of people taking the GMAT in the U.S. rose 5.9 percent to 127,725, and an even sharper 22 percent outside the United States, to 83,424.

On the other hand, notes BusinessWeek.com, MBA aspirants can expect to “face more competition for slots;” international students will find it difficult to get student loans; and “quitting a job is risky.”