I have been unhappy as many in our country about the idea of the Federal Government having to take ownership in major corporations, make loans to banks, oust board members and executives, and set limits on executive pay.  Not because I don’t understand that these temporary measures are preventive and necessary, but because I don’t see the long-term systemic solution.  In that vein, I have been musing about what major infrastructure changes, surgical in nature and practical enough to survive implementation, the Government hopefully WILL be focused on as we enter the second act of this tragicomedy.

Independent Sourcing of Boards of Directors Nominees – The relationship of just about every BOD with executive management has become too close and lost the aspect of independent review, oversight and governance.  As a result, board members no longer perform their essential function.  With the increase in institutional ownership (mutual funds), the ultimate shareholder is further removed from a relationship and representation by the BOD.  This is fixable.

Where the process fails is the lack of enforced independence in nominating proposed board members.

Boards of publically traded corporations are already regulated in terms of how they must be governed in order to enjoy public trading and ownership.  It is no great leap to establish a system where board membership, and the nomination process of prospective board members, is restored to represent shareholders, not the corporation.

The SEC should manage the process of nomination and the election of board members.  We need simple rules for candidacy, vetting conflict of interest, limits on the number of boards on which any one individual can serve and still fulfill their duty, and monitoring of cross-relationships in board representation (i.e., I will be on your BOD if you will do the same for me).  Today’s technology simplifies this proposal to an easy to implement function, as long as we support the idea that the BOD represents shareholders, not the company.

Board Compensation – this is where we need to focus our energy as shareholders, not on the executives.  If we can trust that our representatives are independent and aligned with OUR interests, we can allow a degree of flexibility when it comes to management rewards.  Still, we need to ensure that the BOD compensation is aligned with these principals and does not introduce an implicit conflict of interest.  Compensation must be transparent, comparable and determined by separate action of shareholders.

Term Limits  – Rotation in BOD service ensures that the subsequent relationship between the BOD and management doesn’t switch in alignment.  Long term relationships are essential to allow BOD members to learn the functions and strategies of the company, and to preserve long-term thinking in the execution of corporate strategies.  However, with multiple members, the idea of a gradual transition over decades is healthy and not damaging to the interests of the shareholders.

BOD Education – Serving on a BOD of any large corporation is not an easy matter – there is a extensive body of knowledge and practice to properly handle one’s oversight responsibilities.  Looking into various functions in a corporaton with tens of thousands of employees, complex business holdings, and a range of business models takes aptitude and considerable time.  We need to arm our representatives with the best preparation possible.  This cannot be assumed – we need to make this explicit in the process.  Not so onerous that we create an exclusive class of certified BOD members, but with an eye to giving a wider potential set of participants a leg up and a minimum standard of conduct we can rely on.

These changes will establish and preserve an independent perspective that serves to monitor corporate behavior in many areas – executive compensation, financial oversight, and illegal activity – among all others.  There are too many corporations, future opportunities and too many business models to allow heavy-handed, yesterday’s thinking Government to micro-manage the internal functions of corporations.  We need to establish and rely on mechanisms that allow for innovation and flexibility within the concept that it is the shareholders not the company that benefits from proper independent Boards of Directors.