Tuesday, August 10, 2004

Bring shareholders into the boardroom

The many C. scandals of the past two years have highlighted the importance of effective CG. Cases that are by now notorious, such as Enron, WorldCom, Tyco, and Healthsouth, provided vivid examples of how companies and investors can be hurt when boards of directors do not do their jobs well. How can we improve board performance? One main way is by reducing the extent to which boards are now insulated from, and unaccountable to, shareholders. We need to rethink the arrangements that determine the current power of the board vis-à-vis shareholders.
Of course, in the wake of the C. scandals, some significant reforms have already taken place or are pending.
To begin, the Sarbanes-Oxley Act and the subsequent actions and rulemaking of the Securities and Exchange Commission (SEC) have imposed additional duties on boards and have tightened enforcement. For example, the new legislation prescribes procedures for the audit committees of boards, increases penalties for noncompliance with securities laws, and prohibits the granting of personal loans to executives. Still, as a good C. system must do, these reforms have left substantial discretion in the hands of C. boards.