Corporate Governance

Nell Minow is the editor of The Corporate Library, an independent research firm specializing in corporate governance.

By Nell Minow

President Obama will come into office with very little time to head off a long-term economic downturn. The recent volatility we have seen shows that the need for better corporate governance has never been clearer or more pressing.

The 21st century?s version of "mutually assured destruction" does not require weapons; it is the global economy, one in which we all are now are inextricably intertwined.

Previous scandals ? insider trading, the savings and loan abuses, accounting fraud, market-timing, backdated options, and more ? could be compartmentalized, attributed to a few bad guys abusing the system.

But this latest mess is so pervasive and so ? apparently ? legal that it has called into question the most fundamental notions of trust in Wall Street and in the American economy. The impact of America?s sub-prime loan disaster is felt around the world just as economic crises in other markets affected us.

The new President will have to do a lot more than tweaking some rules and issuing some new lists of best practices and disclosure requirements.

And even a new administration will be limited in how far it can go in reminding corporate boards that good governance is more than simply compliance and check-lists. It is about transparency and accountability, but most of all it is about making sure we have board members who are committed to asking good questions and insisting on good answers.

If the transition team asked me for my to-do list for improving corporate governance, I would provide a combination of quick steps and long-term, more ambitious and far-reaching proposals including:

1. "Say on pay" - When an overwhelming majority in the House approved legislation to give shareholders the right to cast a non-binding vote on executive compensation, it was Senator Barack Obama who introduced it in the Senate. So we can expect administration support for getting it enacted promptly.

2. Race to the top: Shareholders should determine the state of incorporation, a more market-based approach that will encourage the states to protect shareholders, not management.

3. "Majority vote" ? The law now permits a director to continue to serve without getting majority vote from shareholders if there is no dissident candidate. Nearly 30 directors currently serving on U.S. corporate boards did not get majority support from shareholders. One way to remind directors that they represent shareholders is to make it possible for shareholders to remove those who overpay executives and fail to manage risk.

4. Appointments ? The Bush administration recently added new SEC commissioners, limiting the new President?s ability to change its direction. But it is the President who decides who will be SEC Chairman, and the Chairman has the greatest power in setting the agenda and making division-level appointments. There are also positions at Treasury that will be very influential. And it is important to remember that the Assistant Secretary of Labor - with responsibility for ERISA, which governs the largest group of equity investors - should be an expert in capital markets, not just benefits. The failure of ERISA funds to exercise share ownership rights as fiduciaries should be on the agenda for investigation and enhanced oversight.

5. Reorganization ? Combine the SEC and CFTC and eliminate the "self-regulatory organizations" that continue to give the securities industry too much authority in regulation and enforcement. This antiquated structure has been out of date for decades and there is no remaining justification to continue it.

6. Corporate governance has to be reviewed from the "demand side" as well as the "supply side." It is not enough to focus on what boards and executives must do. We must also focus on what investors, especially institutional investors, must do. The US needs something along the lines of the UK?s Myners Report, putting the burden on institutional investors to explain why they are not doing more to demand action on issues like poorly performing boards.

The SEC must also stop blocking the "broker vote" rule to end automatic "for" votes on governance-related issues. ERISA funds and other private institutional investors should be required to disclose all of their proxy votes, their proxy policies, and report annually on their exercise of other ownership rights, including the filing of shareholder proposals, meeting with management, proposing director candidates, and litigation.

7. Regulatory policy ? SEC rules almost always encourage a compliance-oriented approach and discourage innovation. We need a shift to a more flexible "comply or explain" approach that makes the rules the floor instead of the ceiling and encourages innovation. A fundamental, zero-based, 21st Century approach to all of securities regulation is long overdue. The SEC should also step up Chairman Cox?s efforts to use technology to make federal filings more user-friendly. There is enormous opportunity to use online technologies for bail-out related tasks, especially valuation.

8. Global coordination ? As capital markets become seamless we need to work more closely with other developed and emerging markets to assure transparency and consistency.

These steps would do more than make important changes in removing obstacles to the shareholder oversight that is an essential element of our markets' efficiency and resilience. They would send a powerful message that corporate managers will no longer be able to game the system for their own benefit.