Some ideas to reform business
If I could have a business-news wish come true this year, what would it be?
To see more middle-aged white men in handcuffs.
In a just world, we'd want to see middle-aged white women joining them, as well as more people of color. But it's middle-aged white men who run Corporate America. They get the big paychecks, and they should take the hit if our society ever decides to punish white-collar crooks as harshly as they deserve.
A big part of the problem, of course, is that those paychecks are too big. The lure of obscene wealth is behind most of the big corporate scandals of the past year. For proof that top executives make too much, you need only consider that the vast majority are white men. This means the hiring pool for these jobs is artificially small -- that it excludes most women and minorities.
Whenever supply is limited, prices are high. Expand the supply of executive candidates to encompass these excluded populations, and pay will go down.
Increasing possibilities
Who knows how large the supply of qualified executive candidates would be if the clubby traditions of the boardroom gave way to true meritocracy? Ten times larger? One hundred times? A thousand?
We can't know for sure, but we'd have a better idea if we could make the search for corporate executives work according to the rules of an honest marketplace.
Right now, it doesn't. Corporate directors who hire executives often restrict their search to people they already know or people with backgrounds like their own.
Often, they're in bed with the executives they oversee. In fact, at many companies, the chief executive is the chief recruiter for the directors who will set his pay and decide whether he keeps his job.
Even if directors don't have direct financial ties through compensation or consulting deals, they are often executives of other companies and, thus, have an interest in seeing the overall rate of executive compensation rise -- and in keeping corporate power in the hands of people like themselves.
To get this mutual back-scratching out of the system, corporate governance needs to be turned into the democracy it is supposed to be. That requires more vibrant, competitive annual elections with board candidates drawn from a wider, more representative cross-section of the population.
Competition needed
Rules should be changed to make it easier to put competing slates on the ballot.
Today shareholders can vote for only one slate of candidates -- usually one candidate for each open directorship. There's lots of precedent for that overseas, of course; just look at any dictatorship.
Shareholder advocates have long argued, quite rightly, that corporate governance would be better if regulators banned some widespread practices that protect insiders by discouraging democracy. Those include the use of "poison pills" to deter hostile takeovers by, for example, flooding the market with new shares of stock.
Defenders argue that such techniques make companies more stable, but it should be up to shareholders to decide whether they want stability or change.
Greater disclosure
To help candidates in board elections rustle up votes, the identities of all shareholders should be public -- something that would be easy and inexpensive to do on the Internet. Brokerages should have to pass on the identities of investors whose holdings are kept in the firms' "street name."
Shareholders would be left with sufficient privacy so long as the size of their holdings was not disclosed.
Also, mutual fund companies should be required to disclose how they have voted in annual elections for the companies whose stocks they hold.
The Securities and Exchange Commission is considering such a rule, but the fund industry complains it would make mutual funds subject to pressure from interest groups. That, of course, happens in any democratic system.
The whole idea of requiring fund companies to disclose proxy votes is to get them to use their clout to pressure public companies to better serve shareholders. They need to be pressured.
My wish list of reforms wouldn't cure all the ills that afflict the financial markets and economy. But they are based on principles that most Americans take as an article of faith -- allowing light into the system and encouraging the widest possible participation by people who have a stake in the outcome.
There are always those who want to keep us in the dark. They always say it's for our own good.
And they're always wrong.
XJeff Brown is a business columnist for The Philadelphia Inquirer. E-mail him at jeff.brown@phillynews.com.