Getting Schooled on Corporate Governance

The American corporate governance system is broken. Although the U.S. is fortunate to have scores of wonderful businesses that are the envy of the world, the system set up to govern those businesses, for the benefit of shareholders, is embarrassingly poor.

Corporate governance is the province of the board of directors, which acts on behalf of the business owners -- the shareholders -- to direct and lead the company. The board's duties include hiring top managers, setting executive compensation and overseeing the capital structure.

Yet one catastrophe after another has been foisted upon unsuspecting shareholders in recent years, from Tyco (TYC - commentary - Cramer's Take) to Enron to WorldCom to HealthSouth. All of them can be blamed, in part, on lousy corporate governance.

The individuals who sit on boards of directors, as smart and talented as they may be, would be well-served to set aside the prestige and honor (and perhaps the hubris) that goes with their position and review some basic lessons.

In the first installation of this three-part series, I've borrowed a handful of lessons from Robert Fulghum's book, All I Really Need to Know I Learned in Kindergarten. These lessons are as relevant to today's board members as they are to kids. Being an effective director doesn't have to be complicated. All it requires is remembering the lessons you learned in kindergarten.

"Don't take things that aren't yours."

Preventing property grabs in kindergarten of, say, Johnny's lunchbox is generally facilitated by an intervening authority. For 5-year-olds, it's usually a teacher. Sure, parents could stand outside the playground fence and watch their children to make sure they're protected. But time, efficiency and practicality all require that parents place their trust in teachers and the school to do the job on their behalf.

At publicly traded companies, shareholders depend on the board of directors to protect their property interest. (In fact, that's the board's fiduciary duty.) Shareholders are ill-equipped to prevent confiscation of their property -- again, it's an issue of time, efficiency and practicality. While shareholders technically vote on most option plans, the vast majority of shareholders rely on the board of directors' recommendation without reviewing the details in proxies.

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Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor and portfolio manager of The Turnaround Fund, a no-load mutual fund. At time of publication, neither Alsin nor ACM held a position in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback and invites you to send it to [e-mail]. Click here to receive Arne's latest favorite stock picks from his newsletter, The Turnaround Report.

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