Getting Schooled on Corporate Governance, Part 2

Among the panoply of stock market books that are arranged for easy access on my credenza is one book that wasn't written for or about the stock market. In fact, it has nothing specifically to do with the stock market -- it's Robert Fulghum's book All I Really Need to Know I Learned in Kindergarten.

In this second installation of a three-part series on corporate governance, I continue to borrow from Fulghum's book. Here are more lessons appropriate for kindergartners and boards of directors alike, lessons that, if implemented in the boardroom, might dramatically improve the lousy corporate governance we've experienced in recent years.

"When you go out into the world, watch out for traffic, hold hands and stick together."

At most companies, management controls the agenda, which is largely built around management's self-interest. When Verity (VRTY - commentary - Cramer's Take) and Elizabeth Arden (RDEN - commentary - Cramer's Take) can get away with granting options that potentially dilute shareholders' property by 25% and 16%, respectively, in just a single year, it's clear the corporate governance system at these companies is not working, at least not for the benefit of shareholders. The same is true when the board at Apple (AAPL - commentary - Cramer's Take) canceled 27 million worthless options for Steve Jobs and gave him a grant of restricted stock -- now worth over $90 million. Steve called it a "good day for Apple shareholders" -- make that a good day for one Apple shareholder.

Executives have dominant personalities and have carefully cultivated company cultures where contrarian thought is unwelcome, clubby boards are the norm and executives are the de facto power force, not the board.

An assertive board, though a rarity, is better positioned than either management or shareholders to "watch out for traffic." Since executives are often moving at breakneck speed, it's the board's responsibility to slow things down and carefully consider initiatives that could harm the company and shareholders -- to name a few examples: acquisitions, additions to debt, dilutive stock options and aggressive expansion.

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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.