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BOSTON ( TheStreet) -- Most of the problems that led to the global financial meltdown, which first struck 18 months ago, are linked to corporate governance.
Excessive compensation, poor risk controls, opaque financial reporting and lenient boards played a part in allowing the largest U.S. financial institutions to spiral out of control.
Now the government is stepping in after the private sector was unable to police itself. After all, shareholders in
Bank of America(BAC - Get Report),
Citigroup(C - Get Report),
American Express(AXP - Get Report),
Morgan Stanley(MS - Get Report) are still suffering from unabashed risk-taking.
While investors of
Goldman Sachs(GS - Get Report),
Wells Fargo(WFC - Get Report) and
JPMorgan(JPM - Get Report) have fared better, governance deficits touch every large financial company.
Regulations that protect shareholders aren't voluntary. The New York Stock Exchange's rules on independent boards and the federal government's financial-reporting standards, bolstered by 2002's Sarbanes-Oxley Act, came about after companies abused their power and, in turn, shareholders. Increased regulations to narrow the gap between shareholder interests and management's goals is inevitable.
Abuses are prevalent across industries and regions, from widget makers in the Midwest to technology companies in Silicon Valley. But the most egregious and systematic infractions have occurred in the financial industry. Thus, banks, brokerages and insurers will be the first to be fixed by the Obama administration and Congress.
The parade of bankers sitting at congressional hearings hasn't stopped. While some of the anger has died down as the country focuses on health-care reform, the fervor is sure to be back before mid-term elections in the fall.
If Congress focuses on four key points, investors would benefit, and the financial system -- and America -- would become stronger.
A company's board of directors is a proxy for shareholders. It would be impossible for shareholders to vote on every matter, and decisions shouldn't be left solely to management because incentives, both monetary and egotistical, influence their decisions. Boards must be independent of management and advocate for the best interests of shareholders.
NYSE rules say boards must be independent, meaning members aren't also executives of the company or directly involved with partner or related companies. Because of those regulations, all the major financial institutions have independent boards, but other practices that reduce independence, but aren't expressly forbidden, are present.