Insidious greed notwithstanding, corporate governance is the Achilles heel of U.S. public companies. The analyst research scandal, the collapse of Enron and WorldCom and alleged illegal trading practices in the mutual fund industry all could have been prevented had there been sound corporate governance teams in place.
But it's not just the crooks and scandals that pose a problem for the financial services industry. It's more than just a $15,000 dog umbrella stand. It goes way beyond that. It is about the collective mindset to win at all costs that exists in corporate America. Top-level executives have been given rock-star status in this country to the point where a person's success is measured by how much money they make. That creates an environment in which even decent individuals will compromise their integrity to achieve their goals.
Sure, the American dream is based on the capitalist system, but when you are the leader of a corporation, your responsibility is to the company and its shareholders. Many talented and well-intentioned executives get so caught up in the Wall Street game or in their own personal wealth that they don't even know that they have lost sight of their mission. And it's a very slippery slope, as we have seen. That presents an enormous problem for corporate America, and it needs to be fixed.
Recent legislation, such as Sarbanes-Oxley, has attempted to address the issue of boardroom shortcomings by calling for independent directors and the separation of the chairman and chief executive positions. But will increased regulation serve as a panacea for such a flawed system? No, but it is a step in the right direction. In order to bring about true fundamental change in the boardroom, the solution must emphasize selecting the right people. After all, you can't legislate integrity.
What better place to set a standard for best practices in governance than the New York Stock Exchange, the biggest financial marketplace in the world? On the heels of Dick Grasso's forced resignation, the exchange is suffering a bit of an identity crisis. As a result of the turmoil surrounding his departure, confidence on the floor has been noticeably shaken and foreign investors are opting to use rival exchanges.
Grasso didn't break any laws. He didn't shred any documents, and he didn't dip his hand in the till. In fact, most people would agree he did a pretty good job as chief. However, his compensation package was the tip of the iceberg that exposed a gaping hole in the governance system at the NYSE. It brought to light that the system is not structured in a way that serves its investors' best interests. The inherent conflict of interest that exists at the NYSE is that the folks in charge of running the exchange are also tasked with regulating it.
The members of the board are representatives from the specialist firms that trade securities on the floor and the companies listed on the exchange. Currently, the NYSE board of directors is comprised of 27 members with 12 directors from the securities industry, 12 public directors, a chairman and CEO, and two individuals serving as president, co-COO and executive vice chairmen. An effective board must be considerably smaller than that, and the chairman and chief executive position must be split. The NYSE should also do away with a constituency-based board and make each member an independent director whose sole interest is the business of the exchange.
The Investment Company Institute, the trade organization for the mutual fund industry, is lobbying for representation on the newly created board, but that would seemingly create more problems than it would solve. Having the big dogs from Fidelity overseeing the exchange where it does a bulk of its business would lend itself to conflict of interest, be it real or perceived.
"If the interests of investors are to be adequately represented at the exchange, it is necessary for mutual funds to play a greater role within the NYSE's governance structure," said ICI Chairman Paul Haaga in a letter to interim NYSE chief John Reed.
Sure, ICI will tell you it is merely looking out for the best interests of the average mutual fund investor when it suggests it has a greater role in the NYSE's governance structure, but then again, it also said it was a scandal-free industry. Don't they have enough of their own words to chew on?
The way it has "looked out" for mutual fund investors has typically been to issue a press release after improprieties have been uncovered. While it's true that the ICI is diligently working toward improving governance standards and other problems such as fees, breakpoints and disclosure, the fact remains it has historically been more reactionary than anticipatory.
The bottom line is that the exchange needs to employ directors with no vested interest other than the exchange itself. The remedy for the NYSE would be to cut out all special interest group representation and seek unbiased, well-credentialed individuals with impeccable integrity who can successfully get its house in order.
Not to mention, the mutual fund industry has its own housekeeping issues to tend to.
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