A chill in the boardroom

World Business
1086 Words
12 December 2009
The Economist
ECN
393
English
(c) The Economist Newspaper Limited, London 2009. All rights reserved
Corporate reform in America

Corporate reform in America

Business lobbyists complain that a regulatory tsunami is on its way. But some firms
are embracing the proposed reforms

“WHEN people hear the word regulation, they feel stifled, delayed, and many times
they believe that government is being intrusive,” said Hilda Solis, America’s labour
secretary, on December 7th as she unveiled plans for 90 new regulatory initiatives to
improve the lot of workers. If you doubt her word, try mentioning regulation to the
boss of an American company. Then stand back and wait for the inevitable explosion.

Stifled, delayed and intruded upon are the least of the complaints you hear from
America’s bosses these days. Their list of grouses includes ever-increasing
regulation, stricter corporate-governance standards and the threat of higher taxes in
response to the ballooning deficit. This week the Environmental Protection Agency
announced that it considered carbon dioxide to be a dangerous pollutant, raising the
spectre of clumsy administrative measures to reduce emissions—a prospect even
more terrifying to business than the cap-and-trade scheme currently under
consideration in Congress. Meanwhile, hopes of business-friendly reforms to
America’s convoluted corporate-tax regime, among other things, have fallen by the
wayside.

That said, bosses’ feelings about regulatory overkill are much more nuanced than
excitable business lobbyists and outraged Republican politicians suggest. “The
concern is pervasive but rather amorphous in the sense that different executives
have very different worries,” says Joe Grundfest, a former member of the Securities
and Exchange Commission (SEC) who now runs a “boot camp” at Stanford University
for corporate directors. “Some fret over tax policy. Others agonise over cap-and-
trade, or health-care reform. Many worry about additional corporate-governance
regulations. It’s a smorgasbord of corporate neuroses out there.”

Corporate opinion on all these issues is divided. Ms Solis’s campaign on labour is a

case in point. Her colleagues at the Department of Labour make it clear that they
intend to be more active than their predecessors from the administration of George
W. Bush, much as the Department of Justice has promised to be more aggressive in
its enforcement of antitrust laws. This will surely increase the overall cost of
employing people, undermining Barack Obama’s goal of creating lots of new jobs in
the private sector. Yet as Ms Solis points out, the goal of her initiative is in large part
to create a level playing field by obliging firms that flout the rules, thereby gaining
an unfair advantage over their law-abiding peers, to shape up. Moreover, even at a
time of high unemployment, plenty of bosses feel that a reduction in the number of
jobs that endanger the health of those who do them would be no bad thing.

A more vigorous antitrust regime will create winners as well as losers. If done well—
admittedly a big if—the result could be a more competitive economy that allows
smaller, newer firms a fairer shout against sluggish monopolies. Likewise, although
there have been plenty of shrill voices complaining that health-care reform will set
America on the path to socialism, many business bigwigs, including Jeff Immelt of
General Electric and Howard Schultz of Starbucks, have described the current health
system as a drag on America’s competitiveness.

Much the same is true of climate-change legislation, currently becalmed pending

health-care reform. The United States Chamber of Commerce, the most venerable of
corporate lobbies, had been fierce in its denunciation of proposed cap-and-trade
laws. But it has somewhat moderated its rhetoric lately, after four prominent firms
(Apple, PG&E, Exelon, and PNM Resources) quit, Nike resigned from its board and
another board member, Duke Energy, cut its contributions in protest. Clean-energy
firms, not to mention all manner of companies that simply want more clarity about
the future, are keen to see a climate bill passed.

There are even splits over the Employee Free Choice Bill, which aims to increase
union membership (and reduce employees’ freedom of choice) by replacing secret
ballots of workers about whether they should unionise with public ones. Despite what
is generally reckoned to be the best funded corporate-lobbying effort ever seen, the
Obama administration seems determined to press ahead with this legislation next
year, although opponents have vowed to filibuster it in the Senate.

On top of all these changes comes the likelihood of sweeping reforms to America’s
system of corporate governance. Various laws under consideration in Congress would
introduce such measures as obligatory (but non-binding) votes on executive pay and
golden parachutes at all public firms. Another proposal would ban executive pay of
more than 100 times a firm’s average wage unless 60% of shareholders approve.

Congress is also considering requiring the separation of the roles of chairman and
chief executive, annual elections for all board members and the establishment of a
committee on every board to focus on risk. The SEC, meanwhile, is expected next
year to adopt much-delayed rules allowing big shareholders to nominate candidates
for board elections. A new rule introduced by the New York Stock Exchange will end
discretionary voting by brokers who hold shares on behalf of clients; these votes
have tended to be cast consistently in favour of incumbents.

A recent report by Wachtell, Lipton, Rosen & Katz, a Wall Street law firm, claims all
this will “impede the ability of boards to resist pressures for short-term gain and tie
their hands at a time when the need for effective board leadership is particularly
acute.” It is true that ill-designed attempts to promote prudent and far-sighted
management can have the opposite effect. But the report’s lead author, Martin
Lipton, is an inveterate defender of management against shareholders (he invented
the “poison pill” to deter takeovers in the 1980s).

In practice, corporate opinion is again divided. Several companies have voluntarily

adopted “say on pay” policies. Microsoft, for example, has agreed to give
shareholders a vote on pay every three years, Prudential Financial has agreed to a
biennial vote and Verizon Communications, Intel, AFLAC, Apple and others have
adopted an annual vote on pay policy, if not on the actual sums involved.

There is no doubt, however, that all this upheaval will create turmoil for America’s
boards at a time when firms already have lots to be getting on with. And the longer
the economy struggles, the more wayward politicians are likely to become.