Accountable Strategies blog

A blog about accountability issues in the public, private, and nonprofit sectors

Archive for May, 2007

More on shareholder power

Posted by David Kassel on May 31, 2007

Does the center of power in a corporation reside in its executives, its board of directors,  its shareholders? As previously noted here, at least one researcher is changing some long-held views that the shareholders’ interests are paramount. 

The work on the dynamics of corporate shareholder and board power by Lucian Bebchuk at Harvard is proving to be groundbreaking in that it is challenging some long-held assumptions–in particular about the power of a company’s investors, the true owners of its wealth.  Bebchuk’s seemingly counter-intuitive but well-researched findings point to the conclusion that the corporate deck is stacked in favor of the company’s executives and the board of directors, and that the shareholders are relatively powerless outsiders.

As Jonathan Chait notes in The New Republic, Democrats in Congress are currently proposing a bill that would simply give a company’s shareholders an advisory say on how much the company’s CEO can be paid.  But even that would apparently represent too much of a shift in power.  President Bush has promised to veto the measure.

Chait cites the work of Bebchuk and Jesse Fried at Berkeley, who have found evidence supporting the theory that disporporationate increases in CEO pay during the past decade have been at least partly due to the fact that boards of directors, which set CEO compensation, are more accountable to the CEOs than to the companies’ shareholders.

In “Insider Luck,” an article in Harvard Magazine,  Bebchuk discusses his research on the less-than-arm’s-length arrangements that often exist between executives and boards of directors and some of the implications of that close relationship, particularly regarding executive compensation. 

Much of the executive pay issue has revolved around controversial provisions granted by boards to corporate executives of stock option grants and the opportunistic timing processes of granting them, such as backdating.   Stock-option grants have largely consisted of  rights to purchase shares at a price equal to the company’s stock price on the grant date.  Bebchuk and colleagues, examining more than 19,000 stock option grants during the decade from 1996-2005, found that a day was most likely to be chosen as the grant date for awarding options if the stock price was at the lowest level of the month. 

The so-called “lucky grants” were more likely to occur when a company’s board lacked a majority of independent directors, as well as when the CEO had been in place for a long time.  Opportunistic timing of outside directors’ grants was also more likely to occur when the firm had more “entrenching provisions” (weaker shareholder rights) that protect insiders from the risk of removal.

The passage of the Sarbanes-Oxley Act in August 2002 required firms to report grants within two days of any award.   Bebchuk noted that the legislation reduced but did not eliminate the backdating.

Bebchuk has done much of his research on the power of “entrenched” boards whose members are particularly insulated from removal.  For instance, in “The Costs of Entrenched Boards”, Bebchuk and Alma Cohen found that “staggered” boards of directors, in which not all directors are up for re-election in one year, are associated with a reduction in the market value of companies that have them.  Staggered boards are more insulated from removal than boards in which all members are up for re-election at the same time.

Bebchuk calls on investors to press boards to make executive pay arrangements fully transparent, sensitive to performance, and not subject to gaming.  He warns that bonus payments are as susceptible—probably more susceptible—to gaming than stock-option plans.  In fact, he notes, bonus payments have historically been only weakly linked to performance.  And the ability to game bonus compensation is helped by companies’ common use of “constantly shifting short-term performance metrics whose specifics are generally not disclosed to shareholders.”

Bebchuk maintains that the rules governing corporate elections should be reformed to provide shareholders with a viable power to replace directors.  And barriers to shareholders’ ability to place changes in governance arrangements on the ballot and adopt them should be dismantled.  It’s a prescription, however, that doesn’t appear to be going down easily either on Wall Street or in Washington.

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Posted in Governance, Private | 1 Comment »

Determining the “best” companies

Posted by David Kassel on May 29, 2007

What makes a company a good one, a better one, the best one?

 Last week, The Boston Globe came out with its annual Globe 100, which the paper describes as the 100 best companies in Massachusetts. 

 The Globe ranks the companies based on financial measures such as return on average equity, total revenues and and one-year change in revenue and profit margin.  Fair enough, but does that make the firms that garner the highest rankings in these categories the “best” companies?  “Best” certainly has a connotation that goes beyond financial performance alone and passes into the realm of ethics.

In fact, corporate ethics have become a topic of growing interest in recent years, even sparking new centers of academic research, such as the Kennedy School’s Corporate Social Responsibility Initiative, the Center for Corporate Citizenship at Boston College , and the Center for Responsible Business at the University of California Berkeley.

It would therefore seem that when newspapers or other organizations attempt to rank the best companies in their regions, they should take into account at least some corporate responsibility or ethics measures.

In fact, that’s what The London Sunday Times does when it publishes an annual Corporate Responsbility Index, which is compiled by a nonprofit, UK-based organization called Business in the Community.  The 2006 CR Index was published by The Times earlier this month.  The Index ranks the 100 most “responsible” companies in Britain based on measures of environmental and social impact.  The ranking process is a rigorous one that requires companies to fill out a survey that takes up to two months to complete, and requires site visits to the firms and internal auditing.

The CR Index surveys companies on a range of social and environmental issues.  Companies are asked, for instance, whether they have a certified environmental management system in place that meets the requirements of the International Organization for Standardization (ISO), an international standard-setting body, and whether they ask their suppliers to provide information on their environmental performance.  They are asked about their workplace safety measures and other initiatives for the well-being of their employees.  They are also asked about how they engage the marketplace, including the safety of their products and the amount of product information and labelling they provide. 

 I asked The Globe for comment as to whether it would make their own rating system more comprehensive if the paper were to include at least some of the corporate social responsibility measures used in the CR Index.

Caleb Solomon, The Globe’s business editor in charge of The Globe 100 (and who has just been appointed a deputy managing editor for Page One), responded with the following statement:

These are all important and interesting subjects. It’s difficult to see how
to incorporate them into the existing Globe 100, which gives us the
opportunity to rank companies across industries based on the same financial
measures. But augmenting our coverage with some social measures is
something we’re looking at.

 I also thought it might be useful to get a comment on the topic from the Kennedy School’s CSRI prople, Boston College’s CCC, and the Center for Business Ethics at Bentley College.  I contacted all three, but no one responded.

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Accountability in all three sectors

Posted by David Kassel on May 22, 2007

In an essay in PA Times, Christine Gibbs Springer muses on leadership and about how a public manager can build a “legacy” that is based on a sense of “vision” and “values.”

 A lot of scholarship is dedicated to leadership these days, and words like “legacy,” “vision,” and “values” are in vogue.  But Gibbs Springer does take it a step further by tying her discussion to the lack of confidence that so many Americans currently have in “the honesty, integrity, and ethics of leaders in sectors ranging from business and religion to all levels of government.”

That got me thinking that that’s what this blogsite is about–the restoration of honesty, integrity, and ethics in the governmental, business, and nonprofit sectors.  We do live in an age in which public confidence in our institutions and leaders appears to have reached an all-time low and yet still seems capable of continuing to drop.

We’ve all been taught in school that the American system of government, in particular, is fully accountable to us and that we should therefore have confidence in the fairness and ingegrity of the system.  Accountability, after all, implies the answerability of institutions and leaders to the public for all of their public actions.  And yet, polls show that most people don’t feel as though those institutions or leaders really are accountable to them. 

What is it that has gone wrong with our system, with the evolution of the social contract among government, the citizens, and business, as Allen White describes it,  and with the checks and balances that the founding fathers inserted so carefully in the Constitution?

It seems to me that any attempt to deal with those issues has to take into account all three of those basic sectors of society–government, business, and nonprofit–and the relationship of each to the citizenry.  I’ve noticed a growing number of blogs and websites devoted to accountability issues in individual sectors–the corporate sector in particular.  But not many blogsites appear to tie all of these issues together into an integrated whole.  That’s why I started this blog, because I suspect the problems among all three sectors are related.  Individual entries may concentrate on one or more sectors at a time, but I hope to continue to write about articles, events, and issues involving all three.

Your comments and contributed essays would be appreciated.  You can contribute entries via the “about” button above, and all acceptable contributions will be published with whatever username or byline you’d like to use.  I’ll periodically post synopses of the best comments and contributions (provided I get a few).

I’m not looking for essays that wade directly into politics, but more general discussions about how to restore honesty and integrity to any or all of these three sectors of society.

Posted in Nonprofit, Private, Public | 2 Comments »

Holding nonprofit foundations accountable

Posted by David Kassel on May 17, 2007

It’s not only the corporate and governmental spheres that find themsevles beset by accountability issues. 

The nonprofit world continues to exhibit its own range of ethical, financial, and performance problems, and U.S. Rep. Charles Rangel, the New York Democrat who now chairs the House Ways and Means Committee, plans to focus on some of them, according to The Chronicle of Philanthropy.

Rick Cohen of The Nonprofit Quarterly maintains that Rangel appears to be following the lead in this regard of his Republican  predecessors, Rep. Bill Thomas (R-CA) and Senator Charles Grassley (R-IA) of the Senate Finance Committee, who conducted “frequent and pointed inquiries” into the nonprofit sector, particularly hospitals.   In an article in the current issue of The Nonprofit Quarterly, Cohen zeros in on giving by nonprofit charitable foundations and wonders just how far Rangel will go in probing that.

“If Rangel and the Ways and Means Committee are concerned about more than well-crafted foundation PR stories, they might ask about some real substance: Where is foundation money going, who’s getting it and who’s not in terms of addressing the interests of low-income American families?” Cohen asks.

Cohen states that foundation funding for programs for minorities and economically disadvantaged population groups in particular has declined as a proportion of grants awarded by the largest foundations.   Also dropping has been funding by the dominant foundations for community improvement and development and for employment, including job training, job placement, and workforce development.  “It is difficult to imagine that Rangel will not be armed with the annual reports on New York City employment showing the continuing and deepening disconnect between young African-American males and opportunities in the labor force,” Cohen states.

Cohen also notes an additional striking statistic:  the racial composition of foundation boards shows a higher proportion of white board members (87.7%) than the composition of Fortune 500 boards (86.6%).   Similarly, disproporationately few staff positions on foundations are held by minorities.

But the nonprofit sector is not alone in sparking revelations about irregularities in charitable giving.  In a separate Nonprofit Quarterly report, Cohen discusses the question of internal mismanagement of funds and malfeasance (read waste, fraud, and abuse) by corporate foundations.  The latest revelations about corporate philanthropy come from Senators Baucus and Grassley at the Senate Finance Committee, he notes.  Their April 2007 report charges that drug companies were using educational grants for improper purposes, such as rewarding physicians for prescribing their drugs and promoting drugs for uses that have not been approved by the FDA.

 The recent decision to fold the troubled Fannie Mae Foundation into the Fannie Mae Corporation is cause for continuing concern about corporate chargiving, Cohen says.  And then there’s Sallie Mae, the nation’s largest student-loan dispenser, now a private corporation, which New York State Attorney General Andrew Cuomo has investigated for providing various incentives to nonprofit colleges for signing up their students as borrowers.  Cuomo has also been investigating several nonprofit college alumni associations for accepting money and benefits for steering students to the Nebraska-based Nelnet student loan packager.

 Cohen maintains that Congress should consider the public need for mandatory disclosure of corporate philanthropic grantmaking.  Currently, corporations are not clearly required to disclose charitable giving to the IRS, as foundations are.

Clearly, the lines of demarcation among the public, private, and nonprofit sectors have become blurred, creating a new domain of activities and functions that raises a whole new set of accountability issues.

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The power of corporate shareholders and stakeholders

Posted by David Kassel on May 15, 2007

Do the shareholders really have the power most people think they do to affect a company’s strategies and decisions?

Lucian Bebchuk maintains that the power of company shareholders to replace the boards of directors of poorly performing companies is largely nonexistent.

In “The Myth of the Shareholder Franchise” (March 2007), a discussion paper of the Program on Corporate Governance at Harvard Law School, Bebchuk states that the number of challenges mounted by shareholders to replace boards of directors between 1996 and 2006 was very low: There were only 118 challenges mounted of incumbent board members during the 1996–2005 decade, or an average of about 12 per year. The number of challenges was even less for the largest corporations. What’s more, those challenges were successful in only 45 cases in the entire decade.

What may be especially striking to proponents of corporate social responsibility initiatives is that Bebchuk doesn’t even extend his argument to include the view that directors should also serve stakeholders other than shareholders, such as citizens, workers, policy makers, and even the environment. His paper talks strictly about shareholders. This could well leave it to others to debate a number of interesting implications. One is that it’s a bad sign for corporate social responsibility that even a company’s shareholders can’t really influence or remove the board of directors. In that case, what influence could other stakeholders have? On the other hand, this may be a good sign for stakeholders in that it signals that there may be other ways to exert the influence that shareholders lack.

Looking at the matter purely from the point of view of the shareholders and directors, Bebchuk notes that under the rules of corporate law, the power to run corporations is vested in the boards of directors, under whose direction the business and affairs of the corporations are supposed to be managed.

The importance of having directors held accountable to the shareholders is enhanced because directors are largely insulated from legal liability for their decisions. Yet, Bebchuk notes that the mailing, legal and other costs of mounting shareholder challenges to boards of directors is very high. Moreover, challengers cannot seek reimbursement for those costs if they lose a challenge, whereas incumbent board members can charge the company for their expenses regardless of the outcome.

Bebchuk proposes that companies hold elections for the entire board every two to three years; that shareholders be allowed to select directors via secret ballots and majority votes; and that those candidates that receive at least one third of the votes cast would be able to get their campaign expenses reimbursed.

Bebchuk does maintain that increasing shareholder influence on boards will not hurt the prospects of other stakeholders to influence boards. Protecting boards of directors from removal could well be costly to both shareholders and stakeholders, he argues, because “such insulation makes boards accountable to no one.”

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The Internet, citizen involvement…and blogs

Posted by David Kassel on May 15, 2007

In the lead paper in a series of essays on citizen participation and governance in the March/April 2007 issue of Public Administration Review, one of the leading academic journals on government, R. Karl Rethemeyer puts forth a relatively pessimistic view of the role of the Internet in helping save representative democracy in America. The only problem is he doesn’t discuss blogs.

In “The Empires Strike Back: Is the Internet Corporatizing Rather than Democratizing Policy Process?” (which you need a subscription to PAR read), Rethemeyer argues that while the Internet has been heralded as a way to involve citizens more directly in representative democracy, it may actually only serve to strengthen the political dominance of special interest groups, lobbyists, and corporate organizations.

“In fact, there is much evidence that the Internet is increasingly a tool of the powerful, entrenched, and organized rather than the unorganized or reform minded,” argues Rethemeyer, who contends that representative democracy “may be on the critical list” due to “corporatized” politics.

Rethemeyer bolsters his argument with data from two case studies focusing on adult basic education and mental health “policy networks” in an unnamed state that he names “Newstatia.” Rethemeyer’s research appears thorough as far as it goes, but he makes his rather sweeping assertions based on his review of the use of e-mail, instant messaging, and listservs by these policy networks. But what about blogs? The paper says nothing about them.

The jury is certainly still out as to whether national, state, and local political blogsites have had a beneficial impact on representative democracy in their respective spheres.

Rethemeyer notes that the Internet makes it easier to mobilize groups or networks of people to affect elections, in particular. He cites Howard Dean’s successful use of the Internet to raise money during his 2004 presidential campaign. But Rethemeyer found that that use of the Internet did not result in any new members joining either of the two policy networks he studied nor did it create new relationships in terms of communication among the network members. In the case of the mental health network, the core group of Internet users consisted only of key insiders in the executive and legislative branches.

It would seem that we need further study that looks more broadly at the impact of the Internet on representative democracy and at the impact of blogs, in particular. Blogs may not save representative democracy or even be good for it, but they certainly do welcome new members.

Among the other papers in the PAR issue’s series on citizen participation and governance were:

“Citizen Involvement and Performance Management in Special-Purpose Governments.” Tanya Heikkila and Imberly Roussin Isett explore the impact of citizen involvement in non-traditional forms of government, such as special districts and quasi-public authorities that provide specialized services, such as water management, housing, and health care. These quasi-public agencies are often criticized as being less accountable and transparent than traditional governmental agencies.

“When Public Participation Leads to Trust.” XiaoHu Wang and Montgomery Van Wart find that citizen participation is an important factor in building public trust in government. But that’s still not likely to be enough unless government brings about good results.

“The Wisdom of Crowds: Learning from Administrators’ Predictions of Citizen Perceptions.” Theodore H. Poister and John Clayton Thomas note that while public agencies often use surveys to solicit feedback from citizens and targeted consumer groups, those surveys are frequently found to be of questionable value. They find, however, that if public administrators are first asked to predict how the citizens will respond to the surveys, the value of the surveys themselves tend to go up.

Getting One’s Way in Policy Debates: Influence Tactics Used in Group Decision-Making Settings.” Jason L. Jensen discusses the most effective tactics used by influential people in group decision-making settings. The best approach, he says, may be a combination of inspirational appeals and rational persuasion. It’s not quite clear how this article relates to citizen participation.

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Rewriting the social contract

Posted by David Kassel on May 15, 2007

We may have entered a new era of cooperation between business, government, and the citizenry because the ability to address environmental and social problems is increasingly being seen as beyond the reach of any one of those players.

As a result, according to Allen White, a senior advisor to the nonprofit organization, Business for Social Responsibility, it’s time to rewrite the “social contract” that has existed for centuries among business, citizens and government.

Yet how to rewrite it? White maintains there is little consensus about that, particularly in the business community, which has done little to address pressing problems such as the rising cost of health care in this country.

In a paper titled “Is it Time to Rewrite the Social Contract?”, White provides a helpful and clearly written historical context for this issue. He notes that philosophers such as Hobbes, Locke, and Rousseau in the 17th and 18th centuries first conceived of the idea of a social contract that involved the delegation by citizens of a certain amount of authority to the government so that everyone could benefit from the shared social arrangement. These early conceptions evolved into our modern concepts of democratic government, the rule of law and due process.

In the early 19th century, the corporation emerged as a third party to this social contract between the government and the citizenry. Yet, while citizens in democracies could install or replace governments though the electoral process, they couldn’t do the same with corporations. The principal lines of accountability ran primarily from directors of the corporations to the shareholders, not to the citizens.

This director-shareholder dynamic continued into the 20th century, when it began to change, first as a result of anti-trust legislation and the regulatory control exerted by the Securities and Exchange Commission, and later with the enactment of legislation to protect the environment. These events reined in shareholder primacy somewhat. But in the final two decades of the 20th century, the social contract changed back again, with the newfound Regan-Thatcher-style faith in unbridled capitalism and the resulting expansion of privatization.

Yet, into the mix in the past decade has come “civil society organizations” (CSOs)–community advisory panels, ad hoc consultative groups, and partnerships–that have gained some new leverage with corporations on issues such as workplace safety and global climate change. Lately, these organizations have matured into a major player in the continuing evolution of the social contract, White says.

White suggests that a framework is now needed to redefine this changing relationship of business to the other players in the social contract. First, the purpose of corporations must be restated as more than just serving shareholder interests. Secondly, corporations must take a long-term view of wealth creation, rather than concentrating on short-term profits. Third, business must recognize the need to operate in new partnerships with government and civil society. Finally, a declining professionalism in government must be addressed and a consensus reached on the role government should play in addressing 21st century problems.

White frames the title to his paper as a question. But he answers it strongly in the affirmative, concluding that “rethinking the social contract remains one of the most urgent imperatives of our time.”

Posted in Corporate responsibility, Private | Comments Off on Rewriting the social contract

Corporate responsibility in the UK and US

Posted by David Kassel on May 15, 2007

In the wake of corporate scandals in recent years, corporate ethics has become a field of rapidly growing interest to academics, the public, and to business itself.

That may be because it isn’t just a company’s workforce or the environment that benefits when a company seeks to “maximize its positive environmental and social impacts,” says David Grayson, Chair of Corporate Responsibility at the Cranfield School of Management in the UK. Responsible corporate behavior is increasingly being seen as a financial opportunity for business and not just a cost, he says.

Yesterday at the Kennedy School of Government, Grayson, who is also a senior fellow at the Kennedy School’s Corporate Social Responsibility Initiative, recounted highlights of the 25-year history of what may be the world’s first coalition of businesses dedicated to supporting the ideal of ethical or responsible corporate behavior.

Business in the Community is a UK-based nonprofit organization of 750 member companies that is dedicated to integrating responsible business practices in the workplace, marketplace, community, and environment. Established in 1982, it is one of the oldest and largest of the business-led Corporate Social Responsibility organizations. It’s president since 1985 has been Prince Charles.

In the U.S., a comparable institution might be Business for Social Responsibility.  Some states, too, have  their own organizations, such as the Vermont Businesses for Social Responsibility, and it would be good to see businesses in Massachusetts follow suit as well.

Grayson, who served as a managing director of BITC, noted that the organization’s mission has changed over the past quarter century and acknowledged that “BITC has not always got it right” along the way. BITC was slow, he said, to recognize the dangers of global warming and has not always thoroughly followed through on projects it has initiated.

In its early years in the 1980s, BITC mobilized businesses to form public-private community partnerships to help deal with massive unemployment in England at the time. One of the organization’s early efforts involved studying redevelopment efforts underway in Lowell, Massachusetts, by the then Dukakis administration and by then Senator Paul Tsongas, and applying them to the British City of Halifax.

By the 1990s, BITC began to recognize a “disconnect” between the good works companies were doing in their communities and their own business activities, Grayson said. That led to the organization’s current focus on corporate responsibility and the competitive advantage that can accompany it. Today, BITC is heavily involved in benchmarking corporate performance along a range of dimensions, including the workplace, marketplace, community and environment. BITC’s Corporate Responsibility Index can be found on the organization’s website. The 2006 Index will be published May 6 in the London Sunday Times.

The role that business can and does play in the major political, social, and environmental issues of our time is growing, and corporate social responsibility is an important element of that role. Business in the U.S., in particular, needs to get on board in a hurry.

Posted in Corporate responsibility, Private | 1 Comment »