Page 134 - Introduction to Business

108 PART 1 The Nature of Contemporary Business

shareholder enhancing items get careful attention. Unfortunately, this isn’t always
how things have worked in the real world.
First, in some companies the number of inside directors, that is, high-level
corporate officers, may equal or outnumber the outside directors. Second, in many
situations the chairperson of the company’s board is also the CEO (e.g., Merck and
Company’s CEO Raymond Gilmartin also serves as its board chairperson). In such
situations the CEO or board chairperson obviously has a major and directive role in
setting the board of directors’ policy. Finally, even when the CEO is not also the
chairperson of the board, the CEO frequently has considerable power and influence
over who is appointed to the board and to what extent board members might also
receive consulting contracts, use of the company plane, contributions to the organ-
izations where they work if they are from the not-for-profit sector (e.g., university
presidents, medical center directors), and so on. The upshot of all this is that many
corporate board members are to some extent frequently beholden to the CEO in
one way or another, thus making it difficult to effectively monitor her or him.
For example, the former CEO of Enron, Kenneth Lay, also served as the com-
pany’s chairperson of the board, and he handpicked many members of the com-
pany’s board of directors. He was also very generous (with the company’s money!)
to various directors with respect to awarding them side consulting contracts, giv-
ing large sums of money to the medical centers and other not-for-profit organiza-
tions they headed or were involved with, and so forth. Enron’s board was very loyal
to Ken Lay—so loyal that they didn’t ask very many questions about the company’s
use of special purpose entities and other unusual accounting vehicles. But boards
of directors ultimately owe a fiduciary duty to the company’s shareholders, not to
the company’s CEO, and as former U.S. Securities and Exchange Commission
(SEC) chairperson Arthur Levitt has asserted, Enron’s board arguably failed the
“smell test.” 17
It seems obvious that one possible positive step for corporations to take in
addressing separation of ownership and control-related conflicts of interest is to sep-
arate the roles of company board chairperson and CEO. Having one person doing
both of these jobs is somewhat akin to having the fox guarding the chicken coop.
In addition, boards need to have more outside directors, and more clearly inde-
pendent outside directors. Moreover, new independent outside directors should be
selected by a committee of their peers, not by the CEO. Finally, the general power
and independence of the board of directors should be increased so that it has and
exercises real oversight and monitoring authority and is not merely a sort of rubber
stamp for management actions.

SHAREHOLDER PROPOSALS AND INSTITUTIONAL INVESTORS. Shareholders do have one
direct way of monitoring actions by corporate executives and directors, and this is
shareholder proposal process The through the shareholder proposal process. Shareholders generally make proposals
process by which shareholders make a number of months in advance of the firm’s annual meeting, so that they can be
proposals a number of months before a included in the company’s annual proxy materials. These proxy materials are then
firm’s annual meeting, so that they can
be included in the company’s annual distributed to all shareholders, and shareholders vote on the various items con-
proxy materials tained therein. These votes are then tabulated and announced at the company’s
annual meeting.
Shareholders can and do bring proposals on a wide range of issues (e.g., execu-
tive compensation, corporate ethics, corporate workforce diversity). There are,
however, some limits on the types of topics shareholders can bring proposals on.
For example, shareholders cannot bring proposals involving personal grievances
against the company or generally on matters involving mundane day-to-day man-
agement of the corporation.

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