Recently, a group of prominent and influential business leaders issued what could turn out to be an historic declaration of independence for corporate boards. Regardless of whether or not it helps to create a universal awakening across corporate America, the thirteen-point manifesto should be greeted with cheers. It's a quiet, sober and carefully worded proclamation calling for the private sector to wean itself from pressures to achieve short-term shareholder value in favor of long-term growth.
These are issues of urgent concern to everyone, not simply to investors and those in businesses. The pursuit of short-term shareholder value has been one of the primary forces creating the current income and wealth gap that threatens free enterprise and our way of life. Without addressing this misguided philosophy, which has been in place since the 70s and 80s, we won't close the income gap and revitalize our economy.
Yet, you won't find reference to any of this in the document this group has put together. Its proposals are intensely serious about the nuts and bolts of how to reverse the course we've been on for the past four decades. It's so practical and granular, most readers might miss the refreshing quality of its message. For example, the group calls for public companies to quit offering "earnings guidance" to asset managers--no more predictions of earnings growth from quarter to quarter. That may sound benign and rather boring. Why bother with something so minor? Because those earnings predictions become cudgels activists can use to manipulate companies into cutting corners and undermining their own operations to hit earnings targets once they realize the earnings will fall short.
Along with commonsense principles like that, the group urges more autonomy for boards--giving them the freedom to think strategically--and greater transparency.
The group includes such luminaries as Warren Buffet, Black Rock's Laurence D. Fink, and Jamie Dimon of JPMorgan Chase and Co. Not long ago, Dimon made headlines by announcing what was effectively a shot across the bough against short-term greed: an across-the-board raise throughout Chase. And how he's following up with something even more comprehensive and impressive.
In a letter introducing their new principles of governance, the group wrote: "We share the view that constructive dialogue requires finding common ground -- a starting point to foster the economic growth that benefits shareholders, employees and the economy as a whole."
This is a vision that corporate America, and the private sector as a whole, most desperately needs, a sense of devotion to all stakeholders, not just shareholders. It's the sort of philosophy still alive and well in many of our private companies, while increasingly public companies have become puppets of shareholder activists who want immediate gratification from quarter to quarter, with no eye on a corporation's long-term future.
Here are some examples of the group's completely sensible axioms for corporate governance:
• Directors' loyalty should be to the shareholders and the company. A board must not be beholden to the CEO or management.
• Directors should be strong and steadfast, independent of mind and willing to challenge constructively but not be divisive or self-serving.
• Companies should consider paying a substantial portion (e.g., for some companies, as much as 50% or more) of director compensation in stock, (and should) consider requiring directors to retain a significant portion of their equity compensation for the duration of their tenure to further directors' economic alignment with the long-term performance of the company.
• Creation of shareholder value, with a focus on the long term. This means encouraging the sort of long-term thinking owners of a private company might bring to their strategic discussions, including investments that may not pay off in the short run.
• Asset managers should devote sufficient time and resources to evaluate matters presented for shareholder vote in the context of long-term value creation.
• An asset manager's ultimate decision makers on proxy issues important to long-term value creation should have access to the company, its management and, in some circumstances, the company's board.
These few suggestions take up less than a page in a nine-page document, and yet you could discard everything else and implement only these ideas and you would see positive changes that would increasingly ripple out through our economy with each passing year.
It's an important first step by a number of luminaries who understand that the current system is working only for a few and not for much longer. Today's version of capitalism underperforms for all stakeholders. Shareholder primacy does not deliver even for equity holders, while they siphon off nearly all the short-term profit and undermine long-term earnings. Yet the biggest victims of our broken system are the wage earners, outside the C-suite. These wages have been flat for nearly four decades and have contributed to the erosion of America's middle class. In the end we should celebrate the action taken by these leaders: it's both symbolic and pragmatic. Yet, so much more needs to be done. The current version of free market capitalism needs to be reimagined, and this is one of the first steps toward a new mindset.