Give shareholders more say in picking directors

The recent Wells Fargo fraud scandal over its sales practices has once again placed corporate governance in the public eye. While the firm has agreed to pay $185 million in fines for opening 1.5 million bank accounts and 565,000 credit card accounts without customer’s permission over the past five years, it has not admitted misconduct in committing fraud against its own customers.

The notion of accountability is becoming an endangered species. One of the reasons is how common it is for a single person to serve as CEO and chair a corporation’s board of directors.

Last week with public criticism spreading, class-action shareholder lawsuits, a U.S. Labor Department review, moves by California and Illinois to stop doing business with the firm and bipartisan pressure from lawmakers, the board of directors of Wells Fargo, the country’s third largest bank, finally took action. They announced that Chairman and CEO John Stumpf would forfeit about $41 million stock awards, forego his salary during the inquiry, and receive no bonus for 2016.

They also announced the immediate retirement of Ms. Carrie L. Tolstedt, the former senior executive vice president of community banking who ran the unit where the bogus customer accounts were created. She will forfeit $19 million in stock grants and receive neither a bonus this year nor a severance package. Tolstedt should still be able to squeak by; she made $9 million in total compensation and her accumulated stock is supposedly worth over $100 million. If one is going to hell, then best to go first-class.

Then this past Wednesday, John Stumpf abruptly announced his retirement.

Corporate boards are supposed to be the centerpiece of corporate governance. Holding both roles creates an inherent conflict of interest. For instance, key among the board’s roles is selecting, overseeing, and evaluating the CEO. How can that happen when the CEO heads the board?

In the United States, it is estimated that half of public companies have one person serve as both CEO and chairman. Boards need real independence to exercise real oversight and that starts with the chairman. There could be no better time to get real and make a case for unbundling the two positions.

In recent years, public confidence in board independence has been undermined by an array of scandals, fraud, accounting restatements, backdating options, and CEO compensation abuses. These issues have highlighted the need for boards to be fully independent and free of conflicts to protect shareholder interests.

For this reason, the separation of the chairman position from that of CEO job is the model of corporate governance in most European countries. More than 90 percent of the Financial Times Stock Exchange 100 companies have long had distinct roles for the CEO and the chairman. The goal is to keep the two roles separate in the interests of proper and strong oversight of corporate activities including the firm’s culture, CEO evaluation and compensation, not to mention keeping the CEO’s XXL ego in check.

Boards of directors are designed to represent shareholders and provide a critical check and balance on corporate management. Still, it must be acknowledged that board directors have little individual accountability to shareholders because the latter have little influence on who serves on corporate boards.

Prior to the annual shareholders’ meeting the board proposes a slate of nominees. Board candidates are typically nominated not by shareholders but by the board. When new members join, they are joining a board with already established norms.

Instead of merely being able to vote for or against directors nominated by the board’s nominating committee, the time has come to allow shareholders to nominate board members.

The recent Wells Fargo scandal is just the latest reminder that splitting the roles of CEO and chairman of the board is the place to begin the development of independent boards that will produce better oversight, checks and balances, transparency, and disclosure through adequate independence of boards of directors.

Originally Published: Oct 14, 2016