Chaper 20: Challenges to Corporate Governance

The governance of corporations in the United States is regulated primarily by the requirements contained in state corporation statutes. In addition, the U.S. Securities and Exchange Commission regulates many aspects of corporate reporting as well as the issuance of company stock for interstate sale and, as dicussed later, the voting process and related procedures at corporate annual meeting.

To many traditional critics of business, the managements of large corporations are oligarchies, responsible to no one buy themselves. Corporate boards of directors are thus characterized as self-perpetuating groups, accountable to themselves or to the chief executives who supposedly select them.
As a large investor in many companies, Calpers urged stremgthening the role of the outdie directors in sevel ways:

• Adopt a more stringent definition of independent director.
• The chairman should be an outside director
• No director should serve on more than three boards
• A formal program, in addition to the annual meeting, should be set for sharehoulders to communicate with directors.

Most past changes in corporate governance have taken place voluntarily. One of the first efforts to mobilize stockholders to achieve a social objective was launched in 1966 by activist Saul Alinsky. A statistical analysis of shareholder activism during 1982-1998 reveals the limitations of these efforts. Virtually all of the companies- Enron, Global Crossing, Tyco, Adelphia, WorldCom - whose activities enraged the public in 2001-2002 were ignored by the activists.
Under established law, the board of directors is elected by the shareholders to exercise the basic authority over the corporation. In practice, the board is not as all-powerful as would appear from a simple reading of corporate law. In the great majority of cases, the CEO also serves as chairman of the board. The 2002 corporate reform statute specifies that the audit committee of the board, rather than the management, is directly responsible for the appointment, compensation, and oversight of the accounting firm selected to serve as outside audito.The Sarbanes-Oxley Act of 2002 prohibits investment banking firms from punishing analysts who write report critical of the firm's clients.
There are many changes now occurring in corporate government, both on a compulsory and on a voluntary basis. The evolutionary pattern, which has been the experience in the United States over the years, also mirrors the status of the common law that governs much of business activity in the United States and the United Kingdom.

Source:Business and Government in the Global Marketplace (7 edition Murray L. Weidenbaum)