Reforming Corporate Board Structure: Why Barney Frank Is Right

by: Toro

I caught the last snippet of Barney Frank's interview on CNBC Thursday morning. I wanted to track it down and watch the whole thing, so I went to the CNBC website and dug it up, which you can watch here. I would highly suggest you watch it.

Frank acts like a jackass at the end of the interview. Mark Haines was asking legitimate questions, and Frank responds like a petulant, teenage Prima Donna and storms off. However, he is absolutely bang on in his argument, and is correct when he says that shareholders should have increased power over corporate boards.

The United States has serious issues at the board levels of corporations. Too often, boards are like clubs, with directors being too close to the CEO, who is often also the Chairman of the Board (another serious problem since no CEO should be the Chairman of the Board). There is not enough independence amongst directors, nor is there enough independence amongst the compensation committee.

The best model for corporate governance in the world is in Sweden (.pdf). In Sweden, shareholders have far more rights to oversee what management is doing with their money, including

  • The separation of the titles of Chairman and CEO
  • Mergers must be approved by shareholders
  • Shareholders of a certain size can call extraordinary meetings
  • The nomination committee to the board must have shareholder representation
  • It is much easier to remove management, CEOs and directors
  • Compensation is approved at the AGM
  • A plurality of votes, rather than a majority, is needed to pass resolutions and amendments.

Reforming board structure in America along the lines of governance structures in Sweden would go a long way towards eliminating the venality and agency/principal risk inherent in corporate America, which contributed to the debacle in the financial industry.