Just Who Is the New York Federal Reserve Serving? The Public or Wall Street?

Read my full Forbes post here.

Sphere: Related Content

Mark Hurd's Excesses Were in Plain Sight

By Eric Jackson08/07/10 - 10:36 AM EDT

PALO ALTO, Calif. (TheStreet) -- Almost one year ago, I wrote here that former Hewlett-Packard(HPQ) CEO Mark Hurd was the emperor with no clothes. Most on Wall Street have revered Hurd as the consummate guy who would execute and meet Wall Street's expectations. He sounded good -- always in control -- and he certainly seemed much more together than his predecessor, Carly Fiorina.

In my article, I laid out the case for why Hurd was not as dazzling a CEO as many thought and also why he was a risky asset for Hewlett-Packard moving forward.

Although most observers seemed to agree that Hurd did a great job turning around Hewlett-Packard, I pointed out that Hurd's magic really ran out after his first two and a half years on the job. In those early years, HP's stock went up 137%. Over the last two and a half years, however, H-P's shares are down 20%. Although that performance beats the S&P 500, it badly trails rival IBM(IBM), where shares are up 20% over the same period.

The media kept showering Hurd with the "halo effect" reputation of being a turnaround genius long after his actual performance had stopped keeping up with what he accomplished at the start of his tenure with the company.

There are lots of good CEOs who suddenly lose their touch. What alarmed me about Hurd last year was the piggish behavior he and his executive team were exhibiting at the expense of H-P shareholders.

What was worse, they were gorging at the trough of lavish compensation and excess perks at the same time that they were hypocritically turning the screws on H-P employees (who remained after a series of layoffs) to accept pay cuts and reduced benefits.

HP's Securities and Exchange Commission filings of the past few years have -- in plain sight of investors and journalists -- detailed this excess:

• Mark Hurd's total compensation for 2008 (when the global economic crisis reached its nadir) was $43 million, making him the fourth-highest-paid CEO that year, even though H-P's shares lost 29% that year.
• CIO Randy Mott's total compensation jumped 400% that year to $28 million.
• Imaging executive vice president Vyomesh (VJ) Joshi's total compensation increased 83% in 2008 to $22 million.
• Personal Systems EVP Todd Bradley's total compensation went up 263% that year to $21 million.
• Technology Solutions' EVP Ann Livermore's compensation went up 31% that year to $21 million.
• Now-interim CEO Cathie Lesjak got a 49% bump in total compensation in 2008 to $6 million.
• This management team mandated that year that all Hewlett-Packard staffers would take a 5% pay cut for the year, and they boasted that they -- as executives -- would stand shoulder to shoulder with the staff by taking 10% pay cuts. They forgot to say that the executive cuts would be only on base salary and that they would more than make up for that on options, restricted stock units and other bonus goodies.
• In 2008, H-P shareholders paid $7,472 for travel expenses for Mark Hurd's family to accompany him on business meetings. They paid $256,000 for Mark Hurd's personal security detail that year. And each executive was able to use $18,000 worth of financial advice that year on the shareholders' dime.
• Where it gets really interesting is that shareholders paid $136,000 for Mark Hurd's personal use of the H-P private plane fleet in 2008. Furthermore, H-P "grosses up" this taxable benefit, so that Hurd -- the guy who made $43 million in 2008 alone -- didn't have to pay any taxes for that private aircraft use. The filings also show that Hurd could take his spouse on the H-P aircraft whenever it was "requested by H-P" and that she got "grossed up" for that too.
• Michelle Leder of Footnoted also first reported in 2008 that Hurd had been "grossed up" $79,814 for taxes he had to pay as a benefit on meals with his family that were paid for by HP. Leder estimated that, in order to be "grossed up" by such a high amount, Hurd would have had total restaurant bills paid for by HP shareholders of more than $243,000.

Now, we find out that H-P's board uncovered a pattern where Mark Hurd inflated his personal expenses that involved a series of trips involving him and a female contractor, who worked for the company between fall of 2007 and fall of 2009.

Although I cheer anytime I see a corporate board wake up from a deep slumber and take action where it suspects a violation of ethics, I have to emphasize that this is -- by and large -- the same board of directors that approved all of the egregious compensation and perks laid out above. And those are only the ones relevant for 2008.

........

[** This post is an excerpt of the full article, which is available on TheStreet.com by clicking here. Free Site.**]

Sphere: Related Content

Why Goldman should overhaul its board

By Colin Barr, senior writer, Fortune Magazine

April 20, 2010: 4:13 PM ET

(Fortune) -- Not so long ago, it would have been heresy to say Goldman Sachs should take a cue from Citigroup. But as Goldman's sins come to light, Lloyd Blankfein could do worse than to follow Vikram Pandit's path to redemption.

Goldman (GS, Fortune 500) said on Tuesday its first-quarter profit nearly doubled from a year ago. But all is not well.

Goldman's giant pay packages and its omnipresent ties to Washingtonhave made it a target for populist outrage since the financial crisis hit. That anger is now bubbling over following Securities and Exchange Commission allegations that Goldman ripped off some clients by aiding a hedge fund customer thatprofited from their misguided bets.

Goldman denies the charges. But even some who take the firm's side say big changes are overdue. They start with the composition of Goldman's board and the tone of the firm's dealings with the public -- two areas in which Citi (C, Fortune 500) has made real strides.

"Goldman has taken a real drubbing in the court of public opinion," said Eric Jackson, an activist investor and hedge fund manager in Naples, Fla. "That is a perfect reason for making some changes."

Jackson has been saying since last year that Goldman's board is too cozy and lacking in financial know-how to diligently oversee top management.

The board is packed with honchos who led companies that have paid large fees to Goldman, such as Indian steel magnate Lakshmi Mittal and former Fannie Mae (FNM, Fortune 500) chief James Johnson.

The problem with these choices, Jackson said, is that "these people seem to be favorably disposed to senior management's way of thinking," and are therefore unlikely to act as a check on CEO Lloyd Blankfein and his team.

Coziness isn't the only strike against Goldman's board, Jackson said. He believes it is also lacking in financial savvy. Where Citi has reshuffled its board to add the likes of former U.S. Bancorp (USB, Fortune 500) chief Jerry Grundhofer and onetime Philadelphia Fed President Anthony Santomero, Goldman's board lacks any bank CEOs or former top regulators.

And then there are the scandals.

Regulators are examining the role of Rajat Gupta, who said last month he won't return to Goldman's board, in the Galleon insider trading case. Stephen Friedman, who remains on Goldman's board, quit the New York Fed after he was found trading Goldman stock, which is a no-no.

"The board is becoming a lightning rod," said Eleanor Bloxham, who runs the Corporate Governance Alliance in Westerville, Ohio. "Lightning keeps striking them over and over."

All of this has added up to a significant blow to Goldman's once glowing reputation.

"I don't know who's been giving Goldman advice about their public relations, but it has been a disaster," said Jackson, who has no stake in Goldman but owns shares of Citi. "They need to get ahead of this train."

Pandit, after his bank's many brushes with disaster, has recently tried to make amends. Citi's board has added eight members over the past year and the bank lately has been emphasizing its gratitude for taxpayer support extended in the dark days of 2008-2009.

"We owe taxpayers a huge debt of gratitude for assisting us at a critical time," Pandit said in Citi's earnings release Monday.

Of course, Pandit has an easier task than Blankfein in the sense that Citi's governance couldn't get worse than it did in the bubble days. Back then, the firm ended up loaded with toxic investments and prominent board members professed total ignorance.

Still, Goldman has been all over the map. Blankfein issued a vague apology late last year for the bank's role in the subprime crisis, not long before he infamously told a British newspaper Goldman was doing "God's work."

And though Goldman has highlighted its support of pay reform measures such as clawbacks and bans on guaranteed bonuses, in one way its corporate governance is behind the times. Blankfein continues to serve as chairman and CEO, even as the trend in recent years has been toward independent board leadership.

At a time when every decision at the firm is going to come under scrutiny, that conflict doesn't look like a winner in the eyes of the public.

"The issue for Goldman directors is whether they have been able to control the agenda," said Bloxham. "Directors must be asking, can we do our job?"

Given Goldman's unsteady response of late, it's hard to believe the answer is yes.

Sphere: Related Content

Reasons to Like Citigroup Again $C

By Eric Jackson

RealMoney Contributor

3/11/2010 8:00 AM EST

Click here for more stories by Eric Jackson

Over the past year, I've been very critical of Citigroup (C - commentary - Trade Now) CEO Vikram Pandit and of the company's improved but still-deficient board of directors. Perhaps there's no greater example of a once-great company laid low by the financial tsunami of 2008 than Citi.

Yet, the company, which has been plagued by persistent bad press for the better part of two years now, seems to have turned the corner, with investors taking particular notice in the last week. Yesterday, the stock touched $4 for the first time in three months.

It's time to give Citi its due, and it's time to get long the stock. Here's why.

Vikram Pandit has been abysmal CEO, but he is actually learning from the massive criticism he's received. Pandit has done himself no favors since taking the top spot from Chuck Prince. He told a reporter after his ascension that he called his father in India to tell him of the good news by saying, "The Prince has gone and the King has come." Last week's performance of Pandit in front of the TARP oversight committee and with media afterwards was beyond reproach. He struck just the right tone of modesty and wanting to do what's right for Citi shareholders and the country. If he can be coached here by his PR team, it gives me hope that he can also be coached in improving some of the other parts of Citi that need work.

....

[This post is an excerpt of the full article, available by clicking here to go to RealMoney.com. Note: subscription required.]

Sphere: Related Content

Goldman Needs Financially Savvy Directors

By Eric Jackson, Senior Contributor02/24/10 - 09:11 AM EST

Stock quotes in this article: GS , MT , CL , FNM , MDT , SLE

Goldman Sachs(GS Quote) had a great 2009.

The results were so good that Directorship Magazine named Lloyd Blankfein its CEO of the Year for 2009 and one of its 100 most influential voices in the board room at an awards dinner last fall. The award recognizes a CEO's achievements during the year but also a company's board for having done an exemplary job of company oversight.

Despite Goldman's many successes, its board shouldn't be held up as a role model for others, as the case of a departing Goldman director last week illustrates.

Goldman is one of the best managers of risk of any large company in the world. In a business, where the bulk of their earnings come from trading, they have successfully learned to manage risks daily.

Arguably, any company's last backstop for risk management is its board of directors. Ultimately, the buck is supposed to stop with the CEO and the executive management. The CEO gets hired and fired by the board, who agrees on key hires and sets compensation for the executive team and signs off on the company's financial statements and its internal risk management policy.

Since Enron's blowup, the concept of "board independence" has been required of all boards. If we have a majority of sufficiently independent directors in place, the thinking goes, they will be able to better monitor a CEO and a management team.

In practice, many CEOs have selected people who meet the independence standard but come from outside the industry of the company on whose board they serve. Even worse, some CEOs have chosen directors from the nonprofit world or academia, with no business experience at all.

...

[This post is an excerpt of the full article, which is available on TheStreet.com by clicking here. Free Site.]

Sphere: Related Content

Ironfire Capital Letter to the SEC on why Proxy Access Needs to be Passed Now

I applaud that the SEC has taken quick steps to empower shareholders in the wake of the economic meltdown over the last 18 months. One issue still to be decided on is the issue of facilitating shareholders to nominate individuals to serve on a company's board. The issue will be voted on soon -- and hopefully won't be delayed (although the Business Roundtable has recently asked for one).

I recently submitted a letter to the SEC outlining why I think it's critical that the proposed amendments be passed. Here it is:

Ironfire Proxy Access Comment

Sphere: Related Content

Best in Class: America's Top Boards

07/07/09 - 09:11 AM EDT

AMZN , JNJ , BRK-A , C , GE , IBM , GIS

Eric Jackson

It seemed an easy-enough question last week when someone asked me: What's the company in America with the best corporate governance? Yet, in trying to answer it, I was sent on a frustrating journey and a disappointing conclusion that there's no obvious winner. However, I'll name three good companies and look to address why it's so tough to answer the question.

In preparing this article, I reached out to some of the people I most respect in the world of corporate governance today: consultants, writers, bloggers, corporate secretaries and academics. Most of them were stumped by the question of what company is the best when it comes to corporate governance. It's certainly much easier to list 20 companies with bad governance for every company with good governance, which says a lot.

But three really good ones are Berkshire Hathaway(BRK.A Quote), Amazon.com (AMZN Quote) and Johnson & Johnson(JNJ Quote).

I'll revisit them later after I explain how I arrived at my conclusion.

To help spark my thinking, I searched the Web for recent corporate rankings of the best boards in corporate America. I came across a list from BusinessWeek from 2000. The top board on the list was General Electric (GE Quote), which unseated Campbell Soup(CPB Quote). Others near the top were IBM(IBM Quote), Home Depot(HD Quote), Intel (INTC Quote) and Cisco(CSCO Quote).

Since this ranking was issued, the combined stock returns of this group has been down 60% vs. negative 37% for the S&P 500. Three of the worst boards in 2000 in the rankings -- Walt Disney(DIS Quote), Rite Aid (RAD Quote) and Waste Management (WMI Quote) -- actually have slightly outperformed the best boards in the nine years since, but still returning on average negative 54% .

Ten years ago, GE's board was lauded for having a high number of outside directors who owned large amounts of stock in the company, which is worth 77% less today than it was back then. The board's largest move since 2000 was appointing Jeff Immelt as Jack Welch's successor rather than Bob Nardelli. It's hard to fault the board for that pick, given Nardelli's travails since then, but GE's shareholder base was frustrated with the stock's flat performance for the majority of this decade -- and that was before the wheels fell off last year with the concerns about GE Finance and its commercial real estate holdings.

Campbell Soup, the No. 1 corporate board of 1999 according to BusinessWeek, has lagged its peers like General Mills (GIS Quote) and Heinz(HNZ Quote) for a decade and barely treaded water with the S&P 500 over that time. Its stock is down 30% from 1999.

Finding the link between governance and performance has often vexed academics researching the link. At larger firms, with so many moving parts, it's often difficult to find the long-term performance effects of, say, separating the chairman and CEO roles.

''You are never going to be guaranteed total success,'' says Charles Elson, head of the Weinberg Governance Center at the University of Delaware. ''But good governance gives you protection when things go wrong. In the long run, that will play out.''

I spoke to Elson last week about the problem which many governance ratings have had in subsequently predicting company performance. He told me, in his view, that there were two critical governance factors which clearly showed a relationship to performance: (1) equity ownership of directors and (2) independence of directors.

I think he's right. Back in 2000, I was involved in a major research project which sought to link governance-related factors to subsequent company performance. The one factor which stood head-and-shoulders above any other was director stock ownership. And, by the way, owning stock through stock options or stock grants (the equivalent of "found money") didn't predict future company performance compared to when directors actually dug into their own pockets and purchased stock.

Board "independence" has been talked about often since the Enron and Worldcom scandals. We take it for granted that having a board stacked with family members or lawyers, accountants, and consultants who are paid by the company as directors is likely to produce more rubber-stamping boards than ones with more independent-minded people. However, there's still a lot of work to do in linking specific types of independent directors and company performance.

For example, I strongly believe having an independent director with industry experience is going to be more valuable in the long run compared with an independent director without that experience who doesn't want to speak up for fear of looking like a fool in front of the group. I also think too many boards lack diversity, in terms or ages, backgrounds or tenure on the board, which makes them collectively less independent thinkers than boards with such diversity. (However, adding a director for diversity's sake, without required business or industry experience, won't result in any new benefits for the group because such directors, again, will likely be too afraid to speak up.)

There's one more dimension I would add to the mix as being critical to finding a clear link between board governance and future company performance, and that's time to serve. If you go back and review the boards of the big failures from last year -- Lehman, AIG(AIG Quote) and Citigroup(C Quote) - all had a large number of directors who were too busy with other commitments to effectively serve as directors.

You had people like Anne Mulcahy and Andrew Liveris (CEOs of Xerox(XRX Quote) and Dow Chemical(DOW Quote), respectively) on Citi's board, who also served on Citi's audit committee, which is the most time-intensive of any board committee). When their own companies were seeing their stocks drop like stones last year, both Mulcahy and Liveris participated in 25 Citi board meetings and 12 audit committee meetings. In my view, they were stretched too thin from their day jobs to flag Citi's problems early enough.

Directors also can serve on too many other boards. Roland Hernandez who, in addition to serving on the board of Lehman and its "risk" committee (which failed if ever a board committee did), also served on the boards of MGM Mirage(MGM Quote), Ryland(RYL Quote), Vail Resorts (MTN Quote)and Wal-Mart(WMT Quote). Maybe if Hernandez hadn't been so over-committed he might have asked more questions about Dick Fuld's assumptions about Lehman's real estate

So, if equity ownership, independence, and time are the criteria for "good governance," along with evidence of sustained outperformance relative to peers, what are America's best boards? Like I mentioned earlier, the standouts are Berkshire Hathaway, Amazon.com and Johnson & Johnson.

Even as Berkshire Hathaway has taken its hits from the fall in financials and insurance companies, the stock still has beaten the S&P 500 in the last one, five and 10 years by a greater margin as you go back further in time. Investments made in Goldman Sachs(GS Quote), GE, and Harley-Davidson (HOG Quote) in the dark days of six months ago, look shrewd today. From a governance perspective, Berkshire is the gold standard for shareholder openness through its two to three-hour question-and-answer sessions at the annual stockholders' meeting and in its annual letter to shareholders. In terms of stock ownership, with the exception of Sue Decker who joined the board last year, each director owns at least $6 million in stock, with the median holding being $106 million. I also smile every year when I read how much Berkshire directors are paid to serve on the board. The majority of them get $2,700 a year, with a couple of special folks taking home $6,700, which is far less than the $300,000 to $400,000 a year some bank and tech directors take home.

The biggest problem I have with the Berkshire board is its average age. A third of the board is above the age of 80. These directors will have to face board succession issues, as well as CEO succession issues, over the next few years. They seem to recognize that they could benefit from some new perspectives on the board, judging from the most recent appointment of Sue Decker, formerly president of Yahoo!(YHOO Quote) and in her 40s.

Amazon.com also has been a standout performer for the last one, five and 10 years. Although consistently criticized by some for its sky-high valuation, it continues to succeed operationally and in its moves into new categories (most recently with the introduction of the Kindle electronic book reader). CEO Jeff Bezos gets the lion's share of the credit, but the company's board also is deserving. The stock ownership among the directors is high, with the median around $4 million.
But what I love most about this board is that every director has relevant tech or consumer experience which they bring to the group. Bezos didn't waste a seat around the table with the former ambassador to Ireland, buddies from the Seattle business community with no consumer background, former bosses, or the general manager of the Oakland A's baseball team. There's also a good range of ages and length of time served on the board across its eight members. A couple of the directors serve on two other boards besides Amazon's, and three have been on the board more than 13 years, which is getting a little long in the tooth, but these are very minor infractions when compared with most boards.

Johnson & Johnson's long-term corporate performance also has stood out compared with other "Big Pharma" players, and its governance has stood out as well. Unlike many New York-area boards of S&P 500-listed companies, J&J doesn't boast a board replete with active CEOs. In fact, it doesn't have any current CEOs (although disgraced former Citi CEO Chuck Prince was appointed to the board before he was ousted).

The board is a blend of retired CEOs and people from academia or with a specific health care background. The median stockholdings of directors is good at just under $900,000. My concerns with this board are that a few of the ex-CEO directors hold several other directorships -- including chair of JNJ's audit committee, James Cullen, who serves on four other boards. It's also odd that the finance committee didn't hold any meetings in 2008.

If I had to pick one of these as the best corporate board, I would say it's the board of Amazon.com. It's done things right on the most important governance factors of equity ownership, independence and time. Given this, I expect the company's positive stock performance to continue in the next 10 years. More importantly, Amazon's good governance means it's far less likely to suffer a Lehman-like shock that could destabilize or kill the company.

At the time of publication, Jackson had no positions in the companies mentioned.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

Sphere: Related Content

How to Fix Corporate Boards

From TheStreet.com

By Eric Jackson

02/24/09 - 12:01 AM EST

C , BAC , GE (Cramer's Pick) , HD

A couple of weeks ago, I co-authored an op-ed on Forbes.com about the problem of bad corporate boards in America.

In it, Sydney Finkelstein and I laid the primary blame for the wheels coming off our economy in the past year at the feet of our corporate boards. There is no question that others, like politicians, CEOs, banks and consumers all had a hand in this mess.

We don't absolve anyone of their justifiable blame. But ultimately, it was the corporate boards of Citigroup(C Quote - Cramer on C - Stock Picks) , Lehman Brothers, Bank of America(BAC Quote - Cramer on BAC - Stock Picks) and others who gave the green light for excessive risk-taking based on assumptions that housing prices would always rise.

Boards are usually an afterthought for most in the media and public. When asked to explain the problems of the past year, there has been a lot of focus on CEO pay and "Wall Street greed." Most people view boards as nothing more than "window dressing" for a company. They are seen as a group of mostly retired execs, bankers, lawyers and accountants who get together once a quarter and rubber-stamp the desired corporate actions of the CEO.

It's certainly true that these groups have been too friendly over the years in allowing CEOs to run businesses as they saw fit. Quite often, directors feel beholden to the CEOs who appoint them and are well paid for serving as a director, so they do not push back on issues when the CEO is a firm believer. Of course, there's also always a friendly consultant that a CEO can trot out to give some third-party support for whatever the initiative is.

Yet it doesn't have to be this way. Boards are responsible at every company for hiring and firing the CEO. They are also the only interface the shareholders have with the running of a business. Every year (except in the case of staggered boards), shareholders have the ability to vote "for" or "against" each director being re-elected to the job. Sadly, many shareholders don't even bother to vote during these elections. For those who do, they overwhelmingly support the incumbent board, as re-election percentages are usually on the order of 90% to 95%.

If shareholders truly were to become engaged with the voting process, the result would be a much more responsive board of directors on their toes to represent their constituents and not just be in the back pocket of the CEO who appointed them.

Tougher questions would be asked at board meetings, and potential excessive risk-taking would be challenged earlier on. If only boards had been doing their jobs over the last six years instead of cheerleading and rubber-stamping, our economy wouldn't be facing such dire circumstances.
Sarbanes-Oxley Not the Answer

After the last bubble, when formerly billion dollar entities such as Enron, World Com, and Adelphi were shown to be shams, the U.S. government swooped in to improve corporate governance and overall financial and operational fiduciary oversight. The result was the Sarbanes-Oxley law, which required CEOs and CFOs to personally attest to the veracity of financial statements, prevented auditors from also consulting with businesses and supposedly improved the quality of boards of directors.

To have better boards, SarbOx suggested that the roles of chairman and CEO be split, that there be more "independent" directors on every board, and that boards avoid becoming too large so that meetings resembled something more like a United Nations get-together. Of course, none of those changes, even if they were followed (which wasn't required), seemingly did anything to make Lehman's board any better.

Let's consider the Lehman board in detail. About half of the 11-member board had an average age of 77. Seven of the 11 had been on the Lehman board an average of 15 years -- not exactly fresh eyes. Nine of the 11 directors were effectively retired -- many for several years. One director (Roger Berlind) was a former Broadway producer. Another director (Marsha Johnson Evans) was the former head of the American Red Cross and, before that, Girl Scouts of the USA.

There are many types of backgrounds, tenures and ages that make for an effective director. Yet, in looking at this makeup of the Lehman board, you have to ask yourself: Were these people who were going to (or even had the knowledge and experience to) challenge Dick Fuld about the firm's aggressive risk-taking and scenario-planning in the event of a major housing slowdown?

Of course, CEOs, pro-business leaders and their lobbying groups, such as the Business Roundtable and Conference Board, have complained that SarbOx did nothing to stop the breakdown of 2008. Just last week, Ken Langone, supreme capitalist and compensation committee member of the NYSE for Grasso, Home Depot(HD Quote - Cramer on HD - Stock Picks) for Nardelli, and GE(GE Quote - Cramer on GE - Stock Picks) for Welch, made the case on CNBC that the breakdown proved that CEOs should be less fettered by legislation like SarbOx rather than more.

I would agree with critics that SarbOx and other laws that seek to improve the quality of boards and board governance are ineffective. If you switch over a board so that it is 100% independent, how is it going to be knowledgeable enough about the business to challenge the CEO? So, if things like SarbOx aren't the answer, what is a solution for better boards?

The Solution for Better Boards

There are two ways to improve the quality of boards in corporate America today. The first is self-improvement: Boards need to fix themselves. The Securities and Exchange Commission or members of Congress can't be a fly on the wall to all boards to tell them whether they are debating issues enough. Therefore, boards must do it themselves. The massive value destruction in real capital and reputational capital that we've witnessed in the last year in firms like Citi, Bank of America and Lehman should send shivers up the spine of every public company director.

We hope that this spurs them to action and to seek out advice from other directors or consultants who have seen these changes successfully put in practice.

It would be nice if boards actually did take it on themselves to improve the quality of their governance. However, I am cynical enough not to expect that Vikram Pandit and Ken Lewis are putting such an effort at the top of their corporate to-do list. This brings us to a second solution, which does have some teeth to it.

The second solution is called "proxy access." The SEC has kicked the can on doing something on this for mor than a decade now. After 2008, there's no excuse for Mary Schapiro not moving ahead on it now.

Today, if any public company shareholder wants to nominate any one or more candidates to be elected by all shareholders to a company's board of directors, that shareholder must foot the bill and jump over an extraordinary number of hurdles to do so. The out-of-pocket costs are at minimum a million dollars (for lawyers, mailing, and proxy solicitors). They must run against an incumbent board's campaign paid for entirely by shareholders.

"Proxy access" would allow shareholders, if they were able to demonstrate that they held shares in a company for a certain period of time, to nominate one or more individuals to be elected to the board on the company's own proxy (so the challengers wouldn't have to pay the freight costs of mailing out the proxies). If the challengers make their case on why they should get a seat at the table as opposed to an incumbent, they should have a seat at the table. May the best directors -- not only the friends of the CEO -- serve.

Shareholder activist Carl Icahn supports this initiative but wants to limit the right to nominate a director to shareholders holding a 5% stake in the company. That's not a problem for him of course, but it defeats the whole notion of "proxy access," which is that if you hold one share in a company, you have a right to air your views and suggest a legitimate candidate to run.

Opponents of proxy access basically make the case that shareholders aren't smart enough as management to nominate people to serve on the board. They say groups such as the AFL-CIO and Teamsters will "hijack" the process and seek to use it to further their "extremist" views. They also like to criticize shareholders calling for change as not having the "long-term interests" of other shareholders in mind.

Citi was criticized for having an obfuscated corporate structure and lack of corporate strategy years ago. The company responded by saying critics were being short-sighted when the stock was in the $50s. "Let our vision for a financial supermarket play out," they said. They repeated the same thing when the stock was in the $40s, $30s, and $20s. Last Friday, the stock dipped below $2. Are shareholders supposed to still shut up and sit on their hands waiting patiently for the all-seeing and all-knowing Citi managers to dig themselves out of this mess? Of course not.

These criticisms have no merit. Any potential director up for re-election to a board of directors -- incumbent or challenger -- should make his or her case on why they deserve the seat. Shareholders can judge for themselves. Large shareholders like Capital Research, Legg Mason(LM Quote - Cramer on LM - Stock Picks) and Vanguard regularly spend a lot of time and effort studying how to vote. Other large shareholders aren't as fastidious, but hopefully that will improve over time. Shareholders can tell if a potential director is a crackpot, an extremist or simply a pawn of the CEO who will do nothing more than rubber-stamp decisions.

When the SEC allows "proxy access," my prediction is that it won't result in a huge number of shareholders rushing to use the power they've been given. Inevitably, some will, and they'll be successful. These few litmus-case examples will do more for improving corporate governance in America than any SarbOx-like legislation could.

There are other changes the SEC could make to improve corporate governance. For example, any director on a board for a company that goes bankrupt or sees its stock price drop by more than 90% in 12 months (like the aforementioned Lehman directors) should have to resign any other corporate boards he/she sits on and not be able to take any future directorships on a public company for the next 10 years.

The risk of being fired by shareholders through proxy access will always be in the back of the minds of corporate directors. This will indirectly lead to incumbent directors asking tougher questions and better corporate governance. And that will benefit all shareholders in the long-term.

At the time of publication, Jackson had no positions in stocks mentioned.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

Sphere: Related Content