September 03, 2003

Corporate Control

A serious rebalancing of the power of the Board of Directors at MCI: ...Mr Breeden's solution is to hand more power both to the board and to shareholders. MCI's current chief executive, Michael Capellas, must relinquish his role as board chairman to an outside director, a power sharing that remains deeply unpopular with American bosses. All other directors must demonstrate their full independence from management (the New York Stock Exchange insists only that half of the directors be independent). Director qualifications and workload will increase, as will salary: WorldCom paid directors $35,000 a year; MCI will give them $150,000.

Mr Breeden also places big constraints on the freedom of management and board to act independently from shareholders. Mr Capellas must declare an explicit dividend policy, which he can change only with the consent of shareholders. To prove the purity of its accounting, Mr Breeden suggests that MCI pays out 25% of net profits. The board may not pay Mr Capellas more than a specified amount each year (Mr Breeden suggests a paltry $15m or less) without shareholder approval. Big shareholders also help to choose new directors. If no agreement with the board is reached, the firm must run contested elections.

The firm's website will host electronic "town hall" meetings for shareholders to make proposals to management. Ideas that win the support of, say, 20% of shareholders, must be put to a vote at the next annual meeting. All governance rules, moreover, will be written into MCI's articles of incorporation, meaning that changes to them must be approved by shareholders. Where they bother to write them down, American firms for now use company bylaws, which boards routinely change without notifying shareholders.

Mr Breeden's reforms will no doubt invite the sort of quibbles from governance experts that all such lists attract. And they may go too far in their proposal to ban the chief executive from sitting on other company boards. But this should not obscure their wider importance. If they want to avoid reregulation, argues Mr Breeden, firms must do much more to address the legitimate concerns of investors that American managers still lack proper checks and balances.

Posted by DeLong at September 3, 2003 06:58 AM | TrackBack


Wow -- this could be a really, really important new trend. But you didn't add your comments.

Like, on the 15m salaray -- why not more explicit performance related, and especially 4 or 5 year rolling average stock value increase; or options, or what do you suggest?

I hope the economist isn't too upset at you.

Posted by: Tom Grey on September 3, 2003 09:59 AM


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