Public corporations are the dominant institutions in our society. They have grown in size—and aggregated economic and political power—far beyond anything contemplated when they were invented. Federal oversight of corporate behavior is lax, and states compete to provide low-regulation havens in return for charter fees. Corporations also exploit global regulatory gaps and play nations against one another to obtain reduced supervision at the national level.
Corporations are overseen by boards of directors, but accountability to shareholders has long been overtaken by insider control and deference to management. Attempts by investors to improve corporate governance have produced only cosmetic improvements.
A dramatic change is required. We need a law that puts an independent public director on the board of every substantial public corporation incorporated in, or that does significant business in, the United States.
The public director would advocate for the public interest while monitoring the behavior of the corporation’s board, and would be required to report to regulators any action constituting a significant threat of violating the law or a material risk of inflicting substantial harm on employees, stockholders or the public. This person’s attendance at board meetings would prevent prosecutors, regulators or stockholders from being stonewalled by the sanitized board minutes that shield director action from scrutiny, and would help break the code of conformity (or silence) that directors obey. The presence of a public director in the boardroom would also have a dramatic deterrent impact on illegal corporate behavior. Knowledge that there would be an accurate record of what was actually discussed and decided, and who really said what when, would force directors to behave more responsibly. The threat of exposure of illegal behavior would compel corporate directors to make better decisions.
The public director would also oversee periodic disclosure of all lobbying and political expenditures by the corporation and its twenty top employees. Corporate political contributions and lobbying expenditures are legitimate matters of public interest. Greater disclosure (and scrutiny) of these figures would increase public awareness and produce a more informed political debate. While corporations have First Amendment rights to make these payments, disclosing them would in no way interfere with that right. Sunlight is a powerful force. Used here, it would create a more robust debate over corporate influence—another First Amendment value.
If confidentiality is a concern, the public director could be forbidden from voluntarily disclosing confidential information except in furtherance of statutory duties, and would provide testimony only in ongoing legal proceedings or investigations.
To develop financially sophisticated and legally astute public directors, business schools could train lawyers, accountants and others for this profession. These directors would be licensed by the SEC and required to pass a rigorous licensing exam. They would be assigned to boards by the SEC—not handpicked by the CEO. To assure independence, they would serve only three years on a board before rotating to another; and they would be highly paid from a fund created by a tiny tax paid by each public company—say, one-tenth of 1 percent of revenues. Like other securities industry professionals, they would be subject to SEC oversight, discipline and “disbarment” for violating their duties.
More cops on the beat cuts crime on the streets. Putting a corporate cop in the boardroom will cut crime in the suites. And we’ll all be better off.
Read the next proposal in the “Reimagining Capitalism ” series, “Cut Wall Street Down to Size With a Financial Speculation Tax ,” by Sarah Anderson.