Beyond Grasso: Investors key to making corporate changes last, says MIT Sloan expert

Cambridge, Mass., Sept. 19, 2003 — The resignation of New York Stock Exchange Chairman and CEO Richard Grasso is the latest sign of public anger over excessive salaries and other board room practices, but truly lasting reform in corporate governance depends in large part upon the continued vigilance of individual and institutional investors, according to an MIT Sloan professor.

“In the past, investors often paid little attention to the board members they had hired to run and oversee companies on their behalf,” said Peter Wysocki, whose recent research examines how directors who sit on multiple corporate boards influence a firm's decision making. “There was a tendency to pass off responsibility, to assume that others were doing the due diligence.”

Part of the push comes from new and proposed laws to tighten corporate governance, including last year's federal Sarbanes-Oxley Act. In fact, recent actions by some companies go beyond steps called for in Sarbanes-Oxley, Wysocki noted. At E*Trade Group Inc., for example, all members of the board, except the firm's CEO, are now outside directors. But investors still have to be vigilant about outside directors' policy preferences and whether they will push through changes that will benefit investors.

“A director's past track record is particularly relevant information for investors. For example, has a proposed board member served on other boards that were very generous in granting stock options to management? Our research shows that outside directors who reined in high management compensation at one company are likely to do the same at other companies where they serve as directors.”

Wysocki cites other warning flags for investors and others. “Recent accounting scandals suggest that some outside directors were asleep at the wheel,” he said. “But, this lack of oversight appears to be most pronounced among directors who were simply spread too thin. Our research suggests that directors who simultaneously served on four or more corporate boards were essentially out of the loop when it came to the companies' policy agendas.”

“Investors should at least know enough to ask these kinds of questions. It's not as if a board member's track record or policy tastes are unknown - it's just that people may not have been paying enough attention to them.”

Now the challenge is for investors to maintain that attention.

“Scandals come and go and are quickly forgotten with the next bull market,” Wysocki said. “Reforms put in place to address last year's scandal won't necessarily address issues that may come forward in the future. And some companies and boards will figure out new ways to get around the new rules. But if people keep paying attention to corporate governance issues, the momentum may be enough to move overall corporate culture in the right direction.”

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MIT Sloan Professor Emeritus Jay Forrester invented the field of system dynamics and is still a major force in its development.

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