Breeden's seismic shift

New York, 1 September 2003

Particle interactions, like interactions among people, can be violent, resulting in drastic changes of direction or break-up, says Richard Breedon.
This is the experimental high energy physicist talking, not Richard Breeden, the former chairman of the United States Securities and Exchange Commission.

But readers of Restoring Trust, the former SEC's man report into the collapse of the disgraced Worldcom, could be excused for believing that Neutron Richard could have had a hand in its compilation.

For the document cuts through the mire and the muddle of much of recent corporate governance thinking, is forthright and is written in plain English.

Typical of Breeden's phrases is one, which cuts to the core of good governance: -

“One cannot say that the checks and balances against the old WorldCom didn't work adequately. Rather, the sad fact is that there were no checks and balances".

Breeden's recommendations, made in his capacity as the court -appointed official supervising WorldCom's return from bankruptcy, have had a seismic effect on US corporations because they are more stringent than the rules already embraced by the regulators of the SEC and the New York Stock Exchange, which some think are too tough.

The current SEC chairman, William Donaldson, has gone on the record to say that entrepreneurial zeal could be frustrated by too much regulation.

There are 72 recommendations, grouped under 12 themes.

1. Establish a ¢â‚¬Ëœgovernance constitution', which may only be changed with shareholder consent.
2. Set up an electronic ¢â‚¬Ëœcity hall' for shareholders to communicate with the board and propose resolutions.
3. Elect at least one new director each year, with shareholders urged to propose candidates.
4. All board members except the CEO to be fully independent. Directors must spend a quarter of their fees to buy stock.
5. A non-executive chairman should review the performance of CEOs and boards.
6. The CEO must not sit on audit, governance, compensation and risk-management committees.
7. Directors and auditors to be limited to ten years in office.
8. No executive to get more than $15m in compensation without a shareholder vote.
9. No stock option awards for five years.
10. Improve internal audits and set a target for annual dividend payments of 25 pc of net income or more.
11. Strengthen role of general counsel, and train employees in ethics, disclosure and accounting.
12. Limit takeover defences.

While first reaction from American boardrooms has tended to suggest the Breeden proposals - which he believes could be extended to all companies and not just MCI, as WorldCom is now known - are a gravy train for lawyers, there is some influential support.

In a main editorial the Financial Times headlined the proposals as “a blueprint for restoring trust" and said they deserved further study.