Two SEC Veterans On Today's Corporate Battles

WHO BETTER THAN TWO FORMER Securities and Exchange Commission chairmen to put today's regulatory climate in context? Richard C. Breeden, who headed the commission from 1989 to 1993, has served four presidential administrations over the years. A kind of one-man "911" for corporate governance, Breeden was appointed corporate monitor to help untangle the messes at World- Com and KPMG. He now runs a consulting firm that advises companies on everything from financial restructurings to regulatory compliance. In 2006, he also launched an investment fund, Breeden Partners, that turns around underperforming companies.

During his tenure at the SEC, Breeden introduced short-slate proxy contests allowing shareholders to nominate several directors without running an entire slate, greatly enhancing corporate democracy. Yet he worries that the activist movement may be going too far.

Harvey L. Pitt's SEC chairmanship was brief but tumultuous. For 15 months starting in August 2001, he presided over the agency during the post-9/11 market uncertainty, while trying to restore investor confidence as wave after wave of accounting scandals broke. As founder and chairman of Kalorama Partners, he consults to global businesses; he has been a law professor, columnist and partner with Fried, Frank, Harris, Shriver & Jacobson.

Pitt laments that America is in an era of "reverse laissezfaire," which he calls a plague in the business community. Companies "sit and wait" for the government to tell them what they're doing wrong, why it's wrong, and how to fix things. The only cure, he says, is for corporate leaders to take governance into their own hands.

Lessons from the Enron Era
Breeden sees shareholder activism and hyperactive regulators/ legislators as two sides of a single coin. Both are backlashes against a slew of scandals and excesses, from Enron to Hewlett- Packard to the option backdating epidemic. Eventually, he says, "the more resilient we make our market and the more opportunities we have for shareholders to protect themselves, then the less need we have for government agencies to come along to protect the shareholders." Market mechanisms, including the participation of investment funds like Breeden Partners, will correct abuses "before they get to be too large."

But Breeden thinks that one reason behind at least some corporate blowups has been a lack of clarity about who's in charge of governance. "Many of the scandals, in the end, reflect a lack of balance in how companies were being run," he says. Management bears the burden of operating day by day and carrying out corporate strategy. The board "has oversight responsibilities— to know whom to hire as management, to know when to fire them, to make sure that succession planning, strategic planning, and other long-run activities are carried out appropriately."

In this balance, he says, the board serves as the "instrument of accountability." So, for example, on the issue of executive compensation, it's really up to directors to demonstrate a connection between pay and performance, not just insist that they are linked.

As an SEC innovator who first allowed investors to field partial slates of board candidates, Breeden has strong feelings about shareholder democracy. He says that the momentum toward making majority voting in board elections the norm has reached a tipping point. "The Delaware legislature has been making a number of changes to move in that direction," he notes, "which reflects the number of shareholder proposals. Coupled with majority voting, the short slate proxy contest gives shareholders an avenue to address situations in which they may feel that a board is inadequately responsive to shareholder concerns."

Breeden praises current SEC chairman Christopher Cox's efforts to allow electronic proxy voting. But his overall championship of vigorous shareholder democracy comes with criticism. He has little use for activist hedge funds, for example, that stoop to below-the-belt tactics to advance their agendas against companies. "Some of the activist funds are very, very noisy," he says. "Taking out fullpage ads in somebody's local newspaper and saying that they're a terrible person and hoping their children read the advertisement is not necessarily the most sophisticated approach to long-term value creation." He notes that Breeden Partners is not a hedge fund. It takes only long positions, and investors are told the time horizon is two to five years.