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Editorial: More Intelligent Tone at the Top

Matt Kelly | February 1, 2010

Shortly after that Nigerian nitwit tried to blow up a U.S. airliner on Christmas Day, I was listening to a talk radio program discussing the federal government’s response and all the new security procedures airline passengers will inevitably be asked to endure: more questioning at the security checkpoint, less freedom of movement on the plane, full-body frisks, millimeter-wave scans peering under your clothes. The host of the program asked her guests, “Will citizens of the United States really put up with procedures so invasive?”

One of the guests immediately responded: “The public doesn’t really care much if the procedures are invasive. They want procedures that are intelligent.”

Compliance officers, auditors, board directors, and governance enthusiasts, take note.

In many instances, after all, policies exist because at some point in the past, intelligence failed. Somebody didn’t notice a young Muslim man, whose name was on at least one terror-watch list, paying cash for an airline ticket. And because that rather self-evident alarm went unnoticed, we now have a new policy that every single terror tip must be investigated. New procedures to comply with that policy will be invented and enforced on government agents, who will slip into the dreaded check-the-box mentality—all because we didn’t use common sense in the first place, when we should have.

Which brings us back to corporate compliance, and our lead story this month: “Companies Brace for Slew of New Proxy Disclosures.”

We all know the sorry story that led the Securities and Exchange Commission to publish these rules: executive compensation growing larger and larger, even when most of the economy has been wrecked by recession for more than two years; and shareholders feeling more and more frustrated in their inability to achieve changes they want, despite a clear sense among everyone of what they want. (Mostly, they want more reasonable levels of executive pay.)

Boards and executives could have prevented much of the strain of the last two years, including the new proxy disclosures just stuffed down your throat, by delivering a more intelligent tone at the top. That tone isn’t just communicating “we enforce these rules seriously”—it’s communicating the message that “we understand what decent conduct looks like, and we intend to deliver it.”

If you want a recent example of failure to deliver that tone, look to that old chestnut of corporate bungling, AIG. Last month we witnessed the departure of AIG’s general counsel, Anastasia Kelly, because she was unhappy that the government wanted to cut her total compensation. Kenneth Feinberg, the Treasury Department’s point-man on executive pay at companies taking government bailout money, announced that Kelly’s compensation would be cut to $500,000. She balked, and led a group of AIG executives out the door (with a severance package worth $2.8 million).

Yes, Kelly was contractually entitled to more than $500,000 in compensation—but with tens of millions of Americans underemployed, and AIG taking more than $100 billion in taxpayer bailouts, that doesn’t matter. The intelligent, ethical tone to set would have been a gracious statement accepting the lower salary. If Kelly wants to work at the top of Corporate America, voicing that tone is the price you pay.

Instead, Kelly (like many other executives) sent the wrong tone. Public outrage still boils away. And regulators like the SEC chisel that outrage into more intrusive policies about executive pay disclosures in the proxy statement. Clearly, despite all our progress in governance in the last decade, we still have a long road ahead before we’ve mastered tone at the top. Expect more intrusive policies until we do.