We admit to being a little disappointed with the financial press coverage of the sub-prime and structured credit problems. In our opinion, too much of it has been of the 20-20 hindsight variety—the “what part of packaging dodgy mortgages and calling them as AAA-rated financial instruments did Merrill Lynch or Citi or Bear Stearns not understand?” type of story.

Now don’t get us wrong; we’re not excusing the greed and myopia that banks and others exhibited by choosing to facilitate these products and by stuffing them into their portfolios. But some of these voices of rectitude could have been noting long ago that the emperor had no clothes; instead, he’s been parading around naked for years.

Certainly there were some prescient commentators. During the summer of 2005, for example, Paul Krugman of the New York Times, wrote: “Americans make a living selling each other houses, paid for with money borrowed from the Chinese. Somehow, that doesn’t seem like a sustainable lifestyle.” Maybe it was because the column appeared in the dog days of August, but few pundits followed his lead.

Likewise, now that the sub-prime, prime, and structured credit problems have become a turbulent force in both the real economy and the capital markets, there is a paucity of advice about how to prevent such occurrences in the future. So it falls to investors—who ultimately will bear the brunt of the losses—to try to figure out how to respond. Be warned: A number of those efforts will play out against the background of the 2008 proxy season.

For example, the Laborers’ International Union of North America (LIUNA) will submit shareowner proposals at 28 companies in 2008. Those proposals fall into three categories:

Credit rating agencies and some institutional mortgage-backed security industry heavyweights will receive proposals designed to address perceived conflict of interest problems. Moody’s, Standard & Poor’s, Citigroup, and Wells Fargo are among those targeted for such resolutions.

Banks, such as Lehman Brothers, Washington Mutual, and Bear Stearns, will receive proposals to disclose the types of mortgages bought, sold, and held.

Proposals focusing on succession planning or on executive compensation are planned for companies that either have lost, or risk losing, their CEO because of the sub-prime mess. Companies which can expect such LIUNA proposals include Merrill Lynch, Toll Brothers, and Countrywide Financial.

While the disclosure, succession planning, and executive compensation proposals have all been seen before, the proposals against conflict of interest are creative. They would, among other things, require a cooling-off period before rating agencies could hire key staff from the financial and mortgage companies they rate; mandate a five-year period before an analyst could cover his or her previous company, and require financial services companies to disclose conflicts of interest with ratings companies, according to LIUNA.

These are steps in the right direction, but we have long maintained that the single biggest conflict in the credit markets today is that ratings are paid for by the issuers of debt, rather the users of the ratings. To their credit, so to speak, the ratings agencies have created informational walls to try to prevent malfeasance, and these walls can act as strong fortifications against conflicts with a particular issuer trying to game the system. And LIUNA’s efforts can strengthen them. But as we’ve discovered, they are not effective against systemic risks. In the end, the sub-prime and structured credit crisis was caused by an imbalance of greed conquering fear and good judgment through vast swaths of the financial services industry. The fees were large, the credit spreads small, and the voices of caution few. To expect the credit ratings agencies to police the financial services industry, which pays or influences 100 percent of their revenues, is just not realistic.

Moreover, focusing on the sub-prime and structured credit issues strikes us as a bit like closing the barn door after the horses have escaped. It’s important because there may still be some horses you can keep inside. But it’s not a deterrent to the next crisis.

Of course, we don’t always know what the next crisis will be. But in virtually every corporate governance failure to date, what we’ve seen is a divergence between the path of money and the path of accountability. So we propose two “R&R” corporate governance fixes designed to realign remuneration and responsibility.

The first we’ve already foreshadowed: The credit rating agencies should figure out how to move from an issuer-pays revenue model to a user-pays model. Will it make a difference? Well, consider one key data point. Egan Jones may be the best-known user-pays credit rating agency in the country. It has a history of warning investors about credit problems far in advance of the “Big 3” that rely on an issuer-pays model, including warnings about WorldCom, Enron, AT&T Canada, and others. As the firm notes on its Web site: “Unlike ‘The Majors’ we will not hesitate to downgrade or upgrade an issuer. We can do this because … We receive no compensation from any issuer.”

There are other well-regarded user-pays credit analysis firms, such as Gimme Credit, which are stealing market share from the issuer-pays agencies. Gimme Credit recently told the Financial Times, “Investors fear the relationship between the rating agencies and [monolines] is so incestuous, that the rating agencies cannot issue downgrades without implicitly conceding that their proprietary capital models are flawed.” Exactly.

For the second fix, let’s revisit one of the few financial commentators who did see the sub-prime problem brewing. The Times’ Krugman recently suggested a simple fix that goes beyond the specifics of the sub-prime situation and mirrors our thinking. “Executives are lavishly rewarded if the companies they run seem successful … But if the excess turns out to have been an illusion—well, they still get to keep the money … Not only is this grossly unfair, it encourages bad risk taking, and sometimes fraud.” Krugman goes on to note that the issue was raised after the Enron and WorldCom scandals, but not enough happened to end the practice.

That can, and must, change. Why is the board of Citicorp allowing Chuck Prince to keep the $25.6 million he received last year? Why is the board of Merrill Lynch allowing Stan O’Neal to keep the $48 million he received? Each of those banks claims that they pay their CEOs based on performance. But we now know the performance was illusory. After all, that’s what taking a reserve is; it’s saying that the assets bought under those CEOs’ watch aren’t worth what they thought the assets are worth. Effectively, that’s taking a performance hit this year for last year’s problems. So if the source of the performance problem was last year, why aren’t the board members saying, “Sorry, but it’s obvious that your performance last year was inflated, and so you weren’t really entitled to part of your pay. Give it back.”

Nor is such a fix limited to the financial services industry or the sub-prime and structured credit situation. Each time a company materially restates earnings, or changes reserves massively, in reality it’s time-shifting performance. If we want our executives to be responsible for their actions, then we need to link the time periods of their performance to the time periods of their pay. After all, we want adequately reserved companies; failing to link pay and performance time periods also threatens to undercompensate the messenger who tells you that the last guy was the problem, while letting the problem-causing CEO keep his money.

This doesn’t require legislation or even lawsuits from outraged institutional shareowners (although such suits are likely to happen if boards don’t take action). Here’s a better way: Compensation committees of boards should have a basic understanding of accounting—and a gut understanding of what “pay-for-performance” really means. Then they should build that understanding into CEO contracts.