GE Board Ranks Lowest on Independence, Study Says (Correct)
By Mark Jaffe
GE Board Ranks Lowest on Independence, Study Says (Correct)
(Corrects organization name in 2d paragraph.)
New York, June 6 (Bloomberg) -- General Electric Co. won a reputation under
former Chief Executive Jack Welch as one of the best-managed companies.
Many investor advocates say it wasn't among the best governed.
GE's board had the lowest proportion of independent directors among the 20
largest U.S. companies by revenue in 2001, according to a survey by the Investor
Responsibility Research Center, which advises U.S. fund managers on
governance issues.
Groups such as the Council of Institutional Investors, which represents 120
pension funds, and Institutional Shareholder Services Inc., an adviser to 950
professional money managers, say a substantial majority of directors should
have no ties to a company to ensure oversight of management. Seven of GE's 19
directors, 37 percent, met that test last year, well below an average of 67 percent
on the boards of the largest companies, the survey found.
``The biggest and one of the most widely held companies is missing a key
watchdog, an independent board,'' said Patrick McGurn, vice president of
Institutional Shareholder Services.
The bankruptcy of Enron Corp., where half the directors had business or financial
relationships with the energy trader, underscored the danger shareholders can
face when a board doesn't challenge management. Enron's directors waived
ethics rules to allow executives to profit from partnerships that concealed billions
of dollars in debt and propelled its collapse.
Enron Fallout
Since then, companies including Wal-Mart Stores Inc. and Ford Motor Co. have
enhanced independent board oversight. Today, the New York Stock Exchange,
where GE's shares are traded, is scheduled to propose requiring boards of listed
companies to have a majority of independent members.
``It's surprising GE ranks so low,'' said Carol Bowie, the Research Center's
director of corporate governance. ``With all that's gone on, you'd think they'd be
more sensitive to these issues.''
Welch and his successor Jeffrey Immelt declined to comment, GE spokesman
Garry Sheffer said.
Sheffer said GE's directors have been cited as ``one of the best boards in the
country'' because of their ``wide range of business experience.''
Company Ties
He said the company's scope -- its 2001 sales of $125.7 billion were in
businesses as varied as finance, plastics and broadcasting -- makes it inevitable
that ``many of the most experienced and qualified candidates will have
relationships with entities that will have business relationships with GE.''
Sheffer said GE views its outside directors as independent because their ties to
the company began before they were appointed to the board or have too little
value to represent a conflict.
``All the business relationships are detailed in the proxy,'' he said. ``Some are
minor, others longstanding. We don't believe they compromise independence.''
GE reduced its board to 16 members in April with the retirement of three
directors who had each served from 18 to 26 years. The panel now includes 11
directors who are considered non- independent by the Research Center.
Six are current or retired employees of the company or its units: Immelt; Vice
Chairman Gary Rogers; National Broadcasting Co. Chief Executive Robert
Wright; GE Capital Corp. Chairman Dennis Dammerman; Paolo Fresco, who left
GE in 1998 to become chairman of Fiat SpA, Italy's biggest manufacturer; and
former Kraft Foods Inc. vice president Ann Fudge, who left GE in 1975.
Five directors are associated with businesses that received revenue or fees from
GE, according to its proxy statement. They are former Indianapolis 500 racecar
driver Roger Penske; Sun Microsystems Inc. Chief Executive Scott McNealy;
Kenneth Langone, chief executive of Invemed Associates Inc., an investment
bank; former U.S. Senator Sam Nunn Jr.; and Douglas Warner III, retired
chairman of J.P. Morgan Chase & Co.
Audit Committee
Penske, who has a truck-leasing joint venture with GE Capital, and McNealy,
whose company sells computer servers to GE, were members of the board's
audit committee until April. Langone, whose investment bank does business with
GE, joined the panel then.
Governance advocates say audit committee members should be independent
because they are responsible for reviewing a company's accounting and
finances. New York Stock Exchange regulations impose such a requirement
while allowing companies to waive the standard for one non-independent
member. Securities and Exchange Commission rules restrict such a waiver to
``exceptional and limited circumstances.''
Board Vote
Sheffer said GE's board voted that Penske, McNealy and Langone were
independent and thus did not require a waiver. He said Penske and McNealy left
the committee in a general reorganization.
``Membership on committees is routinely rotated,'' Sheffer said. `We are sensitive
to even the appearance of an issue.''
Donald Kirshbaum, an investment officer with the Connecticut State Treasurer's
Office, which manages state pension funds holding 5.5 million GE shares, said
the funds refused to support the election of Penske, McNealy and Langone to the
board this year.
``We don't think they are independent,'' Kirshbaum said, adding that Penske and
McNealy ``shouldn't have been on the audit committee.''
Ford, the second-largest automaker, removed Goldman Sachs Group Inc.
President John Thornton from its audit committee in May, saying the company
wanted the panel to be composed solely of independent directors. Goldman
Sachs does investment banking for Ford.
Survey Findings
The Research Center examined the boards of 1,188 U.S. companies and found
that, on average, 65 percent of their directors were independent, about the same
as the average for the boards of the 20 largest companies.
The survey also found that 16 of the 20 largest companies had a majority of
independent directors. GE was joined below that mark by Wal-Mart, the biggest
company by sales, at 46 percent, American International Group Inc., the largest
insurer, at 44 percent, and Fannie Mae, the largest buyer of home mortgages, at
39 percent.
Wal-Mart this year added two independent directors to its 15- member board,
making them a majority.
American Electric Power Co., the biggest U.S. utility holding company, had the
highest proportion of independent directors, 86 percent, among the 20 biggest
companies in 2001, the survey said.
Under Welch, Fairfield, Connecticut-based GE had 20 consecutive years of rising
profits. In 2001 the company's revenue equaled 1.2 percent of the U.S. gross
domestic product. More than 100,000 job cuts in poorly performing units earned
Welch the nickname ``Neutron Jack.'' His use of the so-called Six Sigma
quality-control strategy was widely copied.
Welch's Record
GE's shares rose almost sevenfold in the decade before Welch retired in
September. The board awarded him a $9 million annual pension and
$17,000-a-day consulting fee.
Since March under Immelt, GE shares have fallen 27 percent to $30.15
yesterday, after first-quarter net income dropped for the first time in seven years,
in part because the company sold off units. After some investors voiced concern
about the transparency of GE's accounting, the company provided information
about the performance of 20 units, cut its use of short-term debt and instituted
quarterly earnings conference calls.
``GE benefited from a Jack Welch halo effect,'' said McGurn. ``A lot of tough
questions were never asked. GE has to re-prove itself to the market place, and
one way to do that is improved governance.''
No Ties
The Council of Institutional Investors and the $150 billion California Public
Employees Retirement System say an independent director may not have a
business, consulting or personal link to management. The $280 billion Teachers
Insurance & Annuity Association-College Retirement Equities Fund rules out
``significant'' ties that ``could compromise the director's objectivity and loyalty to
the shareholders.''
The groups also say they count directors who are former company managers as
non-independent for three to five years after they leave their jobs.
GE's outside directors receive $75,000 a year in cash and stock for serving on
the board. They also receive $2,000 for each meeting they attend. There were 10
meetings in 2001.
GE lists its business relationships with Penske, McNealy, Langone, Nunn and
Warner in its proxy statement.
Penske, 65, is chairman of Penske Truck Leasing Co. GE Capital owns 79
percent of the company and has an agreement to invest as much as $100 million
in ventures managed by Penske Capital Partners LLC, which is controlled by
Penske, according to the proxy. GE Capital also agreed to pay Penske Capital
Partners a consulting fee of as much as $1.5 million a year, the proxy says.
``Roger does not comment on anything he does on the board,'' said his
spokesman Marty Benke.
Purchases
McNealy, 47, joined GE's board in 1999. In 2001, Sun Microsystems, a maker of
computers for corporate networks and Web sites, sold GE and its subsidiaries
$1.6 billion in goods and services, mainly for resale, according to the proxy.
The purchases represented about 13 percent of Sun's sales for the year, based
on the company's reported sales figures.
``When sales exceed 1 percent we think that raises a potential conflict,'' said
Anne Yerger, director of research at the Council of Institutional Investors.
McNealy declined to comment, according to Sun spokeswoman Diane Carlini.
Investments
Langone, 66, is a co-founder of Home Depot Inc. and started Invemed in 1974.
GE uses Invemed for brokerage services and has ``participated in investments''
with the firm, according to the proxy. ``These are minor investments,'' Sheffer
said. Langone declined to comment through his secretary.
Nunn, 63, served in the U.S. Senate as a Democrat from Georgia for 24 years,
and was chairman of the Armed Services Committee. He joined the board five
years ago and is a partner in King & Spalding, a law firm that represents more
than half the Fortune 500 companies, including GE.
``We use them for a variety of services, legislative issues, government services,''
Sheffer said. Nunn declined to comment, said press aide Cathy Guinn.
Warner, 55, the former J.P. Morgan Chase chairman, has been a board member
since 1992. Sheffer said GE obtains bank credit lines, cash management and
investment advisory services from the bank. He declined to specify the amounts
involved. Warner didn't respond to requests for an interview.
The directors who have no reported links to GE are: James I. Cash Jr., a Harvard
Business School professor; Claudio X. Gonzalez, chief executive of
Kimberly-Clark de Mexico SA; Andrea Jung, chief executive of Avon Products
Inc.; Rochelle Lazarus, chief executive of Ogilvy & Mather Worldwide Inc.; and
Andrew Sigler, retired chief executive of Champion International Corp.
Shareholder Proposal
A shareholder proposal calling for more independence on the board won 31
percent of the vote in 2001, supported by investors such as the Connecticut state
pension funds.
``It's been a weak board, but with a star like Jack Welch and such tremendous
growth, nobody cared,'' said Kirshbaum, who represented the Connecticut State
Treasurer's office in the vote.
Other investors say they aren't worried because as one of the most widely held
companies GE is closely scrutinized and many other boards have similar levels
of independence.
``I'd be more concerned about an insider board like this at a smaller company,''
said James Thorne, who helps manages $1.8 billion at M&T Management in
Buffalo, New York. The fund holds GE shares, he said.
John Waterman, chief investment officer at Rittenhouse Financial Services based
in Radnor, Pennsylvania, said, ``I don't lose any sleep over the GE board. The
problem of boards being more a formality than functioning isn't specific to GE.''
Waterman said GE shares are among the largest holdings of Rittenhouse's $18
billion in funds.
Still, Louis Malizia, a corporate analyst with the International Brotherhood of
Teamsters, whose pension funds own 64,000 GE shares, said the board should
be more independent regardless of how much scrutiny the company gets.
``It isn't unreasonable for shareholders to want all the safeguards in place,''
Malizia said. |
