Critics: Time to overhaul corporate boards
by Ron Orol in Washington
Posted 06:56 PM EST, Feb-6-2002
TheDeal.com
With the Enron Corp. fiasco bringing corporate governance issues front and center, a question has resurfaced: Can a board be counted on to oversee the very company to which it's beholden and, if necessary, take drastic action?
The answer, according to many governance experts, is a resounding no. Central to the problem is the lack of clear, enforceable regulations dictating what boards can and must do. The answer, observers say, are sweeping changes to ensure board independence.
The proposed remedies are wide-ranging. They include enacting stock exchange rules that restrict the number of boards on which a director can serve, passing legislation that requires companies to diversify their boards and requiring board members to have their own analysts to help them monitor a company's activities.
For example, it's clear Enron directors could have used an autonomous analyst crew to keep tabs on the company, said William Patterson, director of the AFL-CIO's office of investment.
“Being a director at Enron should have been a full-time job with a separate staff,” he said.
“Most directors can only make it down to the company four times a year for a day or two, so they need internal analysts that would help keep [them] up to date on the business,” added Philip Cochran, a business professor at Penn State University's Smeal College. “[Directors] usually don't know enough about the company to make the right decisions.”
Cochran envisions a system where companies would pay for board members to employ their own analysts. Warren Batts, a board member at Sprint PCS Group and Allstate Corp., takes issue with such proposals. He said more analysts monitoring company books could slow things down and add bureaucracy.
“It would be very confusing for the organization itself, whose work gets priority and what information is shared with whom,” he said. “Directors should understand the industry of the company they are sitting on the board of inside out.”
Batts, however, agreed with Cochran that many directors — especially those that are CEOs of other companies — lack the time to serve on multiple boards.
For example, Patterson said one Enron director, Ronnie Chan, the CEO of Hong Kong-based real estate firm Hang Lung Group, missed 75% of the energy company's meetings. Chan also is a director at Motorola Inc. of Schaumburg, Ill., and Standard Chartered plc.
“Chan is a classic example of a director that sits on too many boards,” Patterson said.
As a fix, Cochran is calling for stock exchange rules restricting CEOs from sitting on more than one or two boards.
But Robert Raber, director of the National Association of Corporate Directors in Washington, argues that no such rule is necessary.
“Companies are already turning away top executives if they sit on too many boards,” he said. “Everyone knows that if they are on five boards, they're just too busy.”
Cochran also wants exchanges to require that all directors come from outside the company. Echoing this need, former Securities and Exchange Commission Chairman Arthur Levitt has called for stock exchange listing requirements that would require half of a company's board members to be independent.
Major stock exchanges typically restrict company insiders, such as chief executives, from serving on audit committees. Yet the rules rarely extend beyond such cursory measures.
Charles Elson, director of the University of Delaware's Center for Corporate Governance, said stock exchanges will likely move quickly to enact regulations shoring up board independence. A spokeswoman with the New York Stock Exchange declined comment on the stock market's plans, except to say that it is looking to the SEC for guidance.
Paul Lapides, a corporate governance professor at Kennesaw State University in Georgia, said stronger stock exchange rules for board independence is critical, given that a CEO approves 95% of the 60,000 board directors in the United States.
“The single most important thing the board does is attract and hire a CEO to make sure the company is performing well,” Lapides said, adding that a board's hardest job is to fire the chief executive. “But because board members often feel indebted to the CEO for the board appointment, they rarely do anything major against him or her.”
Batts denies that assertion. He said that the CEO is not a member of the nominating committee, which usually consists of three board members, and that this group is responsible for finding new independent directors on its own. An executive search firm is often employed to find the new directors, he added.
But Phillip Goldstein, president and portfolio manager of Opportunity Partners LP, a White Plains, N.Y., investment firm, said hiring an executive search firm for new directors does nothing to ensure board autonomy.
“Independent search firms are not going to hire someone that will give the CEO a hard time even if the CEO is not on the nomination committee,” he said. “It's all wink, wink, nudge, nudge.”
Caroline Brancato, director of the Global Corporate Governance Research Center in New York, said the best tool for encouraging board reform is a vigilant financial press to expose wrongdoing. One obstacle, however, is that assessing board independence today is almost entirely subjective.
As a possible remedy, she points to an effort by Institutional Shareholder Services, a Rockville, Md.-based proxy advisory firm, to develop a grading system to help evaluate the independence of company boards, she said.
“It's similar to the way Moody's rates a country's financial institutions— this program rates the level of independence at a corporation,” Brancato said. “And institutional investors can look at the board independence rating and decide whether they want to invest or not.”
But such solutions may be inadequate to the magnitude of the problem. Recently, for instance, industrial giant Tyco International Ltd. paid $20 million to an outside director and a charity in exchange for help in brokering the firm's acquisition of CIT Group Inc., a move corporate governance observers called a clear conflict of interest. In another abuse, Enron director Lord John Wakeham, who is on the energy company's audit committee, received $72,000 as a paid consultant last year.
“Someone that is a paid consultant for the company is not independent and shouldn't be on the audit committee,” Lapides said. He's calling for all companies' audit, compensation and nomination committees to comprise independent directors only. He also wants directors to complete annual performance reviews of CEOs.
The deeper problem, however, is that close ties between executive management and board members is by now a feature of the American corporate landscape. No less a model of corporate probity than Warren Buffett, for instance, has his wife and son on the board of his investment firm, Berkshire Hathaway Inc. Former Senate Majority Leader George Mitchell has been a director at Walt Disney Co., as well other major firms, since 1995. Elson said that is a conflict of interest because the former Maine senator's law firm, Verner, Liipfert, Bernhard, McPherson & Hand of Washington, provides legal services for Disney.
“If they want to be a consultant because they have political connections, then make them a consultant, not a director,” Elson said. “Business ties with the management means they are less likely to criticize or go against the CEO if the case warrants it.”
A consequence of such incestuous relations is the growing disconnect between boards and shareholders, Goldstein said.
“Board members just don't talk to shareholders,” he said. Board members “should at least listen to what a shareholder says, but mostly they don't want to be bothered.” |
