Savage Business
What has become of Enron's former directors?
By Joshua Green
Issue Date: 6.17.02
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Frank Savage's record is appalling, even by the standards of Enron board members. He is a director of the investment firm Alliance Capital Management (he also chaired one of its divisions), which until recently was Enron's largest institutional investor. Alliance was nearly the last to get out of Enron: The firm bought large blocks of stock on August 15, 2001 -- the day after CEO Jeffrey Skilling resigned -- and continued to buy even after Enron's October 22 announcement that it was under investigation by the Securities and Exchange Commission (SEC).
By the time Alliance sold its 43 million shares of Enron stock, it had lost its investors hundreds of millions of dollars, including $334 million from the Florida state pension fund. On May 8, 2002, Governor Jeb Bush and state officials sued Alliance for negligence.
Enron's board of directors long ago secured its place in the annals of poor business judgment. But Savage deserves special recognition: As a board member of both companies, he wasn't just asleep at one switch -- he was asleep at two.
The corporate world has a way of dealing with people like Savage. For the last half century or so it has operated under a kind of gentlemen's code in which businessmen who suffer public disgrace discreetly step down in order to avoid further shame for themselves and the companies they serve. This honor system has historically functioned more or less effectively -- even O.J. Simpson left his spot on the audit committee of Infinity Broadcasting when public scrutiny became too intense.
Many of Enron's directors complied with this expectation. Wendy Gramm resigned from the board of Invesco; Robert Jaedicke left the board of the California Water Service Group; Herbert Winokur Jr. stepped down from the Harvard Corporation; and, after some prodding from organized labor, Ronnie Chan relinquished his place on Motorola's board. "Board members are some of the most reputationally fragile people on earth," explains Nell Minow, a corporate watchdog who runs the Web site The Corporate Library.
But amid the overwhelming greed of the 1980s, the gentlemen's code began to fray. Though the booming economy largely concealed it, the trend continued throughout the 1990s. As with so much else in the business world, Enron -- and Frank Savage in particular -- brought the problem to a head. Savage refused to quit: Not only did he decline to forego his $70,000-a-year spot on Enron's board, he refused to step down from the boards of QUALCOMM and the Lockheed Martin Corporation despite a shareholder campaign (led by the AFL-CIO) to remove him. All of which makes for a vexing dilemma: What do you do when a system governed by shame encounters a businessman who's shameless?
The first to pose that question was the community of institutional investors -- specifically, union and public pension-fund managers. Institutional investors collectively hold about $6 trillion in stock and own between 60 percent and 70 percent of all American companies. Pension-fund shareholders, who account for about one-third of institutional investors, have organized over the past decade and become a growing force in the corporate world. Nevertheless, coming around on Enron took some time. (Savage was re-elected to QUALCOMM's board in February, before an opposition could be organized.) "I called around [to the community of institutional investors] and said, 'Are you going to try to keep Enron directors off other boards?'" recalls Minow. "The AFL-CIO was the only one that said yes." Other organizations, such as the shareholder advisory firm Institutional Shareholder Services (ISS), soon came aboard.
In January the AFL-CIO contacted the nominating committees at 21 companies where Enron directors serve in an effort to get the directors to resign. (To date, four of the 13 directors have complied.) One, Lockheed Martin, proved particularly recalcitrant, refusing to meet with shareholders or even to discuss its plans regarding Savage. "We talked to a couple of executives," says Patrick McGurn, vice president of ISS. "They declined to pierce the veil of confidentiality." The AFL-CIO responded by launching a "vote withholding campaign" among Lockheed Martin shareholders against Savage's April 25 re-election to the board -- essentially a vote of no confidence in the company and in Savage.
The campaign drew the support of six public-pension funds and many money managers, as well as outside companies like the investment firm Barclays, all of which opposed Lockheed Martin's decision. While the group didn't try to block Savage's election by running an opposing candidate -- a complex and expensive process that's difficult to organize on short notice -- it persuaded shareholders to withhold 28 percent of the votes, the single biggest withholding vote that's ever been mustered against an individual director at a publicly traded company. "It was a shot across the bow," says Charles Elson, who runs the Center for Corporate Governance at the University of Delaware. "It sent a signal to [Savage] and to the company that there's a serious problem."
Even so, forcing Lockheed Martin to drop Savage was a long shot that depended wholly on the company's compliance. Corporate rank-closing on issues of directorship is unfortunately the norm. And because corporate law tilts so steeply toward the status quo, shareholders have few viable options. SEC rules prevent them from organizing en masse to sell their shares -- in effect, making the stock tank -- by requiring all sorts of onerous filings. ("You'd rather have your fingernails pulled out," Minow attests.) Removing a director through a proxy fight can cost at least $100,000 and up to $1 million or more. Last year billionaire investor Sam Wyly spent $10 million trying to replace four directors at Computer Associates -- and lost. Even sensible laws have unintended consequences: Worker-protection statutes that prevent overzealous CEOs from firing uncooperative board members actually make it more difficult to remove authentic bad apples like Savage.
If nothing else, Enron highlights the need for corporate reform. "There is not a boardroom in America that hasn't been affected by this scandal," says Roger Raber, president and CEO of the National Association of Corporate Directors. "And they're beginning to act." One hopeful sign, Raber says, is that many are proactively seeking to evaluate their members in an effort to avoid disaster. Another promising development capitalizes on that fetish of the business community: status. Both Minow's organization and the ISS are developing ratings systems for board members based on factors such as attendance and prior performance. A recent sign of improvement is that the board of the Walt Disney Company, routinely considered to be among the country's worst, has hired legendary reformer Ira Millstein.
But the true impetus for reform -- is this a surprise? -- may be money. The irony is that the corporate community's assertion that Enron was evidence of the market's efficiency may soon come back to haunt it. One of the parties most eager for director rankings is the insurance industry, which winds up footing the bill when boards like Enron's fail. In the future, companies with lousy boards will pay hefty premiums for "directors and officers insurance." Until then, Frank Savage will have to serve as a reminder of the need for corporate responsibility.
Joshua Green
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