Monday, March 23, 2009

Perks and Boards

As Enron wound down in the early 21st Century, eight years of maladministration began, and the Enron Board of Directors slipped away into the memory hole. Although there had been noises about prosecuting the Board for failures of its fiduciary duties, those were forgotten by a Department of Justice that was directed to political advancement of the Gang of Nope.

The meaning of director has been lost in a sea of perks, in my experience. Working with a member of several Boards of Directors, I encountered the service on the board as a matter of attending meetings occasionally, taking a yearly excursion at a high dollar resort, getting paid well for service on the board, and leaving the work to company managers. Occasionally the Board member got Minutes, a Resolution, an Affidavit or some such paper to sign off on.

As a result of this kind of service, one board my associate served on got entangled in a mess regarding backdating stock options. The board had simply signed the usual papers, and found out that the CEO and a few others in the firm had gotten stock options cashed at rates of a previous, lower cost, date. In other words, the company executives cheated stockholders because they paid less for stocks than those stocks cost at that time - so the amount they should have paid did not accrue to the company's total assets. Board members had not registered that papers they were sent to sign, something they executed regularly, this time involved a shady transaction.

Service on Boards of Directors has been a matter of fulfilling a symbolic function for good returns for some time, throughout our business sector. As regulations became a dirty word, the actual functions of Board members grew to be a farce.

There have been a few rumblings about failures to direct by those Boards - on Wall Street and financial industry firms now melting down the world's economy with their financial 'instruments'. What were they doing while the company ran amuck? Seems like old times.

Why haven't we learned that it is the boards who are responsible for the massive failures of strategy and risk management at these companies? Regulators, journalists, securities analysts and investors routinely ignore the most obvious indicators of investment risk that are presented by bad boards of directors.

This is particularly obvious in the case of AIG, which has been a serial offender in corporate governance, especially in executive compensation.

Those of us who remember former CEO Hank Greenberg's departure from AIG in 2005, after a corporate governance meltdown that included excessive compensation, appreciate the irony of his comment to ABC News that the retention bonuses were "mind-boggling." Mr. Kettle, Pot is on line 1.

Compensation committees are not responsible for individual pay packages below the CEO, but they are responsible for determining their overall structure -- and for making sure that the CEO's job includes effective management on compensation issues.

Retention of employees may be a legitimate goal of a compensation program, but it can be accomplished in a way that is both effective and credible by being tied to performance goals and by delaying vesting until after the bailout funds are returned to taxpayers.

The Corporate Library released a report in February about the boards of the bailout companies, many of which were outliers in their governance and compensation practices. Some of these were clear indicators of investment and liability risk. In several cases, we found individuals who not only sat on more than four corporate boards but also sat on more than one of these particularly troubled boards during this period.

Several other directors from these troubled boards also sat on either five or six boards altogether. We call the phenomenon of directors who serve on four or more corporate boards "overboarding."

Overboarding can limit the time and attention a director has for each board. It can also be an indicator of -- or a contributor to -- so many relationships and connections that it makes it more difficult to provide the respectful skepticism necessary for independent oversight.

In all, 11 of the 27 companies we identified as "troubled" had at least one overboarded director. Six had more than one; at Merrill Lynch, there were five. By comparison, fewer than 30 percent of S&P 500 companies have even a single overboarded director, and fewer than 5 percent have more than one.
Badly designed compensation is an indicator of poor corporate governance, and poor corporate governance is an indicator of investment risk. Instead of trying to tax the bonuses at AIG, the government and the shareholders should insist on new directors.....insanity is allowing the same people to continue to serve on the board after massive failure and expecting them to produce a different result.

The slippage of regulations over the eight years of war criminal conduct of the White House and executive branch removed any obstacles there may ever have been to malfeasance by companies' executives and their boards. The failures of public protections has meant disaster to the world's economy.

Just as the regulatory agencies such as FDIC and SEC have been perverted into industry shills, the boards have joined executives in carving out a return for themselves from earnings they were supposed to insure to the company and its stockholders. The times were great for theft.

The end is here for malfeasance in corporate offices. If companies are to return to honest functioning, regulation and law must be foremost; the routine robbery by executives cannot be tolerated any longer.

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Anonymous Anonymous said...

Nice post. I deal with nonprofit org boards and there are the same types of problems.

2:27 PM  
Blogger Ruth said...

I suspect that as the business executives choose the board members, they choose those they are sure will not make waves. Pro'ly a factor with nonprofit as well.

7:23 AM  
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