06 Nov Directors more assertive in corporate governance
Madison, Wis. – When it comes to building an effective board of directors, it’s a different world than the one that existed five years ago.
In the wake of accounting scandals that rocked corporate America and led to the passage of Sarbanes-Oxley, board service requires much more time and commitment than ever, and there is more liability and more risk to one’s reputation. In this environment, how does a company – public or private – ensure that its board not only has the right blend of skills and integrity, but also the commitment needed for effective governance?
Prominent executives offered their advice during the recent Director’s Summit at the University of Wisconsin-Madison. The good news for effective corporate governance is that directors are less docile and more willing to serve as “chokepoints” to head off wrongdoing – a trait the new breed of director must have.
“I think that boards are more aggressive today, by and large, with all of the activism that is taking place on the part of shareholders and with the new regulations from SOX 404 in particular,” said Gerald Hobbs, managing director of Boston Ventures. “They are engaging at a much higher level than they used to engage, and they are insisting on being free to go past the board, itself, into the company.”
Assertive directors have many pluses, Hobbs noted, but a culture of effective governance starts at the top. Bob Chrenc, chairman of Symbol Technologies, saw first hand what happens when upper management colludes. When he was asked to join Symbol’s board, the company was mired in financial difficulties stemming from accounting fraud. His first impulse was to wait until the company resolved its problems, but the Securities and Exchange Commission, which had received an anonymous letter regarding the improprieties, wanted stronger governance sooner rather than later.
So Chrenc joined the board as Symbol faced stock market delisting, and as its auditors were being sued. In all, 12 members of the senior management team were indicted – the CEO fled to Sweden, his wife’s native country – and three executives went to trial.
In that atmosphere, the company was instructed to recruit an entirely new board, and it had to be frank with candidates about the situation it was in. To the extent practical, it had all the new directors attend all committee meetings to bring everyone up to speed, it changed outside auditors, it separated the role of CEO and chairman, and it instituted a whistle-blower program. After systematically ridding the company of the problem children, it has met Sarbanes-Oxley requirements for two consecutive years, and now Motorola is paying $3.9 billion for the privilege of owning it.
One of the mechanisms Symbol is using to head off future trouble is the use of a whistle-blower program augmented by EthicsPoint, a software product that encourages communication about misconduct. Chrenc said any employee, purchaser, or supplier of goods with knowledge of improprieties can communicate anonymously through the system.
“We respond to that system, and the message goes back to the person, again, anonymously, and we ferret out any issues around the globe,” he said. “In our case, we’ve received comments from probably 30 different countries, issues that were a problem in South Africa, Australia, Hong Kong, as well as, obviously, the United States, and we have followed up on every one of them.”
Attorney Blaine Fogg, a board member with Griffon Corp., said such systems aren’t as important as organizational culture. “I represented a company that had all kinds of written policies on ethics and good business practices and so forth,” he said. “And the CEO was a bully, and he said to these people, `The [Wall] Street is looking for $1 a share this quarter. We’re going to make $1 a share this quarter, and I don’t care how the hell you do it, but if you don’t do it, you’re fired.’ And that terrorized them, and these people went out and of course they did all kinds of phony deals to get sales in that quarter and every other quarter, and finally that caught up with them.”
Does diversity = ethics?
At one time, business boards changed at a glacial pace, but companies, perhaps mindful of diversity, are casting a much wider recruiting net. In a break from the past, some are recruiting people that other directors have never met before. It requires even more due diligence, but the benefits could be profound.
In recent weeks, the chief executives of two technology companies, CNET and McAfee, have resigned and been terminated, respectively, in the wake of stock option irregularities. The practice of backdating stock options – back to the date where a previous share price was particularly low compared to the existing price, thereby increasing the value of the windfall for top officials – has been particularly controversial.
Kay Koplovitz, founder of USA Network and a board member for Liz Claiborne, said diversity eliminates the single point of view and moderates behavior that otherwise might result from directors having the same backgrounds. “You can look at what’s going on today, particularly in Silicon Valley, but not only in Silicon Valley, with stock options and backdating of stock options,” she noted. “Frankly, in the 1990s, everybody was doing it, and they were just choosing dates and people could do that.
“Well, they were all in the same environment, and I think had there been more diverse views on those boards at the time, more people from different cultural backgrounds, different experiences, the issue may have come to the fore earlier than having it the way it is now, with indictments and so forth.”
In the end, even though a collegial environment is important, good chemistry does not mean directors share the same views. Just as the process of recruiting new directors is no longer the sole domain of the CEO, the responsibility for ethical conduct falls on each director, not just the ones with financial expertise.
On the advice of a director who served on the board of the New York Stock Exchange, Cisco Systems conducted a review of its own stock option practices. “It’s got to be across the board,” Cisco Chairman John Morgridge said of ethical oversight, “and it’s at the point where our board members have enough trust with the company now that they are pretty forthright.”
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