Board Room .

BOOKS: Money for Nothing: How the Failure of Corporate Boards Is Ruining American Business and Costing Us Trillions

by John Gillespie and David Zweig

Reviewed by Michael Connor

If you’re one of the many trying to determine where blame might lie for the financial and economic crises of the last two years, John Gillespie and David Zweig would suggest you look in the corporate boardroom. Their new book – Money for Nothing: How the Failure of Corporate Boards Is Ruining American Business and Costing Us Trillions – is rich with unfortunate detail:

  • Stanley O’Neal, former CEO and president of Merrill Lynch, was paid $48 million in salary and bonuses in 2006, in large part because of the firm’s apparent success in selling mortgage-backed securities.   When the company’s failures made headlines, O’Neal was allowed by his board to “retire” with an exit package worth $161.5 million.  Within three months, O’Neal was back in a boardroom, “this time as a director of Alcoa, serving on the audit committee and charged with overseeing the aluminum company’s risk management and financial disclosure.”
  • Countrywide Financial, a leader in the subprime mortgage market, paid each of its directors from $344,988 to $538,824 in 2006, more than twice the average for the five hundred largest U.S. corporations, while CEO Angelo Mozilo himself made $48 million, not including gains on stock options. In the two years prior to the housing market crash, independent board members cashed out more than $24 million in stock gains.
  • The board of Lehman Brothers included “a theatrical producer, the former CEO of a Spanish-language television company, a retired art-auction company executive, a retired CEO of Halliburton, a former rear admiral who has headed the Girl Scouts and served on the board of Weight Watchers International, and until two years before Lehman’s downfall, the 83-year-old actress Dina Merrill.”  In a September 2008 conference call, Lehman CEO Dick Fuld told analysts: “I must say the board’s been wonderfully supportive.”  Four days later Lehman filed for bankruptcy.  Lehman shareholders, represented by the board, lost more than $45 billion.

Unfortunately, in the annals of modern corporate governance, those are not isolated cases.  Gillespie (an investment banker who has worked at Bear Stearns, Lehman Brother and Morgan Stanley) and Zweig (a journalist who has worked at Time Inc. and Dow Jones), put forth an abundance of evidence to support the stereotype of a modern-day corporate director – typically an over-compensated, under-challenged former corporate executive (or former government official) who never argues with management and votes to reward CEOs and senior executives with multi-million dollar salaries and bonuses even as the companies themselves all-too-often spiral into oblivion, damaging the lives of real people, including employees and shareholders.

The subject is truly anger-inducing, and rest assured Money for Nothing will make you angry (or reinforce your existing anger) about the current state of corporate governance.  But if policy-makers and the business community are going to set a corrective course for the 21st century corporation, it’s critical that we get beyond the anger and begin to pick apart issues while creating new definitions for accountability.  Money for Nothing succeeds at that as well.

(Listen to Money for Nothing co-author John Gillespie on a Business Ethics podcast.  You can download an MP3 audio file of the program here.)

Defining the Job

Corporate directors have existed, and been criticized, for hundreds of years; forty years ago  Harvard Business School professor Myles Mace characterized them as “nothing more or less than ornaments on the corporate Christmas tree.”   More recently – in the wake of scandals at Enron, WorldCom, Tyco and others – the Sarbanes Oxley Act of 2002 introduced a number of reforms aimed at improving the effectiveness of boards for U.S. companies.

In fairness, most large global enterprises consider governance a top priority – IBM and Coca-Cola are among those that come to mind – and work hard to improve the performance of their boards.  And these days, especially with the threat of litigation, directors who take their jobs seriously can sometimes confront a formidable task.  Increasingly, report executive recruiters, the best director candidates don’t want the job.

Perhaps most disconcerting for directors themselves, Gillespie and Zweig suggest, is the intense public debate about the role of corporate governance in the modern-day corporation.  Should directors be encouraging management primarily to increase shareholder value?   If so, how important are near-term profits and short-term stock performance?   What about long-term sustainability of the enterprise? And how does one incorporate the many demands of multiple stakeholder groups, including employees, local communities and a panoply of activist groups dedicated to particular causes?   Juggling those priorities requires directors with a far-sighted mind-set and ethical core that allows for day-to-day constancy and the ability to make difficult decisions amidst extraordinary circumstances.

In Search of Solutions

The authors recommend a number of solutions aimed at changing boardroom culture. The most radical might be the creation of a new class of directors – “public directors” – an idea first proposed in the 1930’s by William O. Douglas, then head of the Securities and Exchange Commission (and later a U.S. Supreme Court Justice) and adopted more recently by some experts in governance.  Public directors would be identified as such by a government entity, independent of the company, and constitute a minority of the board.  To ensure objectivity, the authors suggest, independent directors might even be paid independently, maybe by an assessment on large companies or even publicly.

Other suggestions include creating a director training consortium; insisting on greater diversity of board members; imposing term limits; limiting directors to serving on three or fewer boards; and requiring that directors “put skin in the game.”  This latter recommendation, which has been proposed before (by governance expert Charles Elson and others) would require directors to have a “meaningful percentage” of their net worth invested in companies they serve – maybe to 6 percent, depending on the number of directorships they hold.

Probably the biggest check on board behavior, though, is the power of shareholders.  Among other recommendations, the authors suggest allowing shareholders to call an Extraordinary General Meeting in which a majority of those voting may remove directors.  It’s a practice allowed in the United Kingdom and other countries, but difficult to imagine being implemented in the U.S.

Despite the horror stories they report, in their final analysis Gillespie and Zweig seem reasonably optimistic about the future. “Boards can play the single most effective role in advancing the future opportunities and prosperity of our families, our communities, and our country,” they write. “If we expect and demand more of them, they will rise to that challenge and answer that call.”

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