Sound governance is not some abstract ideal or utopian pipe dream. Nor does it occur by accident or through sudden outbreaks of altruism. It happens when leaders lead with integrity, when directors actually direct and when stakeholders demand the highest level of ethics and accountability. ~ J. Richard Finlay in testimony before the Standing Committee on Banking, Commerce and the Economy, Senate of Canada.
Once again, a whirlwind is about to separate American homeowners from their homes. While the devastation of Hurricane Katrina was an act of nature, the disaster involving subprime lending was entirely man-made. (more…)
They’re at it again. They have opposed every progressive move society has widely demanded, from the minimum wage to the first environmental regulations. They lobbied against car safety laws in the 60s and consumer protection legislation in the 70s. They had nothing at all to say as corporate greed and boardroom crime were claiming company after company beginning with Enron (and continuing today with Hollinger) and then dismissed it all as being nothing more than a few rotten apples in the barrel. Some apples; some barrel, as Sir Winston might have said. (more…)
Get this man a new pair of glasses! Former Fed chairman Alan Greenspan says he didn’t see a need for most of the 2002 Sarbanes-Oxley legislation and “argued that the business scandals that prompted the law didn’t suggest a massive breakdown in corporate governance,” according to the Wall Street Journal.
The remarks were made at a Treasury-sponsored conference on capital markets regulation in Washington this week, the translation of which is a collection of CEOs and Bush administration officials who are trying to figure out how to roll back laws that are forcing CEOs and directors to do their jobs properly or face serious consequences. We dealt with the first volley in that campaign here.
As chairman of the Fed, Dr. Greenspan made a career of talking in guarded terms and convoluted sentences few really understood. That made him brilliant in the eyes of many. Now, as a much in demand $100,000 a pop speaker to prominent companies and business groups, he has finally found a virtue in plain speaking, and is calling in remarkably unequivocal terms for less regulation. Regulation for which he claims he saw no need.
If we are to take Dr. Greenspan at his word, during the time he headed the Fed he didn’t see the need for changes in governance when huge corporate icons were crashing down about him and taking the stock market with them. He didn’t see the need for codes of ethics that would have protected whistleblowers who tried to prevent Enrons from occurring. He didn’t see anything wrong with the hundreds of millions in loans boards were doling out to CEOs that were never repaid. He didn’t see anything wrong with audit committees that were meeting less frequently than compensation committees while permitting huge liabilities in “off book” arrangements. He wasn’t bothered by auditors who were making all kinds of fees from non-accounting jobs and were more interested in pleasing management than reporting on the true health of the books. He didn’t see a problem with paying CEOs hundreds of millions in stock options without expensing them on the company’s balance sheets.
What else can’t this man see? How about the 200 or so companies who have admitted to backdating stock options so that top management could line its pockets even more. Is that a good testimonial to strong internal controls and vigilant boards at those companies, which include Apple, Research In Motion and Home Depot? How about all the boards today that are demanding more pay because they say the boardroom is not the cozy club it used to be? What were they really doing when Dr. Greenspan could not see any need for change. The consensus of many, including influential committees of the House of Representatives and Senate, is not nearly enough.
Seldom have the capital markets been more shaken than they were by the collapsing corporate dominos that prompted the Sarbanes-Oxley Act –legislation Dr. Greenspan doesn’t see as being necessary. Common to all of these disasters, and to so many that preceded them, was the Typhoid Mary of corporate governance that left company after company with an affliction manifested by palpitating CEO pay, apparent unconsciousness on the part of directors as to what was happening about them, a pronounced inability on the part of auditors to count accurately and a detachment from reality among CEOs often characterized by an abundance of personal jets and decadent parties.
Never in the history of modern American business have so many at the top engaged in such egregious displays of criminal wrongdoing and fraud, and others in outright acts of negligence, leading to such a magnitude of losses in stock value, regulatory penalties and shareholder lawsuits as in the period leading up to and immediately following the passage of the Sarbanes-Oxley Act of 2002. Billions were paid out by Citigroup, CIBC, AIG Insurance and Marsh & McLennan alone to settle litigation brought by outraged regulators and aggrieved investors. And the cost of that era grows almost daily. Just this week, the SEC announced that Bank of America will pay $26 million to settle charges that it issued fraudulent research on a number of companies, including Intel. If the great tsunami of fines, payments, trials and prison arrivals by ex CEOs witnessed day after day by Americans and investors around the world during this period was not indicative of a “massive breakdown in corporate governance” –which Dr. Greenspan never saw– I’d like to hear nominations for that category.
Want to make American capital markets more competitive? A race to the bottom of weaker regulation or looser boardroom rules is not the answer. Scandals do not attract investor confidence; laws that set and enforce standards of integrity and openness in the markets and in corporate conduct, when voluntary efforts have failed, do. This was recognized in another era by American lawmakers who passed their equivalent of Sarbanes-Oxley legislation —it was actually much more revolutionary— which was aimed squarely at directors and CEOs. As the report of the House committee on Interstate and Foreign Commerce that accompanied passage of the Federal Securities Act of 1934 stated: “If it be said that the imposition of such responsibilities upon these persons will be to alter corporate organization and corporate practice in this country, such a result is only what your committee expects.” Some CEOs, directors and their spiritual advisors from Wall Street now complain that Sarbanes-Oxley is actually disturbing the status quo in the boardroom. Do you think? Maybe that’s the idea.
No, the answer to Dr. Greenspan & company’s concerns about American competiveness lie in a different direction. A global market that is becoming increasingly volatile and upon which so many depend for their livelihoods, their prosperity and very often their dreams, requires new rules for the road —not a free-for-all. In this complex environment that has too often in recent years experienced the consequences of those who play only by their own rules and tend to forget the trust from others they hold, a premium will flow to where the regulatory structure and corporate governance regime demand and produce transparency, integrity and ethics. Companies and markets that become synonymous with those values will enjoy a competitive edge. Those that do not will suffer. That’s the reality behind Sarbanes-Oxley legislation and other efforts to empower investors and bring common sense to the boardroom.
What’s not to see?
Scandals are real time drainers. Last week, it was the stock options backdating mess at RIM. This week, and it’s only Monday, I’ve spent a lot of time answering press inquiries about the SEC’s charges against Nortel announced this morning. And I’m actually on vacation.
The Centre for Corporate & Public Governance has a statement on its website about the charges —late in coming for thousands of aggrieved shareholders and employees who have lost their jobs, to be sure. But the prospect of a process that will get to the truth about this unfortunate saga and perhaps bring its perpetrators to justice is no less welcome.
I find the OSC’s piggybacking on the SEC’s allegations of accounting fraud to be rather amusing. Canada’s regulators routinely show themselves to be bit players in the North American capital markets. They had a chance to change that with Nortel —a Canadian headquartered and founded company. They left the heavy lifting to their American cousins instead.
I’ll have more to say about this developing story later in the week.
Chinese stocks are taking quite a tumble today. There appears to be no official or definitive explanation as to why. Getting to why in China is never easy, especially when it comes to business. Rampant corruption and lack of transparency make truth and accuracy elusive commodities in that country. The poor corporate governance practices that have been ignored by many analysts and accepted by most investors in return for soaring numbers will not assist in stabilizing flagging market confidence as the gains shift in reverse. Many investors will now begin to ask how much they really know about China and its companies. Others will conclude that the lure of short-term gains is not worth the risk of dealing in a financial market that undervalues western practices of truthfulness, transparency and disclosure. A regime that places little value on human rights, after all, is unlikely to care too much about investor rights.
I have for some time suspected that these conditions, along with widespread corruption in China, were creating a serious distortion in that country’s true financial picture and that recent stock gains may well be, in part at least, the result of heavily jiggered figures. Any hint of a government crackdown or effort to bring genuine transparency to the market might well reveal China’s own Enron equivalents, and on a much larger scale. Most of China’s corporate economy and publicly traded companies are owned and controlled by the state. Many investors appear to have forgotten that this is a communist regime where accountability and openness are observed as the exception rather than the rule. Proper disclosure, meaningful certification of financial results and insider trading laws don’t exist in the Chinese markets for all practical purposes. Their absence may not be forgiven very long by western investors if a major slide is in the works and there is a contagion influence upon North American and European markets.
China is not a country whose capital markets infrastructure, regulatory apparatus, securities law enforcement or corporate governance practices were ever prepared for the huge run up in valuations that has taken place in the past 20 months or so. It certainly won’t be eqipped to deal with that other —and often forgotten by investors— part of Newton’s first law of physics.
Few companies have become so emblematic of the continuing affliction of self-aggrandizing CEOs and slumbering boards. Bob Nardelli, who by several accounts has already been compensated to the tune of $245 million during his five year tenure as CEO, will now receive a further $210 million. Just for leaving. All that was missing from Mr. Nardelli’s departure was the accompaniment of the June Taylor dancers and Jackie Gleason shouting and away we go!
Anyone viewing Mr. Nardelli’s despotic performance at the last annual meeting –an annual meeting at which not a single director other than Nardelli showed up– could have little doubt that this was a board, and a CEO, who had forgotten to whom and for what they are accountable. Mr. Nardelli’s exit addresses only part of the problem with this company. The directors who awarded these princely sums in the first place for a strategy that did not work, who lost the confidence of the investing public, and who then had to pay out more than $200 million dollars again to get out of the mess, need to bear ultimate responsibility.
This is a board that seems to reflect little of the real world around it and appears more content indulging in its own cozy emoluments. Each director is paid a handsome retainer of $130,000 annually. Then there are the additional payments for members and chairs of committees. But that’s not enough. On top of the retainer, directors at this company need another incentive just to show up. Accordingly, and with the generosity that is only evident when dispensing other people’s money, these directors award themselves a further $2,000 for each meeting they attend. Perhaps this helps to explain a boardroom culture that is prepared to pay a CEO millions to take on the job but feels it has to offer tens of millions more annually for him to actually show up and do something.
Board members also participate in a stock option plan, the kind of plan IBM recently eliminated for directors because the company finally recognized that they are incompatible with modern governance principles. Stock options have become something of a curse for this board. First, there is the way they were used to boost Mr. Nardelli’s compensation package. Second, there is the astonishing fact, brought to light last December, that stock option dates had been manipulated routinely over the past 19 years in order to obtain greater advantage for those exercising them. Two years’ backdating might be chalked up to bad judgment –not an inconsequential vice, by any means, but one that nevertheless occurs in corporate America and elsewhere. And there may well be consequences for those involved. But two decades of backdating can only be viewed as the product of a corporate culture of willful deception and lack of accountability. In that, the entire governance structure of a company must be viewed as suspect. One heretofore overlooked fact is that, of the company’s 10 independent directors, five were on the board during the period of options backdating, which apparently lasted until 2001. Two sat on the board even before the backdating of options began in 1981.
There are those, of course, who wonder why such a big deal is made about any CEO pay package. They can’t be spending much time in or near the organizations whose employees see such a growing disconnect between the standards set for a privileged few by the board and those imposed upon workers on the floor. They don’t think about factors like morale, or fairness or leadership that eludes respect and the extent to which these affect the performance, growth and, ultimately, the earnings of a company. And I don’t suppose the defenders of Nardelli’s pay even give a second thought to the significance of the fact that the company he led continues to be at the bottom in terms of customer service, and far below its nearest competitor, Lowes, or that it seems to have developed a unique capacity to alienate customers as any quick sampling of opinions on the Internet will reveal. Others still are not particularly bothered by options backdating, viewing it as an innocent mistake. Funny that they always inure to the benefit of some other party, usually the party making these so-called mistakes.
All these things diminish respect for capitalism, which, from my perspective of some thirty years of first-hand involvement in it, is an economic system that needs its guardians of principle and champions of responsibility as much as it needs its hedge fund managers and free enterprise tycoons. The surest way to bring about the overreach and inefficiencies of government intervention is for the laissez-faire advocates of business to continue to cling to the increasingly discredited notion that no amount is too much to pay a CEO. The consequences of the erosion of confidence in capitalism and esteem for its leaders are too important to be left to such short-sighted thinking or to dysfunctional boards –which brings us back to Mr. Nardelli and the board of directors, for it is this board that is the fundamental cause of the company’s difficulties.
Composed mainly of past and current CEOs, boards have had a vested interest in perpetuating a flawed compensation system that has been very good to them. This is a board that boasts of its independence from management –so independent it acceded to Mr. Nardelli’s instructions that no director appear at the last annual meeting. But the most obvious qualification for these directors seems to be that they be connected to each other by way of friendship and past company experiences. I will be exploring this further in a future piece.
For its Annual 2006 year end awards, Finlay ON Governance inaugurated what it called the Home Despot Award for the board and CEO who displayed uncommon obliviousness to the growing discontent of shareholders and customers. The winner of that award demonstrated its blindness to reality by overly compensating an autocratic CEO who had lost the confidence of many stakeholders and alienated other key constituencies, and continued to do so again when it rewarded an exiting Bob Nardelli with more than $210 million for that privilege. These are just a few of the many reasons why the actions of Home Depot’s board are the Outrage of the Week.