With the tragic news that there were no survivors of the explosion at the Massey Energy coal mine in Montcoal, West Virginia, and all 29 miners were lost, attention will soon turn to the causes of the disaster. The company’s board of directors should not be permitted to escape scrutiny in that regard or to invoke an implausible claim, like the Lehman Brothers board did, that it had no idea what was really happening in the company. Indeed, there were plenty of red flags to alert Massey’s board to the point where it may well be in possession of information that could prove vital for regulators and investigators.
Over the years, Massey has developed a reputation as something of a serial safety violator in the mining industry. More than 800 citations, many involving gas and ventilation, have been issued against the company since 2008 alone. These are the kind of matters which the board’s committee on safety issues is required to take note of and to act upon.
The committee is composed of seven independent directors. Company filings claim that its purpose is to:
“review and make recommendations regarding safety, environmental, political, and social trends and issues as they may affect our operations and the operations of our subsidiaries,” among other things.
This is not an incidental committee for the board. Seven of nine directors sit on the committee. The unusually high number of directors suggests that the board has consciously decided to give serious attention to safety concerns. How it manifested its purported concern is a question the families of many victims will be asking.
The committee is also required on a quarterly basis to make a report to the full board regarding the company’s compliance with “worker safety and environmental compliance, rules, regulations and goals.”
There will be considerable interest in these reports. They will give a clue as to how the company viewed the safety issues that made their way into the Massey boardroom and what, if anything, company management and directors might have done to prevent the Upper Big Branch site from becoming the worst mining tragedy in more than 40 years.
More than 20 hours since the horrific explosion that killed 25 and has left others missing at the Massey Energy mine in Montcoal, West Virginia, the company’s web site still shows a photo of a smiling vice president of safety and training, and boasts that 2009 was another “record setting year for safety.” It is amazing that a company listed on the NYSE with sales last year of more than $2 billion does not understand that a web site needs to be a tool to quickly and accurately inform during times of crisis, not a device that seems hideously disconnected from reality. This does a terrible disservice to the families affected. Unbelievably, many still have not been contacted by the company and are not being kept aware of developments on any systematic basis. If there is one lesson gained from previous mining disasters, it is that family members of victims should not just be left to figure things out on their own.
So far, the company has issued only written statements and has not been available to reporters, according to CNN. It will be interesting to see whether Don L. Blankenship, the company CEO who also holds the positions of president and board chairman, comes forward to face the media and what will become apparent in the culture and governance of the company that might have contributed to the deadliest mining disaster in a quarter-century. We know one thing about the board so far: none of the eight independent directors could have bothered to look at how Massey is handling the crisis in its online presence or, if they have, they don’t understand anything about the nature of a crisis. The unease of investors in that connection is also being registered in the stock price, which is down nearly ten percent in morning trading.
Update: April 9, 2010
Massey Energy has finally updated the home page of its web site to remove the inapproprate graphics and text noted above. It is unfortunate that such a large organization took so long to show the sensitivity that should have been evident at the outset of the tragedy.
It would be foolish to conclude that Apple’s glowing status today is due in part to its anomalous boardroom style, or that there will never be a time when its directors will need to be fully engaged to deal with a real crisis. They are ill-prepared for that eventuality.
The Wall Street Journal had an unusual piece on Apple’s corporate governance the other day. We use the term “unusual” because there has not been much mainstream analysis of the board structure of the company that has been on such a winning streak. That needs to change. The Journal’s article was prompted by the death of Jerome York, an independent director who served on Apple’s board and headed its audit committee. What was previously a tiny board is now down to a mere six members, including CEO Steve Jobs. No company anywhere near Apple’s market cap has such a bizarre board regime, or so few directors who spend less time in the boardroom. We raised some of these issues in 2006.
In 2009, the board met on only four occasions, as did most of its committees. That is two or three times less often than at most other major companies. You might have seen that kind of leisurely approach to corporate governance in the 1950s. It’s not what you expect for one of the world’s most valued companies in the 21st century.
Then there is the strange case of who chairs the board. We assume Steve Jobs fills that role, too, but the function is not listed among his duties or job description in proxy filings. Apple is the only company we have encountered in more than 30 years of studying corporate governance that keeps shareholders in the dark about who actually chairs the board. Best corporate governance practices have long called for separation of the posts of CEO and board chairman, with the latter slot being filled by an independent director. This is an important principle in any listed company but it is even more critical in a case like Apple’s where so much investor focus and corporate power is centered on Mr. Jobs. While Mr. Jobs is widely viewed as being pivotal to the company, the board has a duty to mitigate that exposure by at least providing some couterweight among independent directors. It also needs to show investors that Apple’s directors are not entirely mesmerized by Mr. Jobs and can think independently about the best long-term interests of the company.
Perhaps the board thinks it is making up for this weakness by having two co-lead directors. But this only deepens the mystery of Apple’s governance. We have likened the role of lead director before to that of the first runner-up in the Miss America pageant. It really doesn’t have much clout alongside a CEO who is also chairman of the board, especially since both Andrea Jung (chairman and CEO of Avon Products) and Dr. Arthur D. Levinson (chairman of Genentech) also have substantial governance obligations with major corporations and public institutions. Having two lead directors is ridiculous. You might as well appoint every one of the five independent directors co-leads and be done with it.
The stock option deal enjoyed by Apple’s non-employee directors is also troubling. They should not be on the same track as management. Nor should their stakes be such that they might be perceived to have an interest in holding back bad news or be unwilling to take on management because it will affect their bank accounts. Compensation for Apple’s five independent directors in 2009 ranged from $436,372 for Albert Gore Jr. to $1,004,224 for Mr. York. Most major boards realize that director stock options are a no-no.
It would be foolish to conclude that Apple’s glowing status today is due in part to its anomalous boardroom style, or that there will never be a time when its directors will need to be fully engaged to deal with a real crisis. How would the board act on such an occasion? The stock options backdating fiasco Apple faced some years ago and, later, the confused and conflicting blunders about Steve Jobs’s health problems were two large red flags that signaled major changes were needed in Apple’s boardroom. Unfortunately, its directors appear to be waiting for anther disaster before they climb out of their 1950s sleeping car and into the 21st century.
It is one thing for Apple’s shareholders to be afflicted by the illusion of invincibility that surrounds the company at this uniquely successful but arguably impermanent point in its history. It is quite another for its directors themselves to succumb to that vice.
The court-appointed Examiner chose to continue the same lackadaisical approach to directorial performance and accountability in his search for answers as the directors themselves evidenced in their drowsy drift toward disaster.
A little noted statement in the report of the court-appointed Examiner in the Lehman Brothers bankruptcy reveals the extent of the deference displayed to the company’s former directors.
The Examiner admits in his report that he provided witnesses “advance notice” of the topics he intended to cover and that he allowed them to make use of notes and written statements before the interviews in order to “refresh recollection.” No doubt these were prepared with the assistance of legal counsel, whom the Examiner confirms represented interviewees in the “vast majority” of cases. Significantly, the Examiner chose not to conduct his examinations under oath, and, if that’s not astonishing enough, no transcripts were ever recorded. The Examiner preferred an “informal” approach over the formal depositions available to him.
This is how the largest bankruptcy in history conducted its search for information and how Lehman’s directors, who presided over the downfall, were allowed to take part in what amounted to a quest for the truth with all the rigor and intensity of a marshmallow roast – – without the fire.
We have long maintained that directors are among the most pampered class in the business world, accorded by society, the media, investors and the courts a level of deference and respect that has few parallels. Time and again, it is this approach that has permitted directors to take shelter in the harbor of the disengaged and uninformed, giving rise to the appearance of men and women who, having been lauded in press reports and company statements just days or hours before as experienced and exceptionally accomplished, suddenly adopt the demeanor of amiable dunces in their hapless efforts to explain what happened and why. This is what occurred in Enron’s collapse and before the fall of the Penn Central Railroad. The spectacle of Hollinger’s confused directors at Conrad Black’s criminal fraud trial in 2007, where board members appeared challenged even in reading important documents, will also be recalled among astute boardroom watchers.
As we noted well before the company’s demise, and repeated here, Lehman’s feeble approach to corporate governance was well established by its board and the structure and membership it adopted. It was, in our view, a significant and inevitable contributor to that downfall. It is an outrage that the Examiner chose to continue the same lackadaisical approach to directorial performance and accountability in his search for answers as the directors themselves evidenced in their drowsy drift toward disaster.
Once again, an inept board escapes culpability through a Houdini-like contrivance called the business judgment rule, one of the most anti-shareholder and destructive of legal principles ever to emerge in modern times.
Lehman Brothers made a brief return in the news today, just long enough to fall into another abyss of folly and misjudgment that will leave its former shareholders and the investing public shaking their disbelieving heads. The appearance of the once-fabled but now bankrupt firm comes in the form of a report by the court-appointed examiner. As The New York Times notes today:
The directors of Lehman did not breach their fiduciary duties in overseeing the firm as it acquired toxic mortgage assets that eventually sank the firm, a court-appointed examiner wrote in a lengthy report published Thursday.
The report, by Anton R. Valukas of the law firm Jenner & Block, found that while Lehman’s directors should have exercised greater caution, they did not cross the line into “gross negligence.” He instead writes: “Lehman was more the consequence than the cause of a deteriorating economic climate.”
Here’s what Mr. Valukas wrote on the Lehman board’s conduct:
The examiner concludes that the conduct of Lehman’s officers, while subject to question in retrospect, falls within the business judgment rule and does not give rise to colorable claims. The examiner concludes that Lehman’s directors did not breach their duty to monitor Lehman’s risks.
We rather strongly disagree. As we pointed out months before the collapse of the company, Lehman Brothers was a poster child for how not to run a board. On the Lehman boardroom stage there was but one speaking part, that of CEO Richard Fuld. He also served as board chairman, as well as chairman of the powerful two-man executive committee. The only other member was 81-year-old John D. Macomber. The executive committee met 16 times in 2007, more often than the board itself or any other committee. Lehman’s finance and risk committee was headed by 80-year-old Henry Kaufman. It met on only two occasions during 2007 — the very time that Lehman’s destructive risk, debt and CDO time bomb was ticking away.
Five of Lehman’s directors were over 70. Most were hand-picked by Mr. Fuld. Many had no previous connection at all with Wall Street. The 83-year-old actress Dina Merrill was a member of Lehman’s board and its compensation committee for 18 years until 2007. And we know that Mr. Fuld was compensated exceedingly well, to the tune of some $354 million between 2002 and 2007 alone. Somehow it seems poetically symbolic for the kind of board Lehman was that Ms. Merrill (about whose acting career we were early young fans) should have appeared on What’s My Line? and starred in such movies as A Nice Little Bank that Should Be Robbed and, a perennial favourite of many corporate directors, Catch Me if You Can (original 1959 version).
You can read more about Lehman’s antiquated and dysfunctional board here.
Once again, an inept board escapes culpability through a Houdini-like contrivance called the business judgment rule. In our view, this doctrine has been shown time and again to be one of the most anti-shareholder and destructive of legal principles ever to emerge in modern times. Talk about the need to stand up for capitalism. There is no greater form of boardroom socialism than the business judgment rule. Time and again, those who otherwise claim to have the intelligence and experience to govern giant corporations, and are paid handsomely for the privilege, suddenly appear to have been deaf, dumb and blind in the face of the disaster that was approaching. They say they should not be held to account. They claim they didn’t know what was really happening. They stress that they tried their best. Sorry things didn’t work out. Could they have a note from the court now so the besieged directors could go home early?
Lehman’s directors even managed to get away with this spiel at a time when the world was reeling from the unraveling of credit markets, when subprime mortgages and derivatives were sending off toxic alarms everywhere and when generally accepted standards of sound governance strongly signalled that the Lehman board was a train wreck just waiting to happen.
Fortunately, the judgment rule has few parallels that protect other professionals in a similar fashion, or society would be in an even more frantic state than it is today. Unsurprisingly, this rule takes its origins from a time when the courts felt it only proper to defer to men of means and that nothing too arduous should be permitted to interfere with their avocational diversions.
Under this doctrine, you have to wonder, if Clarabell the Clown and the Marx Brothers had been kibitzing about while serving on the board of Lehman Brothers in the years before its collapse, would the examiner’s report have been any different?
On second thought, you don’t have to wonder. You have your answer.
Regulators and the investing public need to demand that boards of directors be placed on the front line of accountability and not be allowed to slip away from scrutiny like some escape artist in a circus act.
The SEC’s settlement with Bank of America, still to be approved by the court, raises another question beyond the shell game contrived to give the impression – entirely misleading in our view – of a fair financial settlement for shareholders. Our thoughts on the $150 million “penalty” were set out here.
The boards of both Bank of America and Merrill Lynch appeared to escape the scrutiny of regulators, as well. While some 25 management personnel and in-house lawyers were deposed by the SEC, no independent director of either company underwent such questioning. Though a great deal of attention was focused on emails to and from legal counsel and management, there is no evidence of any effort to look into what the board was thinking when it came to its role in the merger or in related compensation and disclosure issues.
The settlement makes reference to some rather cosmetic changes in respect of the compensation committee. One bars members from accepting “consulting, advisory or other compensatory fees from the Bank…other than routine compensation for serving as a Board member.” But the Commission has offered no evidence that any compensation committee director at Bank of America was receiving anything beyond normal compensation. In any event, the idea that such ancillary compensation might have played a role in compromising the independent judgment of compensation committee members has no antecedent in any of the SEC’s supporting documentation. It has, instead, the appearance of being included as a part of the settlement to make it look like something meaningful was done.
Finally, the settlement requires the Bank’s CEO and CFO to certify proxy statements along the lines set out under the Sarbanes-Oxley Act for quarterly and annual financial statements. But there is no requirement that any independent director, like the chairman of the board or the chairman of the audit committee, has to certify anything along SOX standards. This has always been a flaw in the existing SOX legislation from our perspective. It is one that could have been addressed in the settlement, as the certification process is intended to concentrate the mind of key shareholder guardians in a way that ensures that they have done their due diligence.
It is astounding that in the recent succession of corporate disasters of Depression-era proportions – which many feared would lead to a return of Depression-era misery – the SEC has not been moved to conduct a sweeping review of the generic failings of the board of directors. The often expressed discovery that it was the last to know of the problems, and that it had no idea what was really happening around it, is a common refrain on such occasions, as we remarked some years ago to the U.S. Senate Banking Committee when it was considering legislation in response to the Enron et al. debacle, and as we repeated in an appearance before Canada’s Senate equivalent later. It does not assist in investor confidence or society’s faith in its giant institutions of capitalism that boards either view themselves, or are viewed by regulators, as the junior partners in corporate performance and outcomes, as if they were some 1950s suburban housewife who by custom and design tended to be sheltered from having any knowledge of or responsibility for the business affairs of the household.
Time and again, in one corporate calamity after another, the question has been posed: Where was the board? If the world’s top securities regulator is not prepared to dig deeper to find out the answer, if it is unwilling to hold directors’ feet to the fire during major enforcement investigations like the one involving Bank of America, that question will persist like a great mystery. But as the world has been painfully reminded on too many occasions, boards have a role beyond being viewed as a riddle or the perennial focus of ridicule.
They are the governing authority elected by company owners to operate in their interests and according to the customs and standards of society. They are generally paid handsomely to perform their tasks, and when they fail, the consequences, in personal and financial terms, have been devastating. The only option, therefore, is for regulators and the investing public to demand that boards be placed on the front line of accountability and not be allowed to slip away from scrutiny like some escape artist in a circus act.
