The subtitle of Money for
Nothing![]()
lets
you know what's coming: How the Failure of Corporate Boards Is Ruining American
Business and Costing Us Trillions![]()
. If
you've had your pitchfork and torch at the ready for a march on corporate
malfeasance, then this is the book for you.
John Gillespie and David Zweig spend the first half of the book bashing on the
easy targets: Countrywide, Lehman Brothers, Tyco, Fannie Mae, GM, Chesapeake,
and AIG.
The role of the board of
directors
The board of directors of a
corporation is supposed to oversee senior management, approve key strategic
decisions and nominate directors for appointment by shareholders. That part is
the legal framework.
Strong governance would
have the board members contribute their business knowledge and long-term vision
for the company to help guide the executives in running the business
operations. They should be a check on executive power and act as a watchdog for
long-term shareholder value.
For some companies, the
board is merely a tool to lend legitimacy to the fiction that shareholders'
interests are being taken into consideration.
Testing board governance
How do you measure or
identify poor corporate boards? One measuring stick is executive compensation.
It does make sense that an over-compensated CEOs should be an indication that
the board is not willing to stand up to the CEO. That may also lead you to conclude
they are not paying attention to succession, ethics or risk management. The
authors don't reference any studies or empirical evidence that their conclusion
is correction.
Board failure
Clearly shareholders should
want a board of directors that contribute to the leadership of the corporation.
They should not want simple rubber stamps for approving the decisions made by
the CEOs.
A director who speaks out
risks being ignored or being thrown off the board in the next election cycle.
After all, shareholders have little or no input on who gets nominated to be a
director.
Chesapeake
One example in the book is
Chesapeake Energy Corp. They cite the work of Michelle Leder of Footnoted in
digging through the company's filings to discover excessive executive compensation and naming the worst footnote
of 2009. In addition to his excessive salary as the company was
under-performing, the company purchased CEO Aubrey McClendon's antique map
collection for $12.1 million (that was $8 million over its valuation).
Separating CEO and
Chairman
Is it the structure of the
board? One change that makes a lot of sense is splitting the Chairman and CEO
positions. The authors cited a study by Lucian Bebchuk and Jesse Friedin in Pay without Performance![]()
.
Bebchuk and Friedin found that CEO pay is 20% to 40% higher if the CEO is also
Chairman of the Board.
Let the CEO run the company
with the board of directors as the CEO's boss. Let the chairman run the board
of directors. They are different tasks with different needs.
How does excessive CEO
compensation happen?
Zweig and Gillespie mention
one reason when they discuss a conversation they have with Dennis Kozlowski,
the imprisoned former CEO of Tyco. Kozlowski said he thought his
compensation was justified in relation to what hedge fund managers were getting
for creating considerably less value.
The second reason is one I
like to call the Lake Wobegon Effect. It's hard for a board to say that a
CEO is below average without firing him. If you set the pay and compensation to
be below average, then you are making a negative statement. As a result most
CEO pay gets set at the average or above average. That has the effect of moving
the average upward when next year's round of compensation consultants look at
average salaries.
An Economic Policy
Institute study showed that CEO compensation has risen to become about 10% of
all corporate profits. That's nearly double the level it was in the min-1990s.
(See The State of Working
America)
How much does the board
affect performance?
It's easy to attack the
failures of Lehman, Bear Stearns and Merrill Lynch. If you are going to blame
some of the failure on their boards, shouldn't there be some credit given to
the boards of Goldman Sachs and Morgan Stanley? Goldman and Morgan
survived and the others didn't. Perhaps the causation is not as strong at the
authors think.
The authors criticize the
board of Exxon-Mobil. I agree with the criticism. On the other hand, the
company has experience remarkable success as one of the world's biggest
companies.
(I do own stock in Exxon and Goldman.)
The gatekeepers
The authors don't just stop
at the board. They have plenty of harsh words for the auditors, lawyers,
compensation consultants and other professionals hired by boards. These
gatekeepers have a "vested interest in preventing the boat from rocking."
They have a rant worthy of Francine McKenna on auditors:
"Accountants and auditors
in America seem to have spent the last century dodging five major terrors:
regulation, financial liability, legal liability, the imposition of uniform
accounting practices, and offending current and future corporate customers by
making audit rules and processes more rigorous and accurate."
What to do?
For retail investors I
think the answer is very easy. Sell the stock and buy stock in a different
company. Its a bigger issue for institutional investors. Their ownership
interest may be so large that selling their position would bring down the share
price even further resulting in an even bigger loss.
After 200+ pages of
pointing out board failures the authors turn to a chapter full of solutions and
ways to fix boards. If you are a student of corporate governance you're not
going to find anything particularly new or innovative in the author's proposed
solutions.
The real question is how to
get them implemented. As the authors tell throughout the book, it's not in the
short-term interests of the board or senior executives to implement these
changes. It will be up to the exchanges, regulators and big investors.
Thanks
I want to thank the book
publisher for providing a review copy of the book and Jerod Morris of Corporate Compliance Insights
for directing it my way.
To access a link to
purchase Money for Nothing, please see the original post on Compliance Building,
a blog of commentary on and analysis of developments in compliance and ethics
by Doug Cornelius.