Corporate governance gets attention

Good corporate governance pays dividends.

Boise attorney Thomas Chandler says the renewed focus on director oversight of management is not just about curbing the Dennis Kozlowskis and Bernie Ebbers of the world. Installation of informed, active boards translates into higher regard by credit-rating agencies and mutual funds, which helps generate higher returns on investment.

For example, $1 invested in September 1990 in a portfolio of companies with “democratic” boards returned $7.07 by the end of 1999, a 23 percent annual rate of return. That $1 invested in companies with “dictatorial” boards paid $3.39, or an average 14 percent.

“Good corporate governance has demonstrable economic benefits,” says Chandler, who was in Coeur d’Alene Tuesday speaking to a conference of state bank supervisors. Chandler himself is a director of Syringa Bank in Boise, and a member of the National Association of Corporate Directors.

The implosion of WorldCom under former Chief Executive Officer Ebbers and the excesses of Kozlowski while he was the head of Tyco were wake-up calls to the good ol’ boy school of corporate directors, Chandler says. WorldCom directors paid $24.8 million out of their own pockets to settle investor claims against the company. Normally, insurance protects directors from the financial consequences of their own irresponsibility.

Ebbers, in particular, had board members under his thumb. So wrongheaded were director priorities, the compensation committee met 17 times in one year, the audit committee just six hours.

Chandler says other companies may have boards afflicted with one or two domineering members, or boards too anxious to second-guess management, or too satisfied with doing as little as possible.

“There are legal duties, but if you sit down with directors, they don’t know this,” he says, adding that directors should attend classes conducted by the NACD or other organizations, preferably on an ongoing basis. Yet the banking supervisor from one state estimated that only 150 of the 2,000 bank directors in his state had ever taken any classes, he says.

“If you have never gone to any classes, you’re setting yourself up,” Chandler says.

And legal standards are the minimum. The New York Stock Exchange, Nasdaq and industry groups may set the bar still higher. The goal, says Chandler, is meeting best-practice standards, meaning performance compared with mere conformance.

Although increased scrutiny of director actions might suggest a higher level of legal risk to directors, Chandler said such is not the case. All the attention and litigation dedicated to corporate governance has helped clarify director responsibilities. If director recruitment has become more difficult, it’s because many candidates, particularly those already serving on other boards, do not have the time to do the job justice. Executives who might have served on three, four or five boards in the past are limiting themselves to two or three.

Companies benefit when directors can import ideas or practices that work well for other boards, he says.

Chandler says boards must be collegial, not clubby. One of a board’s most difficult tasks may be rejuvenation, which can involve the ouster of members who may have been critical to a company’s success in the past, but have stayed in too long.

“By asking that director to leave, you’re disturbing the culture of the corporation,” he says. Sometimes, he says, holdovers can be convinced to leave in the context of discussions about the company’s future, and the kind of people needed to get it there. Foresight is the hallmark of a good board.

“You don’t fight the last war, you fight the next war,” Chandler says.

He says investors should beware boards that stagger member terms in order to block hostile takeovers. Or those that block shareholder initiatives, or provide “golden parachutes” to executives who might be ousted. At least half the members, and all those responsible for nominating new members, should be corporate outsiders.

Certainly, Spokane investors and workers have reason to suspect boards laden with insiders. Think Metropolitan Mortgage & Securities Co., or Kaiser Aluminum Corp.

Chandler says the term “governance” typically evoked just a questioning glance a few years ago. Now, the response is serious questioning. Maybe not as easy to evaluate as an income statement, but sooner or later governance shows up on the bottom line.

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