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The
Enron debacle has made board members of most companies wary. They
now fear the risk of damaging their reputation and becoming the
target of a shareholder suit, reports Carol Hymowitz
Landing
a directorship at a powerful public company is an impressive accomplishment.
Outside board members earn hefty cash and equity awards, and get
to rub shoulders with other successful and prominent people.
Often,
it is the relationships among board members that attract new members.
Many join boards “for the networks they can build and the learning
they can bring back to their own companies,” says Russell Reynolds,
chairman and chief executive officer of the Directorship Search
Group in Greenwich, US.
The
scandal at Enron, however, is forcing directors to switch their
focus from how boards might serve them to how they must serve shareholders.
Anyone considering taking a seat now must ask themselves whether
they are up to a serious task—and will be accountable if things
go awry.
“Directors
at a lot of companies are spooked, and are asking themselves if
they really know the business of the company whose board they sit
on,” says Reynolds. For every individual who currently accepts
a directorship at a major company, five turn it down, says Dennis
Carey, vice chairman of Spencer Stuart, Chicago, who recruits directors.
The main reason: lack of time. “Chief executives make the best
directors because they know business and how to deal strategically,
but many are ‘boarded up’ or have date conflicts or have
been told by
their own board not to spend time away from their company,”
he says.
Now
add to that list the growing fears about the risk of damaging one’s
reputation and becoming the target of a shareholder suit.
Recently,
Peter G Peterson, chairman of Blackstone Group, a private investment
bank in New York, resigned from the board of ImClone, a biotechnology
company whose stock price plummeted after the FDA rejected its
cancer-drug
application. ImClone now faces inquiries by the Securities and Exchange
Commission and the Justice Department, as well as a congressional
investigation and a rash of shareholder suits over whether it misled
investors about prospects for the drug.
Peterson
served on ImClone’s board for just three months. While he declined
to comment on his reasons for resigning, it’s clear that ImClone
directors are being heavily scrutinised.
Enron’s
board contends it was kept in the dark by management and by Arthur
Andersen—Enron’s longtime auditors until dismissed recently—and
didn’t learn about the company’s troublesome accounting
until October. But according to a report by outside attorneys, directors
on at least two occasions waived Enron’s ethical code of conduct
to approve partnerships between Enron and its chief financial officer.
Those partnerships kept significant debt off Enron’s books
and masked actual company finances.
The
board approved the partnerships and apparently didn’t question
their use, says Roger Raber, president and chief executive officer
of the National Association of Corporate Directors. Nor, apparently,
did it invite proposals from other auditors who might have served
Enron better than Andersen.
Directors
who serve on a board’s audit committee are expected to do that
every three to five years, Raber says. “When the board approved
these partnerships, it imposed on the management a whole series
of controls,” says W Neil Eggleston, counsel for Enron’s
outside directors and a partner at Howrey Simon Arnold & White,
Washington.
It
takes persistence and boldness to seek explanations at board meetings.
“I ask dumb questions, which are the questions I think we should
ask,” says a director of three Fortune 1000 companies who didn’t
want to be named. Once, she said, she was presented with financial
material she didn’t understand and felt uncomfortable about.
“I didn’t think enough analysis had been done on the numbers.
I said ‘I can’t vote on this,’ “ she says.
As
a result, “I think some people see me as scrappy or difficult,”
she adds. Busy directors often want to get through board meetings
as quickly as possible and discourage discussion.
In
the post-Enron environment, however, “there is a new mantra
on boards to ask, ask, ask,” she says. This will require directors
willing to spend more time at meetings and on preparing for them.
It also will require companies to select directors who don’t
already serve on so many other boards that they won’t have
the time to adequately monitor management. More than famous personalities,
companies need directors “who are competent to ask financial
and business questions,” says Raber.
More
attention also must be paid to a board’s independence to avoid
the conflict-of-interest questions surrounding several Enron directors.
Enron director John Wakeham, for example, a member of the British
House of Lords, also served as a paid consultant to Enron. Other
directors were employed at nonprofit organisations that received
charitable donations from Enron.
Directors
have to hold themselves accountable and not just do what the chief
executive officer wants, says Reynolds. “There’s a difference
between being a self-righteous jerk who questions everything,”
he says, “and having the intelligence and integrity to stop
the music when it gets too loud.”
—-www.careerjournal.com
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