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Dubious Distinctions in Corporate Governance

Dubious Distinctions in Corporate Governance

Unfortunately, Enron was just the tip of the iceberg in the train wreck of corporate scandals that have devastated shareholders, employees and communities across America. “Best Practices in Corporate Governance” (the best ways to run a corporation) were apparently ignored, abused or eviscerated in favor of greed, fraud and corruption.

If any board members or officers at Enron, WorldCom, Global Crossing, Tyco, Adelphia Communications, or any other companies are convicted of crimes, I only hope they are not put in jail. Rather, I hope they are put under the jail, because that’s where they belong.

But are the vast majority of board members and officers in corporate America (i.e., those who are honest) following the “Best Practices in Corporate Governance?” Some certainly are not, even if these directors and officers are well intentioned and experienced. As proof, I present the “Ostrich Awards for Dubious Distinctions in Corporate Governance” (named after the bird that is known for sticking its head in the ground).

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And the winners are:

“You Gotta Have Friends” Ostrich:

Winner: Jeff Rodek, Chairman/CEO of Solutions Corp. in Sunnyvale.

Dubious distinction: Mr. Rodek says that to fill (board) openings previously, he would just “go to my Rolodex and call up my friends.” That appeared in the Wall Street Journal Aug. 9.

Best practice: The nominating committee of the board of directors should be finding directors, not the CEO. Friends of the CEO should not be board members since they are less likely to control the CEO.

Domination

“Dominator” Ostrich:

Winner: Board of Coolbrands International of Toronto , $150 million (annual sales) , maker of Chipwich ice cream bars.

Dubious distinction: “Management’s near total domination of the board is a real issue.” Five of six board members are either management or management’s family. That appeared in the New York Times Sept. 15, 2002

Best practice: Majority of board members should be independent , that is, not management, family, friends, consultants or suppliers.

See No Evil, Hear No Evil

‘What Me, Worry?’ Ostrich:

Winner: Chairman/CEO of a local Nasdaq-listed company

Dubious distinction: Chairman/CEO states: “The board doesn’t need to know anything about IT security.”

Best practice: The board must oversee every area of the company. Therefore, it must guarantee that controls, systems and procedures are established for each area, from information technology security to finance, and from sales and marketing to intellectual property, and everything in between.

Above It All

‘Holier Than Thou’ Ostrich:

Winner: Fannie Mae, the nation’s largest source of financing for home mortgages, and the nation’s third-largest corporation (in terms of assets).

Dubious distinction: “Even though its shares are publicly traded on NYSE since 1970, Fannie Mae had for years successfully argued that it did not need to file financial statements and its executives’ insider transactions with the SEC. It finally bowed to pressure from investors who want to be able to fathom the company’s financials and will begin making these filing in 2003,” , New York Times, Sept. 29, 2002.

Best practice: A company should make full disclosures and be “transparent” to its shareholders.

But why do even well-intentioned and experienced directors not follow “Best practices in corporate governance?” Simply put, they don’t know their jobs, but think they do, which makes matters even worse. The culprit? The “twin evils” of arrogance and ignorance.

In other words, never attribute to malice what can be adequately explained by arrogance or ignorance.

The Myths Of Leadership

The “Qualification Myth” exemplifies the arrogance of directors. There is a prevalent myth historically and today that just because a director is or has been a successful CEO or has prior board experience, that the director is automatically qualified. Nothing could be further from the truth.

Successful CEOs may be unqualified as directors because they may empathize too much with the CEO, have a jaundiced view of boards, or get too involved in the details of day-to-day operations. Also, prior board experience may mean that directors have learned bad habits that may have to be “un-learned” to be a good director.

The “Mushroom Board” exemplifies the ignorance of directors. Some CEOs want their boards to remain ignorant , that is, left in the dark like a mushroom , without ever seeing the light of knowledge that could cause the board to exercise their omnipotent power over the company and the CEO.

In short, CEOs don’t want their boards to know how powerful they are because that knowledge will most likely result in more control of the CEO.

The Need For Continuing Education

Director education should ensure that boards follow the “best practices in corporate governance” in all companies, large or small, public or private. A board member faces an extremely difficult job and risks personal liability as a director.

Any director that thinks he or she “knows it all” or couldn’t benefit from continuing education, shouldn’t be a director. It’s that simple. There is no way that any director can keep up with the changes in the law and best practices without continuing education.

For accountants, doctors, and lawyers, continuing education is required to keep practicing their profession. Why should directors be any different? After all, directors must be professionals because the buck stops in the boardroom. The board is the first and best line of defense against corporate mismanagement and fraud. Therefore, directors must blame themselves for failing to follow the “best practices in corporate governance” and quit trying to pass the buck to management, accountants, auditors, plaintiffs’ attorneys, the SEC, stock analysts, media or shareholders.

Not only should director education result in a more effective board, a more profitable company, and less risk of lawsuits from shareholders and employees, but it should also begin to restore the confidence of shareholders, employees and communities in corporate America.

Gordon, an attorney specializing in corporate law, heads up the general counsel solutions group at the law firm of Klinedinst, Fliehman & McKillop.

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