Rosters of Corporate Directors Get a Second Look
Finance: Shareholders Demanding More Accountability of Boards
BY MIKE ALLEN
Senior Staff Writer
Those proxy statements shareholders may have tossed out as junk mail are getting more scrutiny in the wake of the Enron meltdown.
Along with closer inspection of the document detailing who sits on the firm’s board, the directors’ affiliations and compensation, shareholder groups are making increasing demands about who the directors are and how they are selected, said Patrick McGurn, a vice president at Institutional Shareholder Services, a Maryland-based corporate adviser.
In a presentation before the Corporate Directors Forum on April 18, McGurn said the makeup of the Enron board of directors “on paper, didn’t look all that bad.”
Yet once the company began unraveling, it was revealed many directors had close ties to the firm’s management, making them less likely to challenge its failed strategy.
McGurn said closer board scrutiny is among the many things that have changed for corporations as a result of Enron.
“When we look back to this period 10 years from now, we’ll see a world that was separated before Enron and after Enron,” he said. “Corporate America will never be quite the same again.”
Case in point is Gateway Inc., which holds its annual shareholders meeting May 16 in Sioux City, Iowa.
One of two shareholder proposals on the ballot of the Poway-based PC maker is to change the “classified system” of electing directors, which only allows for the election of a third of the board each year.
That’s because Gateway directors are elected to staggered, three-year terms, with only two up for election annually.
The California Public Employees Retirement System, one of the largest pension funds in the nation, is seeking to eliminate the company’s classified system and make each director term one year.
Rejecting Proposals
In the proxy, CalPERS argued it wants the board to have more accountability to shareholders and remove insularity of its makeup.
“Insularity may have made sense in the past (like during the takeover frenzy of the 1990s). But now, we believe insularity works primarily to hamper accountability,” according to the CalPERS statement.
Gateway’s board recommended rejecting both this proposal and one by another minority shareholder, Calvert Asset Management. The latter requests a report on reducing the use of hazardous materials in Gateway’s manufacturing and eliminating a charge for recycling old PCs with the company.
CalPERS has good reason to have more say in how Gateway’s board is composed.
As a holder of some 1.16 million shares, the value of that stake has declined more than 60 percent over the past year, or by more than $56 million. Shares of Gateway that traded at more than $55 in April 2001, closed at $6.30 April 24.
CalPERS targeted Gateway and four other companies, Lucent Technologies, NTL, Inc., Quest Communications; and Cincinnati Financial on a list it says represents the worst examples of poor financial and governance performance.
It lambasted Gateway for its poor financial performance versus its peers, and for some of its corporate policies, including a lack of complete independence on its audit and nominating committees, a classified board and a recently adopted poison pill.
CalPERS said Gateway has not answered a request to meet.
Gateway spokeswoman Ashley Wood said the company’s audit committee is composed of three persons, none of whom is employed by Gateway. She said the firm didn’t have any record of a request to meet, and that it is happy to meet with any major shareholder and does so regularly.
CalPERS also led an unsuccessful attempt earlier this year to unseat Frank Savage, a former director of Enron, from Qualcomm Inc.’s board of directors.
Losing More Clients
McGurn said more than ever, shareholders are looking closely at not only who does the company’s books, but who’s on the corporate auditing committee, which selects and approves the auditor.
Enron’s auditor, Arthur Andersen, has lost more than 130 public firms as clients, and any company sticking with Andersen better have a good explanation ready, McGurn said.
In San Diego last week, another public firm, Vical Inc., dropped Andersen as its auditor.
Shareholders are also scrutinizing how much their companies spend on auditing and the amount spent on non-auditing consulting services. McGurn said one survey found the norm for the largest Big Five firms, for each dollar it received for auditing, it also got about $3 for non-auditing services.
More companies are replacing directors who were installed on boards simply for their glitter appeal, McGurn said.
As examples, he cited O.J. Simpson, who was once chairman of the audit committee for Infinity Broadcasting, and Fran Tarkington, the former NFL quarterback, who served on Coca-Cola’s board.
All this tougher shareholder scrutiny is a good thing but some of the proposed changes aren’t warranted, said Ken Stern, president of Asset Management Solutions in Rancho Bernardo.
Electing board members for one-year terms would inhibit continuity and long-term planning, Stern said.
A more effective method for ensuring greater accountability would be to tie board compensation to the company’s stock performance, he said.
Also, many public companies are making greater disclosure and changing some of the ways their corporate boards are structured.
“A lot of these changes are self-induced by management as a way for them to say, ‘We smell like a rose,'” Stern said.
On the whole, the battered stock market had some positive impacts, he said.
“We need markets like this one that reveals lousy board members, and to give cushy CEOs a wake-up call and figure out what’s going on.”
