VideoIn 16 years of professional basketball, Julius Erving never had trouble controlling the boards. As a member of the New Jersey Nets, and later the Philadelphia 76ers, Dr. J dominated the glass with his sweeping offensive rebounds and above-the-rim acrobatics.
These days, Erving may not have such an easy time of it with boards. Since retiring from the NBA in 1987, Dr. J has parlayed his fame—and business acumen—into a nice career as an executive ambassador and entrepreneur. But fame and business acumen have also landed Erving on the audit committees of two corporations—Saks Inc. and Darden Restaurants Inc.
And that puts him squarely in the line of fire. In the wake of Enron and other accounting snafus, board directors and their audit committees now face intense scrutiny from regulators, lawmakers, institutional investors, and corporate governance advocates. That goes double for high-profile or celebrity directors, who can expect something akin to a full-court press from shareholder activists. "Companies should consider board members with corporate finance or Wall Street experience," argues institutional investor Bert Denton, "rather than wooing former senators."
Sit and Rotate
Denton is not alone in his thinking. At the very least, corporate stakeholders, hell-bent on curbing corporate financial failure, will spend the next year meticulously reevaluating the makeup of audit committees, which are typically comprised of a company's directors. Shareholders will also be taking a long, hard look at the financial literacy and independence of board members.
Congress will be doing the same thing. With corporate bankruptcies and financial restatements making the front page on a nearly daily basis, legislators are feeling pressure to do some legislating. But Capitol Hill—watchers say it's unlikely Congress will act on any new corporate accounting laws until after the first week in November. It's an election year, and reform—especially when linked to the biggest financial scandal in history—is a contentious, often emotional issue. Politicians don't want to end up on the wrong side of the debate as voters head to the polls.
The delay in passing new statutes is probably good news, says Bob Williamson, CFO at Boca Raton, Florida-based investment bank vFinance Inc. and a former audit committee member of Equinox Inc. Williamson doesn't think heaping new rules on audit committees is the answer. "The rules are already in place; we just have to figure out how to enforce them effectively," says Williamson. "When someone runs a stop sign, you don't change the law, you enforce it."
It's likely that proactive shareholders will ask audit committee members to do much of the policing. Given Enron's spectacular collapse, observers say a number of institutional investors now want audit committees to examine off-balance-sheet transactions and special purpose entities. Many shareholders would also like boards to start deciphering those complicated footnotes often buried in the back of financial filings and annual reports.
Some governance activists go even further, promising to take a stick to the structure of audit committees. Sandy Winer, a partner at law firm Foley & Lardner and a former SEC attorney, says that several measures have already been submitted by stakeholders that would dramatically alter who sits on audit committees—and for how long. One group, he notes, is pushing for a mandatory rotation of external auditors and internal audit committee chairs.
That would be a big change. At some companies, being named audit committee chair is practically a lifetime appointment. Enron's audit committee chair, for instance, served almost 25 years.
Pick of the Literate
If shareholders are keen on limiting how long directors serve on audit committees, the SEC wants to make sure they belong in the boardroom in the first place. The commission has already passed a rule mandating that audit committees consist of not less than three directors, all of whom must be "financially literate." What's financially literate? Being able to read and understand fundamental financial statements, says the SEC. The new rule also stipulates that at least one of the three members of an audit committee, usually the chair, must have specific finance or accounting employment experience.
Given such a requirement, executives and shareholders may have little choice but to court finance types for directorships. In fact, managers at executive search firm Christian & Timbers already report a dramatic shift in client requests. They say they've seen a 50 percent rise in requests for board member candidates who possess strong financial backgrounds—or CFO experience. Jeffrey Christian, CEO of the search firm, attributes the increase to the SEC's new rules and the fiasco in Houston. "Enron has taught everyone that the audit committee is the most important committee of the board," says Christian.
Several institutional investors are also eager to get finance executives on corporate boards. Denton, who founded investment firm Providence Capital, believes big investors should sponsor director nominations to ensure that a board is not simply made up of cronies of the executive committee. Last year, Providence submitted alternative director slates to two portfolio companies: ICN Pharmaceuticals and Trover Solutions Inc., formerly Healthcare Recoveries Inc.
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