VideoDo shareholders bear any responsibility?
Shareholders were the enablers. They voted in favor of a lot of bad pay plans, they voted to reelect a lot of poor boards, and they failed to pay attention to many, many red flags. Furthermore, shareholders themselves have been corrupt at times. In the Hewlett-Packard/Compaq merger last year, one of HP's largest investors, Deutsche Asset Management, voted against the merger. Then, after receiving a call from the investment-banking side of Deutsche, they agreed to reconsider. Carly Fiorina went to visit, gave them a check for $1 million, and they changed their vote. That kind of behavior is inexcusable.
What were the lessons of the past year for the shareholder community?
The single most important thing I can say to you is that while both the Sarbanes-Oxley Act and the New York Stock Exchange reforms will make a difference, the most important change will come from the market itself, when shareholders insist on better corporate governance.
There have been egregious governance violations in recent years. Why has it been so hard to get shareholders to act?
When The Corporate Library first started, we picked Global Crossing as the worst [CEO employment] contract in America. I had read through about 20 contracts, which were fairly identical, before I got to this company. It said the CEO had a $10 million signing bonus, which was OK, but he also got 2 million options at $10 a share below market. Furthermore, the contract provided the make and model of the Mercedes the company would buy for him, and specified that once a month Global Crossing would fly his family, including his mother, first class to visit him.
So, from that contract I concluded that (a) the CEO thought the stock was going to decline in value and (b) the board was incapable of saying no to him.
But no one really took it very seriously. People said, "Isn't that cute that he wants his mother to come out and visit?" I got E-mails saying, "This is the fastest-growing stock in the history of the NYSE, and if I am willing to spend a quarter of a cent a share to fly his mother out so he doesn't have to worry about her, it's not your business." I just felt that there was what I would now call governance risk.
You've said you consider yourself to be "an anthropologist of boards." What do you mean?
My training is in law, and lawyers tend to think in terms of structural solutions. But in the boardroom, there's no structural solution that can't be subverted in some way. So when you're trying to figure out what's wrong in the boardroom, you have to look at it more as an anthropologist — what is it about the human interaction and the culture in this little world that makes it so ineffective? I've met a lot of corporate directors, and almost without exception they are intelligent, honorable, and dedicated, and bring a tremendous set of experiences into the boardroom. For that reason, it's really endlessly fascinating why they do such a bad job.
What is it about the culture that breeds ineffectiveness?
One thing is that the people who are invited on boards are consensus-builders. They are brilliant at sizing up the norms of whatever situation they're in and adapting to them. But unfortunately, it creates a culture that makes it difficult to ask questions.
Why are you so convinced that a better board could have made all the difference in last year's cases — or in others?
Who is in the best position to identify and mitigate damages when you do have a bad apple? Obviously, there are always going to be crooks. But let's talk about some of these companies for a minute. At Tyco, Dennis Kozlowski did not ask for a contract until 2001. The contract he gave to his board, which they signed, provided that conviction of a felony was not grounds for termination. A better board might have said, "Dennis, we're sorry: Are you planning to knock over a bank? Is there something you want to tell us?"
The Conference Board recently recommended a structural change — separating the roles of CEO and chairman--although it gave multiple methods for doing it. Why should that work?
Splitting the roles is inconsistent with the cowboy culture, and it's certainly inconsistent with the popular notion of the CEO as superstar. But my concern is the same as The Conference Board's — I don't care how you do it, but you have got to pry the CEO's fingers off the control of the agenda and the information. And if their egos are so sensitive that they can't withstand a sharing of a title, then perhaps they should not be in the job.
There have also been calls for boards to meet without the CEO present. How significant is that?
When I testified before the New York Stock Exchange, I told them that that rule was the most important requirement they could impose. There again, you have to get this overpowering presence out of the room and allow for candid exchange. The problem is that the CEOs still pretty much control the nomination process [for board members] and will always say, "I'm looking for someone who has XYZ credentials and is a consensus-builder." You don't want people throwing things at each other in the boardroom, but when you have 11 consensus-builders and one visionary, dynamic leader who bosses people around all day, it becomes almost impossible to achieve anything but the lowest-common-denominator sort of performance.
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