VideoAmong our recommendations was to separate the office of chairman of the board and CEO. Of course, one size does not fit all. And for some companies, that separation would be either redundant, costly, or unnecessary. But the concept of a lean independent director, I think, lacks that redundancy. And I think one or the other of these solutions would be useful for almost any board.
I think throughout our board structure, directors would be independent more than in name only. They must be truly empowered and motivated to carry out their duties. I've sat on enough boards and audit committees to understand the kind of culture of seduction that characterizes many boards. It's a game that many CEOs played and played well by seducing their boards with perks and private attention and contributions to favorite philanthropies, and meetings that were short on substance and long on fluff. The boards became willing accomplices. And it's part of the American personality to go along and become more fraternal rather than more vigilant.
Some may look at these recommendations and ask, with all that is being asked of boards today, how are we going to recruit good, competent people? Won't it be much tougher? I guess my answer to that is, yes, it will be and it should be. Director slots should be filled by people who are qualified and able to devote the amount of time needed to be effective members of that board.
Now more than ever, placeholders have no place. There is now no role for directors whose only qualification is that they send their children to the same private school as the CEO. There is no role for directors whose only qualification is that they were great baseball players or running backs. Not long ago, a major media company had O.J. Simpson not just on its board, but on its audit committee. And that's no joke. Such types of appointments are totally inappropriate to the demands of today's market.
Even when good directors are found, financial executives should take the lead in quality control. Take the time to fill in the gaps in your directors' knowledge base. Make education a key part of your role.
That leads me to my final suggestion:
(7) Make sure you are part of the solution, not part of the problem.Be leaders not just within your own companies, but in the public debate about reform as well. And the one issue where we need your input and the one that I suspect will evoke the greatest amount of dissonance is the debate over the expensing of stock options. While there are many factors that led to the bubble of the 1990s, I agree with Jack Bogle that if we have to name a single father of the bubble, we would have to say that it was executive compensation tied to fixed-price stock options. When executives are paid more the higher they push the stock price, that is exactly what they will do. And for some that means pushing accounting principles to the very edge, and very often even over the line.
Thankfully, during the past 18 months the move to treat stock options as an expense has gained steam. Some 175 companies, including GE, GM, and Coca-Cola, have chosen to expense options. Business leaders and investor advocates from Warren Buffett to the California Public Employees' Retirement System have called for their expensing. Yet there are those who are still playing the politics of private interest at the expense of the public interest. They are using their influence with lawmakers to stop the movement toward more-accurate financial statements.
Financial executives can be a powerful voice in this debate by pushing your own companies to expense stock options and offering expert advice to those undecided. In addition, as we are clearly moving toward expensing, we will need your expertise to help hone the tools we use to measure the value of these options, to improve the economics, consistency, and comparability of the measurement of the cost.
Recently, I was struck by one small piece of data hidden in a large report put out by Deloitte & Touche and BusinessWeek about CFOs and their role in American companies. Based on their research, they found that nearly a third of CFOs don't think that the Sarbanes-Oxley Act will make another Enron less likely. At first glance, I found this troubling. After all, this is the legislation that is supposed to change business as usual, and the men and women polled were in the vanguard of enforcing these changes. But I guess I've had enough experience with legislation to know that it is the last possible solution to any problem, and always carries unintended consequences.
The truth is that the CFOs who responded that way were absolutely right. Rules alone will not prevent another Enron. But honest, ethical, vigilant business leaders will bring us back the kind of public confidence that is essential to the renewed growth of American business. Financial executives who understand the obligation a company has to its shareholders can change Corporate American culture and restore public confidence. And financial executives and accountants dedicated to removing the tarnish from the public franchise they have been given will lead people to trust the numbers, the men and women who issue them, and their corporate leaders once again. That same element of trust belongs to the CFOs and CEOs who are the custodians of the public trust.
Taken together, this will do more to restore public confidence in the markets and in our private sector, lift our stock markets, and strengthen our economy than any law we pass or any regulation that is implemented.
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