INTERPUBLIC REACTS TO ENRON AND CHANGES ITS BOARD
"Enron" will become a code name for
"independent" Directors who fail in their responsibility to the
checks & balances system called Governance.
"Enron" is more than a company. It is a code name for a Board
concept that "We are All One Big Happy Family and You Can Trust Daddy To
Not Put His Selfish Interests Ahead of the Shareholders."
Our Founding Fathers had an enduring sense of human nature and that is
reflected in the U.S. checks & balances system of government.
tel. 781 736 0900
The push is on to make boards more independent - and accountable
By D.C. Denison, Globe Staff, 2/17/2002
nterpublic, one of the largest advertising agencies in the world, wasted
little time after business commenced last Monday in announcing a dramatic
shakeup of its board of directors.
In a brief statement, the company said that four Interpublic executives would
resign from the board to reduce its size and also increase the percentage of
members with no company connections.
''The interests of our shareholders will be better served by a board that is
smaller, and has a higher proportion of outside, independent directors,'' chief
executive John Dooner added in the release, which noted that he and chief
financial officer Sean Orr will now be the only two Interpublic executives on
the nine-member board.
While Dooner said the board changes had been planned for more than a year, it's
a safe bet the expanding Enron scandal was a factor behind the timing of the
announcement. Suddenly, in the post-Enron era, investors are turning a
critical eye toward corporate boards, questioning whether they have been
vigilant in overseeing management and protecting shareholders' interests.
''The free ride is over,'' said Patrick McGurn, a vice president at
Institutional Shareholder Services, a group based in Rockville, Md., that
analyzes corporate governance issues for large institutional investors.
''In the good old days, even if a company melted down, the directors walked
off without any damage to their reputations,'' McGurn added.
''People used to say, `You can't hold the directors responsible.' Well
investors aren't saying that about Enron's board, and now they aren't likely
to say it about other company boards either.''
Where was the board? That's a question that has been asked with increasing
frequency, whether the troubled company is Polaroid Corp., Global Crossing
Ltd., or Tyco International Ltd.
In Enron's case, the question is particularly pointed: Critics note that the
board was stacked with insiders with financial ties to the company and that
the board's audit committee rubber-stamped a series of questionable
accounting partnerships. The board even voted to waive Enron's own ethics
policy, allowing the company's CFO to serve as general partner in
partnerships that had financial transactions with Enron.
The consequences of these lapses, for Enron directors, have been swift and
severe. Last week, Enron said that seven board members would resign,
including four directors from the highly criticized audit committee.
A special board committee led by William Powers, the dean of the University
of Texas law school, chastized the board for examining Enron's off-balance
sheet transactions in only a ''cursory way.'' And the AFL-CIO has formally
asked the Securities and Exchange Commission to bar all Enron directors from
serving on any other boards, claiming that they would pose ''an imminent danger''
to employees' retirement savings.
The most significant consequences of the Enron debacle will likely be felt
far beyond Enron, however, in corporate boardrooms nationwide, say corporate
''The first board meetings after Enron are going to be very interesting,''
said Robert Raber, president of the National Association of Corporate
Directors. ''Board members are going to be asking a lot of questions. ... The
board will also be examining themselves: What kind of conflicts do we have.''
Although membership on a corporate board is often regarded as an honorary
capstone to a successful business career, directors have a prominent place in
the corporate hierarchy. Corporations are owned by shareholders; boards are
accountable to shareholders; managers, including the CEO, answer to the
board. In the modern corporate model, board members are expected to exercise
careful management oversight.
Interpublic, in its announcement last week, stressed that it was moving to a
largely independent board of directors ''in recognition of corporate
governance best practices.'' The company announced the addition of one
prominent new outside member, Michael Roth, head of The MONY Group, praising
him for having ''the highest professional and ethical standards.''
According to Raber, whose group tracks trends in corporate boards,
compensation for corporate directors often depends on the size of the
company. The most recent NACD survey showed that small public companies pay
board members an average of $44,000 a year, consisting of 40 percent stock
and 60 percent cash; the largest 200 corporations pay an average of $137,000
a year, of which 60 percent is in stock and 40 percent in cash.
A typical board member for a large public company should expect to spend ''
200 hours a year'' on the job, including meetings, research, and interaction
with company officers, Raber said, although he acknowledged that many board
members probably devote much less time to the job.
That may soon change. Shortly after the Enron collapse, Raber issued an alert
to association members listing ''some basic issues for director focus.''
Raber warned board members to double their efforts to understand financial
reporting practices; to question needless complexity; to strive to protect employee
retirement plans; to be more careful about conflicts of interest and rules
concerning insider trading; and to work harder to create ''a climate of
integrity and responsibility.''
This added responsibility, Raber believes, will increase demands on board
''If a prospective board member seems reluctant, or unable, to make a
significant commitment, I now advise the search committee to put on their
track shoes and run away from him as fast as they can,'' he said.
''The job is much more complex now. A minimal approach won't work.''
The due diligence is not only on the company's side, Raber said.
''Many prospective board members are asking a lot of questions now. They want
to know what they can realistically contribute, and if there is a climate of
disclosure. They don't want to be the last to know about problems.''
Board members are also worried about personal liability. Although directors
are typically covered by insurance policies that protect them from
shareholder lawsuits, the coverage evaporates if fraud or criminal conduct is
Also asking questions with renewed energy are groups that represent
shareholders and institutional investors in advocating for a variety of
corporate governance reforms.
''For us, the Enron situation has been a good thing, in that we no longer
seem like fringe group, or gadflies,'' said Ann Yerger, director of research
at the Council of Institutional Investors, based in Washington, which
represents the interests of more than 250 pension funds and $2 trillion in
The council has persistently advocated for more outside board members since
its formation in the mid-1980s. Now that the issue is in front of
congressional committees, Yerger is more confident that change will happen,
especially since the reform movement has the backing of such investor
behemoths as the California Public
Employees' Retirement System.
''It's common sense,'' she said. ''As an investor, you want to know board
members are comfortable asking the hard questions. You don't want them
beholden to the company in any way.''
Yerger and others point to recent examples that show that company troubles
can often be traced to the boardroom. Tyco found itself trying to explain why
it paid an outside director $20 million for his help in brokering an
acquisition; Global Crossing's board has been lambasted for approving an
excessive contract for chief executive Robert Annunziata; and Polaroid's
board has been criticized for not protecting the employee pension plan as the
company slid into bankruptcy.
Charles Elson, director of the Center for Corporate Governance at the
University of Delaware, put the matter bluntly. ''There will be increased
demand for independence,'' he said, ''no financial connection to the company
At the same time, Elson says, board members may soon be required to make
substantial, long-term investments in company stock, as a way of aligning
board and shareholder interests.
Some CEOs and board members are also agitating for change. Harry Gray, former
CEO of Hartford-based United Technologies Corp., who served on a number of
corporate boards, says that some boards have gotten ''a bit lax, kind of
clubby'' in recent years. But he believes the solution is more vigilance by
''At United Technologies, I expected my board members to understand the
product lines and the operations,'' Gray said. ''I wanted them to know the
If a director didn't take the job seriously, Gray says, he did not hesitate
to ask him to resign.
''I did that quite a few times,'' he said, using a brief, standard letter
suggesting that the board member did not have the time or inclination to
fulfill his duties.
Gray says he took his own board positions seriously. He served on the boards
of Exxon Mobil Corp., Union Carbide Corp., Citigroup, and Aetna Inc.
''I never served on more than three boards at one time,'' Gray said. ''And I
had a personal rule that I wouldn't accept membership on a board unless I
felt I could interrogate the managers.''
Gray often used his position on the board to play an active role in the
company. As a member of the Union Carbide board in the mid-'80s, for example,
Gray helped rebuff a hostile takeover by GAF Corp. by personally directing
the divestiture of a number of Union Carbide brands.
''I had experience buying and selling companies,'' Gray said, ''The CEO
needed that experience and asked me to make the deals. I was happy to
For less motivated board members and corporations, corporate governance
experts say, the path to improved board performance may require new
regulations from the SEC or the stock exchanges, which currently mandate
basic board requirements for the companies they list. Individual states,
which regulate the corporations within their borders, also have the power to
require greater board independence and oversight.
By far, however, the most significant influence in changing board behavior is
likely to be investors themselves.
''The financial markets will ultimately determine how corporate boards
evolve,'' said McGurn, of Institutional Shareholder Services. He noted that
board-related transgressions at Tyco and Nortel Networks Corp., where an
executive and board member recently resigned after admitting to insider
trading, both caused significant sell-offs by investors, with resulting
declines in the stock price.
''If a company's stock price starts heading down and there's a perception
that the board isn't doing its part,'' McGurn said, ''the changes will come.
The boards will change, whether they want to or not.''