"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.
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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 governance specialists.

''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 members.

''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 involved.

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 assets.

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 all.''

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 board members.

''At United Technologies, I expected my board members to understand the product lines and the operations,'' Gray said. ''I wanted them to know the managers.''

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 oblige.''

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.''

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