Where Was Kodak’s Board of Directors?

Eastman Kodak’s (NYSE: EK) board of directors has been invisible as the company first intimated it would not need new funds, and then a short time later said it had potential cash problems. The board’s inactivity probably has cost Kodak shareholders dearly, and likely will continue to do so.

At the end of last month, Kodak said rumors of a Chapter 11 filing were untrue. The company had drawn $160 million from one of its lines of credit. A spokesman for Kodak said, “The purpose of the revolving credit facility is to bridge timing differences between cash outflows and inflows, which is a common practice at many corporations.” A timing difference is generally not considered an emergency.

Kodak’s position changed suddenly on November 3. The company said it probably would need money soon as it reported earnings.

The head of Kodak’s board audit committee is William G. Parrett. He is a retired senior partner of Deloitte & Touche USA. As an accountant, he should have seen that Kodak’s cash position was such that it needed capital when he considered the company’s position a month ago. The head of the finance committee of the board, Timothy M. Donahue, should have known as much, too. He is the retired executive chairman of Sprint Nextel (NYSE: S). Richard S. Braddock, Kodak’s presiding director, probably had intimate knowledge of the firm’s financial position as well. Braddock is a former chief operating officer of Citigroup (NYSE: C).

The Kodak financial debacle is another example of how the management of a troubled company — in this case long-time CEO Antonio Perez — can allow the corporation to make an encouraging announcement to shareholders only to basically contradict it almost immediately.

When the demise of Kodak is analyzed in some detail, one of the most important questions will be the role the board played as the company spiraled downward. This board had members who should have, and could have, known much more about Kodak’s problems. They should have encouraged a full disclosure of the company’s financial situation. It is hard to make a case the board knew little of the coming trouble when Kodak reported,“The purpose of the revolving credit facility is to bridge timing differences between cash outflows and inflow …”

Douglas A. McIntyre