As Board After Board Fails, Governance Takes a Beating

Many Americans, and some politicians, have attacked the boards of major U.S. corporations for paying their CEOs too much, not holding management to tough earnings goals and lining their own pockets with rich payments and rides on corporate jets. Recent news has shown that boards have another reason to be attacked. Many barely pay attention to the operations of the corporations they oversee or to the people who manage the companies.

The list of governance failures in the past month or so is a long one. The board of Chesapeake Energy (NYSE: CHK) allowed its CEO, Aubrey McClendon, to share in the firm’s riches from drilling, which is certainly a conflict of interest. The board of Green Mountain Coffee Roasters (NASDAQ: GMCR) allowed the firm’s founder, Robert Stiller, to pledge shares for loans. Lead director William Davis did so as well. When Green Mountain’s stock collapsed after poor earnings, each director was hit by margin calls. The balance of the directors forced them out of most of their board positions. There is a case to be made that the services of the two were valuable to the company because of the length of their tenures. But where were the rules about margin commitments?

Yahoo! (NASDAQ: YHOO) continued to have one of the most dysfunctional boards of any large public company. The scandal over former CEO Scott Thompson is hardly worth mentioning again. Mistakes over vetting of his background cost him his job and also triggered the resignation of director Patti Hart. Most of the Yahoo! board has turned over at a time when some stability is almost essential to a corporation so near drowning.

The credit crisis of 2008 should have heightened board oversight at banks. Risk management at a high level is part of financial company governance. JP Morgan’s (NYSE: JPM) board obviously did not take that seriously. Or it was passive enough to allow management to be the sole judge of risk. That approach has helped cost JP Morgan a $2 billion write-off and a significant cost to its reputation.

At Best Buy, (NYSE: BBY), there is yet another example of the weakness of a system in which a founder and large shareholder controls the company for years. Chairman Richard Schulze followed disgraced CEO Brian Dunn out the door. Now the troubled consumer electronics store is leaderless, for all practical purposes. The Best Buy board allowed Schulze to run Best Buy as a private enterprise. Schulze believed he was powerful enough to keep Dunn’s indiscretions from the balance of the board. Much of the blame for that sits with his fellow directors.

Board reform is often debated in abstract. What if a board makes a major error in oversight? What if its allows management to run a company with the belief that the board is passive, perhaps because a CEO or chairman is unusually powerful? Or the perks of being a board member may be so good that the idea of changing those benefits in the name of better governance is too much of a temptation.

Governance took a beating recently. If the past is any indication, this will not change things much. Boards remain self-governing and assured of election. The system is still broken, and inertia at the level of government regulators and most investors will cause it to remain that way.

Douglas A. McIntyre