America's Worst Boards

At a time when corporate malfeasance is high on the public radar, it is important to understand corporate structure and how the checks and balances within a public company operate. GMI, a corporate governance and accounting research firm, provided 24/7 Wall St. a list of 30 companies with the worst corporate boards. GMI rated the boards based on the firm’s own proprietary ratings of measures such as board attendance, related party transactions, and the number of independent board members.

Read: America’s Worst Boards

24/7 Wall St. screened the GMI list in two ways. In our first article published in May, we looked mainly at companies where a single shareholder holds control of the company, as is the case with Facebook. In this article we concentrated on companies that have a market cap greater than $10 billion.

According to best practices in corporate governance, the board of directors and management shouldn’t be so closely aligned. If they are too close, the board can’t adequately perform its role as an independent supervisor over management. The breakdown or the absence of this kind of system was highlighted recently in the case of JPMorgan’s huge trading loss.

As part of its board, JP Morgan (NYSE: JPM) has a Risk Policy Committee that is “responsible for oversight of the CEO’s and senior management’s responsibilities to assess and manage the corporation’s credit risk, market risk, interest rate risk, investment risk, liquidity risk and reputational risk, and is also responsible for review of the corporation’s fiduciary and asset management activities.” Where was this committee when the bank was engaged in a trade that lost billions of dollars? The answer is the it did not fulfill its fiduciary obligation

At Chesapeake Energy (NYSE: CHK) it has been alleged that founder, CEO and Chairman Aubrey McClendon took advantage of the company by making personal investments in the Chesapeake wells. Part of Chesapeake’s Nominating and Corporate Governance Committee job is to monitor violations of the company’s Code of Business Conduct and Ethics. Where was the committee before the SEC stepped in to evaluate McClendon’s actions? It was not acting in a way that benefits the company’s thousands of shareholders who lost money as the scandal over the McClendon financial violations spread

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When analyzing GMI’s worst boards list, 24/7 Wall St. took a detailed look at the number of independent directors compared to the number of board members as well as the interconnectedness among board members. Another factor we looked at was whether the CEO was also the chairman. A board entrenched with company insiders may not have as strong oversight of management as a fully independent board might. And on a board where a number of family members serve both on the board and in management objective oversight is at risk.

Finally, we looked at how long board members have served. Members who have been on a board for well over a decade — particularly boards with several such members — may be too close to management to execute their fiduciary responsibilities.

Based on these factors, here are the nine worst corporate boards in America.

1. Coca-Cola
> 2-yr. stock change: +46%
> No. board seats: 17
> No. independent directors: 14
> Combined CEO/chairman?: Yes
> Board attendance rate: 98%

Several non-independent directors serve on Coca-Cola’s (NYSE: KO) board. In addition to CEO Muhtar Kent, Donald Keough, the company’s former president and chief operating officer, serves on the board. Keough is currently the non-executive chairman of boutique investment firm Allen & Co., and Allen & Co.’s chief  Herbert Allen also serves on Coke’s board. Allen & Co. has served as a major financial advisor for Coca-Cola for more than 30 years, according to the company’s most recent proxy.

The board of directors of the largest beverage company in the world is rife with more interconnectedness. Keough serves on the board of Berkshire Hathaway, where the son of Berkshire Hathaway CEO Warren Buffett (NYSE: BRK-A), Howard also serves. Howard Buffett serves not only on Coke’s board, he also serves on IAC/InterActiveCorp.’s board. And IAC’s (NASDAQ: IACI) CEO and board member, Barry Diller, also serves as a member of Coke’s board. Many Coke board members have served for a long period of time. Six of the 17 have served for more than 20 years.

2. JPMorgan Chase 
> 2-yr. stock change: -10%
> No. board seats: 12
> No. independent directors: 10
> Combined CEO/chairman?: Yes
> Board attendance rate: Not listed

Along with the lax oversight of the board’s risk committee with regard to a set of trades that cost the bank several billion, the JPMorgan board effectively isolated itself from shareholders. In the last proxy, the board recommended that several shareholder proposals be rejected. Among these were that the chairman and CEO jobs be separated — powerful chief executive Jamie Dimon holds both now. In opposing the proposal the company said, “Implementing the proposal is unnecessary because the Firm’s board leadership structure already provides the independent leadership and oversight of management sought by the proponent” Yet, a number of directors have served since the 1990s, and most of these board members served before on boards of other banks that since merged together to create current company. These predecessor banks were run by Dimon.

3. PNC 
> 2-yr. stock change: -1%
> No. board seats: 15
> No. independent directors: 14
> Combined CEO/chairman?: Yes
> Board attendance rate: 75%

The board of PNC (NYSE: PNC) has a fair share of interconnectedness. Charles Bunch and Thomas Usher serve on the boards of both H.J. Heinz and PPG. Meanwhile, Richard Kelson and Anthony Massaro both serve on the board of Commercial Metals Company.

Furthermore, a large number of the financial firm’s board members have served for multiple decades. Richard Berndt was a member of the board of Mercantile Bankshares Corporation, which was bought by PNC. Between the two boards, he has served since 1978. Donald Shepard served on the board of Mercantile Bankshares since 1992. CEO James E. Rohr has been a member of the board since 1990. Based on a strict definition of “independent board” members, all of these men would qualify except Rohr. However, the links among members don’t make them truly independent. Despite the stock price remaining flat in the past two years the board has treated Rohr extremely well. Over the three years from 2009 to 2011 he made over $50 million.

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4. Bed Bath & Beyond
> 2-yr. stock change: +60%
> No. board seats: 9
> No. independent directors: 6
> Combined CEO/chairman?: No
> Board attendance rate: 100%

The board of Bed Bath & Beyond (NASDAQ: BBBY) is barely an independent majority. Current co-chairmen Warren Eisenberg and Leonard Feinstein both serve on the board, along with current CEO Steven Temares. Eisenberg and Feinstein founded the bedding and bath retailer in 1971. Each has been a board member since with Temares joining in 1999. The CEO and chairman roles may be separated, but the three men have been together for 13 years. While all three each now hold less than 2% of the shares of the company, together they have one third of the board seats. Both Eisenberg and Feinstein were paid more than $3 million in 2011, while Temares was paid almost $14 million. Eisenberg and Feinstein may elect to become consultants and be paid $400,000 a year.

In addition, lead independent director Klaus Eppler, who has served on the board since 1992, may not truly be independent, despite the company calling him that. He is a pensioned partner at law firm Proskauer Rose, which provides legal services to Bed Bath & Beyond. Eppler, despite his firm’s connection to the company management, serves on the compensation committee, which determines the pay of top executives.

5. Loews  
> 2-yr. stock change: +14%
> No. board seats: 13
> No. independent directors: 10
> Combined CEO/chairman?: No
> Board attendance rate: 75%

Three members of the Tisch family are on the Loews (NYSE: L) board of directors: President and CEO James Tisch, and co-chairmen Jonathan and Andrew Tisch. Together, those three directors own about 9.8% of the outstanding stock. However, they control 30% of the board’s seats. For their services, the Tischs are paid quite well. James has received nearly $28 million since 2009, while Jonathan and Andrew received more than $20 million each in that time.

The board does have a lead director, who is in charge of the independent directors.  However,that director, Paul Fribourg, has a long affiliation with the company and the Tisch family, having served with them on the board since 1997.

6. Vornado Realty Trust  
> 2-yr. stock change: +12%
> No. board seats: 11
> No. independent directors: 9
> Combined CEO/chairman?: No
> Board attendance rate: Not listed

Vornado (NYSE: VNO) has four non-independent directors on its board. In addition to current CEO Michael Fascitelli, former CEO Steven Roth serves as chairman of the realty trust. An interlaced set of relationships exists among the board and the company’s top management and founder. Three members of the board — Roth, Russell Wight and David Mandelbaum — are all partners of the real estate company Interstate Properties. Since 1992, Vornado has actively managed the operations of Interstate Properties. Together, the three men control more than a quarter of the board seats, but control only 12% of the common shares.

Meanwhile, all four of the aforementioned directors, along with Richard West, serve on the board of Alexander’s, where they, along with Interstate Properties and its general partners, own 60% of Alexander’s common stock combined.

7. Dollar Tree
> 2-yr. stock change: +150%
> No. board seats: 11
> No. independent directors: 8
> Combined CEO/chairman?: No
> Board attendance rate: 75%

Like Bed Bath & Beyond, discount retailer Dollar Tree (NASDAQ: DLTR) has a board loaded with inside directors. In addition to CEO Bob Sasser, co-founders Macon Brock and J. Douglas Perry have both served on the board since 1986, as has H. Ray Compton, who was a former executive vice president and chief financial officer. In addition, Thomas Saunders, a founder of Saunders Karp & Megrue Partners, L.L.C. and a former major investor of the company, serves on the board as well. Saunders and Brock each own about 1% of stock, yet hold a disproportionate share of the company’s board seats.

The board also has some interconnectedness. Both Conrad Hall and Lemuel Lewis previously served as executives and directors of Landmark Communications, where Brock has served on the board.

8. Progressive
> 2-yr. stock change: +1%
> No. board seats: 11
> No. independent directors: 10
> Combined CEO/chairman?: No
> Board attendance rate: 75%

Directors of auto insurance company Progressive (NYSE: PGR) tend to be busy individuals. Take director Bradley Shears, the former CEO of Reliant Pharmaceuticals. In addition to Progressive, he also serves on the boards of Covance, Henry Schein and Honeywell International. Six other directors serve on two other different for-profit boards.

Some of the board is interconnected as well. Lawton Fitt serves on the board of Ciena Corporation, where another director, Patrick Nettles, serves as executive chairman. Meanwhile, the company’s board is loaded with people who have been there a long time. Peter Lewis, the founder and current non-executive chairman, has served on the board since 1965. Stephen Hardis has served on the board since 1988, and Charles Davis has served on the board since 1996.

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9. Kohl’s
> 2-yr. stock change: +1%
> No. board seats: 12
> No. independent directors: 10
> Combined CEO/chairman?: Yes
> Board attendance rate: 75%

Kohl’s (NYSE: KSS) is another board loaded with insiders. In addition to chairman and CEO Kevin Mansell, former CEO William Kellogg and former COO John Herma both serve on the board of directors. Herma serves on key committees of the board, notably the audit and governance & nominating committee. In addition, Peter Sommerhauser isn’t truly an independent director because the law firm he is a partner with, Godfrey & Kahn S.C., provides legal counsel to the company. Many directors have become glued to their board seats as well — four of the 12 directors have been on the board more than 20 years.

This board, like many, is also very interconnected. Both Sommerhauser and Dale Jones serve as trustees for the Northwestern Mutual Life Insurance Company, where another board member, John E. Schlifske, serves as chairman and CEO. Meanwhile, Hampshire Trust owns 6% of Kohl’s shares, where Sommerhauser shares voting and investment power with three other people. In addition, directors Peter Boneparth and Frank Sica both serve on the board of JetBlue.

Douglas A. McIntyre, Sam Weigley, and Lisa Uible