Tyco directors’ lack of awareness about events surrounding criminal charges against CEO Dennis Kozlowski underscores the lax oversight of management that plagues many company boards, corporate governance experts say.
Tyco, in a lawsuit filed Thursday against Kozlowski and other senior executives, insists directors were duped for years as millions were allegedly looted from the firm. Kozlowski, former CFO Mark Swartz and former chief counsel Mark Belnick have pleaded not guilty on related criminal charges that they perpetrated a $600 million fraud scheme.
But Joe Goodwin, head of Atlanta-based director search firm The Directorship Group, says Tyco directors shoulder much of the blame for management’s actions.
”Just how do you hide this much money for so long from your board?” Goodwin says. ”It’s their job as a director to know what’s going on.” Tyco directors declined comment or couldn’t be reached.
At many companies, directors are viewed as too beholden to CEOs, as rubber-stamping lackeys who rarely ask tough questions and do a lousy job in fiduciary roles as shareholder watchdogs, says John Nash, founder of the National Association of Corporate Directors.
Nash notes that issues being raised about directors at troubled firms will inevitably mushroom elsewhere. ”Directors have forgotten they set policy, not management,” Nash says.
Explosive growth in CEO pay and a bull market exacerbated lax board oversight. When stocks surged and start-ups were raiding major firms for talent, a sort of CEO royalty evolved. CEOs became highly paid Wall Street and media stars. Directors feared questioning their pay or asking tough questions for fear of losing them, says Dick Marty of Execucounsel.com, a Toronto-based board consultant.
In some cases, relationships between directors and CEOs became too cozy as more executives joined each other’s boards. ”It’s become a matter of course that you rub my back, and I’ll rub yours,” Nash says.
Lucrative consulting deals between directors and the companies on whose boards they sit have also flourished, creating conflicts of interests. Critics say Tyco directors might have had difficulty maintaining their independence from management.
Tyco paid now-retired director Frank Walsh $10 million and gave $10 million more to his foundation last year for his role in Tyco’s acquisition of financial group CIT, which Tyco eventually shed by spinning it off as a separately traded company.
Another Tyco director, Lord Ashcroft, received $2.5 million in a 1997 real estate deal.
Several board members at Enron also had company consulting deals or worked for organizations that received sizable grants from Enron entities at a time when the energy-trading giant was beset with an accounting scandal that plunged it into Chapter 11 bankruptcy protection. Enron directors maintain they knew nothing of executives setting up partnerships that inflated financial results.
Even at companies where there’s been no wrongdoing, critics suggest that business relationships with corporate directors can taint their roles. General Electric’s board has several directors who represent firms that have major GE contracts. In 1996, board members signed off on a retention agreement with then-CEO Jack Welch that will allow him lifetime use of GE corporate jets, lodging and other perks. The company says that has cost ”several million dollars” in Welch’s first year of retirement
Increasingly, companies such as Kmart are diffusing potentially cozy relationships between CEOs and directors by splitting the CEO and chairmanship titles into separate roles. Such measures are designed to provide a buffer between directors and management. But even that doesn’t always assure board oversight. At Enron, for example, Kenneth Lay chaired the company while Jeffrey Skilling was CEO.
Tyco is replacing almost all Kozlowski-era directors with independent outsiders and expanding the board to 15 members from 11.
Yet, insisting on independent directors — a mantra preached by regulators and governance experts — might not be enough to protect shareholders. Corporate governance adviser Eleanor Bloxham of the Value Alliance suggests that directors be selected to be ”independent minded.”
”It’s no longer enough to choose outsiders,” she says. ”They have to stay tough and objective in evaluating management. If not, why have a board at all?”