Aubyn Hill
THE MELTDOWN of 'star companies' such as Enron and Worldcom, and the managerial difficulties of others such as Disney, Citigroup and most recently AIG (one of the largest insurance and financial services group in the world) has exacerbated the problems and risks of men and women who accept the challenge to become directors of companies. The pressing requirements of transparency, disclosure, personal accountability and possible jail time put additional burden on directors to ensure that they are members of properly functioning boards.
In Jamaica, Douglas Orane of GraceKennedy has a well-earned reputation for running good boards and good board meetings. Board meetings start on time, agenda and board papers are distributed well ahead of each meeting, each board member is given reasonable and even ample time to speak, but meeting deliberations follow an agenda and time, including ending-the-meeting time.
Management executives are forced to come to meetings prepared because they know their directors have been chosen carefully and will probe. I have served on many boards and committees and the best ones, locally and internationally, operate in a similar fashion.
TOO MUCH POWER - STAYED OVERLONG
Maurice 'Hank' Greenberg ruled AIG for almost 40 years as chairman and CEO. During that time he took an unknown property-casualty company and transformed it into one of the world's leading financial companies with last year's revenues topping out at US$98.61 billion. How could this company, which was started in 1919 in Shanghai and now does business in 130 countries, come to such ignominy, grief and indictment by Attorney General of New York, Elliot Spitzer, on Thursday of last week?
The allegations of the suit are serious and devastating. It is alleged that AIG concealed losses from insurance underwriting through offshore shell companies; mischaracterised incomes from the purchase of life insurance policies; and lied to state insurance regulators about its ties to offshore companies.
'COLLEGIALITY TRUMPED INDEPENDENCE'
How could this happen? Look to the board of directors. They were very good friends and long-time associates of Hank Greenberg. The Wall Street Journal called two very influential AIG directors Frank Zarb, former chairman of the National Association of Securities Dealers and Bernard Aidinoff, retired lawyer long-time friends of Mr. Greenberg. Mr. Aidinoff had been a friend for over 40 years. It is clear that AIG's board members remained quiet when they should have questioned and even confronted Mr. Greenberg.
Published reports indicate that directors were afraid to look stupid before the powerful executive chairman and avoided confronting him. They could end up in jail for their fear, avoidance and diplomatic going-along. Certainly, their reputation is tarnished, instead of being burnished in their twilight years.
Warren Buffet, one of whose companies is implicated in the lawsuit, but he is not, warns directors against letting management ( as executive chairman and CEO, Maurice Greenberg was head of AIG's executive management team) get away with foolish and egregious spending and compensation decisions that are against the interest of shareholders. AIG is facing a US$ 2.7 billion hit on shareholders net worth. Clearly, in AIG's case, Mr. Buffet would claim that "collegiality trumped independence". I suspect that similar instances happen in many boardrooms in Jamaica with unacceptable regularity.
Dysfunctional boards are often equated with "fractious" ones. Not so in most cases. In America, and possibly in Jamaica as well, more damage has probably been done by board members who have acquiesced with strong and powerful executive chairmen who lost sight of the interest of their employers - shareholders than the damage caused by the professional, balanced, strong but infrequent disagreement or confrontation from a few board members. Messrs Lay and Schlling ( Enron ), Ebbers (Worldcom) and Greenberg (AIG ) and their companies could have been better served by a set of really independent-minded and strong directors. So too could that whole slew of CEOs and senior executives that were destroyed in the FINSAC meltdown.
REGULATORS NEED SHARP TEETH AND CLAWS
It is instructive to note that the old boys (and a lady ) clubby AIG board did not act to remove Mr. Greenberg from his post as CEO (and subsequently as chairman) until Attorney General Spitzer issued an ultimatum in March this year that the AIG chairman had to go or the firm would be indicted the next day. Since the financial sector meltdown in Jamaica in the mid-nineties our regulatory framework has improved significantly. The consensus is that our regulators need to acquire and use sharper teeth and claws - fairly- to provide better oversight and protection to institutions and the investing public.
DIRECTORS' NUMBER ONE JOB
A board of directors' single most important duty is to select an excellent CEO to run the business then give him or her managerial autonomy and monitor and measure the executive regularly and effectively. To do that well, I believe like Mr. Buffet, that each director must have business-savvy, interest in the company and a very focused and firm shareholder orientation.
Business-savvy is the key. It is a quality that many bright people who are accomplished in specific fields simply do not possess. This single weakness causes too many directors to go along when they should not and others to be disruptive and dysfunctional when they should be quiet.
Aubyn Hill is Managing Partner of Corporate Strategies Ltd., a Restructuring and Financial Advisory firm. Respond to: writerhill@gmail.com
