Aubyn Hill
IN RECENT weeks, there has been a spate of corporate governance activities in the country. Similarly, recent headlines have once again highlighted the importance of practising good and effective corporate governance in publicly-traded companies, government enterprises and agencies, and within small and medium enterprises. The news headlines remind us of the high price that individual board members and executives pay when their institutions fail to practise good governance.
The recent court judgement that Bernie Ebbers, the former chairman and CEO of WorldCom and his chief financial officer, Scott Sullivan, must serve jail terms of 25 years and 10 years respectively, is a sobering and even chilling reminder of the consequences of poor corporate governance. The former head of TYCO is gone to jail for a very long period of time, while senior partners and executives of the accounting firm KPMG have had to pay fines and face possible indictment. Enron is the marquee case that comes to mind, accompanied by their former auditing firm - the now defunct Arthur Anderson and Company - and they are joined by the large international insurance company, American International Group (AIG), Parmalat in Italy and most recently REFCO - the U.S. hedge fund company.
COLLEGIAL BOY'S CLUB
Invariably, these companies that have come up against hard times and have been broken, have had chairmen and or chief executive officers (CEOs) who have had far too much power and have generally stayed too long in their positions. Maurice 'Hank' Greenberg literally ruled AIG for over 37 years, Dennis Kozlowski at TYCO ruled as an unquestioned and decadent emperor, Bernie Ebbers at WorldCom and Mr. Bennett at REFCO used their companies' money and assets as if they were their own.
Many of the board members of these companies have been good, long-time and unquestioning friends of the chairmen and CEOs. Board members who did not toe the line were sidelined. The urge to conform and not offend the powerful chairman or CEO tended to weaken or obliterate any courage to take a professional position on the issues. In these kinds of situations, directors avoided any sign of conflict and adopted a diplomatic going-along, and became quiet out of fear and unwillingness to rock the boat. 'Rocking the boat' is not what one does in a boy's club that prizes 'collegiality' and avoidance of conflict above all else.
QUALITIES OF A GOOD BOARD MEMBER
Warren Buffet, the billionaire and controlling owner of Berkshire Hathaway in America, states that "business savvy" is the first requirement that a prospective board member must meet. Notice the criterion is not academic achievement, or brilliance, or specific professional skill, or political or social prominence. It is good if a director has these other qualities, but the first quality of a successful director must be plain and simple business-savvy - that ability to understand business and be able to make business decisions and formulate them into broad strategies quickly and simply for management to execute.
The good director must also have a keen interest in the job as a director. He or she must have a clear and strong shareholder orientation, and widely held public shareholding companies must have a majority of outside directors who should be responsible to establish standards for the CEO's performance, and then evaluate the CEO against those standards. Excellent directors work hard and are well prepared for board meetings. In Jamaica and elsewhere, these business-focused and shareholder-oriented criteria are hardly the ones that have been used when directors are being selected. As we move up the scale of good corporate governance, the business and shareholder criteria are the ones that will have to dominate in the choice of directors.
DIRECTORS CARRY A HEAVY RESPONSIBILITY
New York's Attorney-General, Elliott Spitzer, leaned hard on AIG's outside directors to remove Hank Greenberg, first as CEO and then as chairman of AIG. Before that the authorities in New York city forced Sandy Weil, then the chairman and CEO of Citigroup, to split the positions of chairman and CEO with him becoming a non-executive chairman. His company had to pay a large fine to the governmental authority.
Under the new Companies Act in Jamaica, all directors shoulder a great responsibility to carry out their duties with due care and to handle their fiduciary responsibilities based on an objective professionalism. The FINSAC years in the mid-to-late '90s highlighted a number of deficiencies in the way our businesses and economy operated, and one of them has to be the deficient corporate governance environment that existed. Today, the Dyoll case brings the issue of corporate governance and the role of directors into very sharp focus once again. At the extreme, directors should be reminded that jail is a very personal and individual punishment where acquiescent collegiality provides absolutely no protection. Corporate governance is not a philosophical concept that should be admired and forgotten, rather it is a living and important requirement that boards of directors and businesses ignore at their own peril.
Next week, I will look at the three general types of boards on which directors are called to serve.
Aubyn Hill is managing partner of Corporate Strategies Ltd., a restructuring and financial advisory firm. Respond to: writerhill@gmail.com.
