How Much Corporate Reform Do We Really Need?
from
November/December 2002
by John R. Engen
As Washington continues to talk tough about cracking down on corporate behavior, directors seem more or less evenly split over what they’re hearing. Slightly more than half (53.7%) of the 1,047 board members who responded to an e-mail poll said that the passage of 15 proposed or recently enacted measures would make them feel “more secure” as directors, while 32.3% said “less secure” and 14% said that putting all those regulations in force would leave them feeling so exposed that they would “likely resign” their positions.
The e-mail survey went out to 6,183 directors. Some of the percentages here differ slightly from the preliminary results released earlier.
Most directors agreed that some reform is needed. Indeed, board members interviewed for this article joked uneasily about the newfound attention they’re getting from friends and family as Enron, WorldCom, Qwest Communications, and other tainted companies make headlines. “It’s the first time they know what I do,” laments Richard Koppes, a Sacramento, California, attorney and a director of Apria Healthcare Group and ICN Pharmaceuticals. “And they’re concerned: ‘You’re running with a bunch of crooks!’”
In July, President Bush signed into law the Sarbanes-Oxley Act, which requires greater oversight of accounting procedures and faster notification of insider stock trades, and stiffens penalties for various corporate crimes. The law’s provisions are expected to come down particularly hard on directors, who will see their workloads increase and could become targets of more civil litigation. That, in turn, has sparked grumbling in corporate suites across America.
“I’m concerned that Congress thinks boards are all-powerful and should be held completely responsible for what happens at their companies,” says Bruce Gottwald, chairman of Richmond, Virginia-based Ethyl Corp., a maker of petroleum additives, and chairman of the audit committee at rail operator CSX Corp. “Directors can provide good judgment and advice on things that are disclosed to them. But if you’re not told the facts, there isn’t much you can do. I don’t know that lawmakers understand that.”
Most directors do like the new regulation requiring CEOs of public companies to sign off on the accuracy of their financial statements: 72.7% of participants in the e-mail poll supported that rule, which was one of the legislative measures the survey asked them to respond to. A whopping 82.2% gave a thumbs-up to another of the 15 ideas—stiff federal criminal penalties for executives who “knowingly or recklessly publish” misleading financials.
“What would really go a long way toward making people feel better about investing would be to put some of these CEOs in jail,” says Raymond Davis, the CEO and a director of Umpqua Holdings, a financial-services company in Portland, Oregon.
Support for the next round of reforms, which are expected to focus on compensation-related issues, is more restrained:
- 41.5% were in favor of proposals to fully expense stock options; 37.7% were opposed.
- 41.2% favored longer vesting periods for options; 38.4% were against the idea.
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49.7% voted yes to an increase in the holding period after the exercise of options; 32.4% said no.
Some questions in the poll drew far more one-sided responses. A hefty 63.4% opposed putting limits on CEO pay (24.4% liked the idea). Even more overwhelming, 79.8% said they were against prohibiting directors other than the CEO from holding material equity stakes in a company. Only 11.6% were for it.
A strong majority (88.4%) wanted members of the compensation committee to be independent of management; 56.9% would require shareholder approval of all options plans for executives and non-executives alike; and 54.6% favored prohibiting companies from moving their corporate headquarters to offshore tax havens such as Bermuda.
But directors also expressed a fear that Congress could overreact. “I understand that there’s outrage [about executive pay], but you can’t legislate morality and good behavior,” says James Swigart, a San Diego business consultant who serves as a director of Mesa Air Group in Phoenix, Arizona, among other companies. “If Congress wants to regulate people’s compensation, they need to reconsider. That’s something best left to the market.”
Roger Raber, CEO and president of the National Association of Corporate Directors, agrees. He argues that it would be more effective for businesses, the stock exchanges, and accounting groups to decide the details. “I favor a heal-thyself approach,” Raber says of his desire to cut Washington out of the reform mix. “From a business perspective, you’d much rather see the exchanges taking the lead, because they’re closer to the action and understand what enhances shareholder value.”
Self-correcting machinery already appears to be clicking in. Directors interviewed say they are examining items like off-balance-sheet entities and independence issues with a renewed sense of purpose. For example, members of the audit committee at Mesa Air have dived deeply into their numbers and now make a point of meeting regularly with the company’s auditors—and the CEO, Jonathan Ornstein, is excluded from these meetings, says director Swigart. Adds Richard Koppes, the San Diego attorney: “Frankly, I feel a little better sitting on boards now, because everybody has become much more diligent.”
That, more than Washington’s reform fever, may be the best way to reinstill investor confidence.
