Heading Off Trouble—And Confronting It When It Crops Up
from November/December 2007
How can directors best monitor a company and ensure that it is practicing good governance?
Follow the money, says one board member. Another says, go eyeball to eyeball with people to see if anyone blinks.
You have to become more activist and recognize that canaries in the coal mine usually indicate problems broader than just the one that came to your attention. As a result, you have to inquire and investigate, and if necessary bring in outside counsel. You have to look at things from a broad perspective, not just at the item that hit you.
Jock Patton, 61
Private Investor, Phoenix, Arizona
Janus Capital Group, JDA Software Group
There is no substitute for knowing how a company makes money. If you know that, you’ll see things. You’ll see that there wasn’t an accrual or something was reversed or something was changed, or a goal was revised or whatever. You’ll see the red flag if it’s there. And if you don’t know how the company makes money, you should learn or get off the board.
W. Larry Westbrook, 68
Former CFO, Southern Co., Atlanta
Cleco Corp.
By avoiding rigidly structured or CEO-managed board and committee meetings, or any sense of limits and control on contact with staff executives. Directors need to meet with staff to get the feel for corporate tone. The audit committee needs to have executive sessions with staff and auditors.
G. Lawrence Buhl, 60
Former Audit Partner in the Philadelphia Office, Ernst & Young
Assured Guaranty Ltd., Harleysville Group
Ask questions, ask questions, ask questions—that’s the job of a director. Study what’s going on in the marketplaces. Governance is mainly common sense. I’ve always said that any of my board meetings could be on CNN and I wouldn’t be embarrassed about it.
William I. Jacobs, 66
Former Senior Executive Vice President
for Strategic Ventures, MasterCard International, Purchase, New York
Asset Acceptance Capital Corp., Global Payments, Investment Technology Group
We do an annual board evaluation, and we take it seriously. We try, I think with success, to ask ourselves the tough questions about our performance. We also have an executive session every board meeting without the CEO, to exchange views on how the meeting went and what our concerns are. These meetings have proved to be very productive.
Wade Meyercord, 67
President, Meyercord & Associates, Los Gatos, California
California Micro Devices, Endwave, Microchip Technology Inc.
Within the audit committee, I carefully review all SEC reports before they’re filed. We also have strong communication lines with our director of internal audit, who does a lot of corporate governance requested by us. And we make sure that the corporate minutes and other information produced by our general counsel are carefully reviewed.
Frank E. Jaumot, 50
CPA, Ahearn Jasco & Co., Pompano Beach, Florida
MasTec Inc.
Stay close to management and get directly in front of the operations people—look into their eyes, get a response to probing questions, and feel comfortable with the answers. There’s no room for 99% integrity. It needs to be 100% all the time.
J. David Smith, 58
Chairman and CEO, Euramax International Inc., Norcross, Georgia
Commercial Metals Co.
First you need to have a governance committee with a clear charter and guidelines that it periodically reviews and implements. And it’s really important to know the best governance benchmarks, which means attending conferences and roundtables to hear how your peers are practicing good governance.
Zuheir Sofia, 63
Chairman, Sofia & Co., Columbus, Ohio
Dominion Homes, Lancaster Colony
What do you do when you see a red flag, such as the need to restate earnings, missed strategic goals, or employee lawsuits?
First, spit out an expletive. Then, track the problem to its source.
I don’t want to see it; I want to “hear” the red flag before I see it. I want to hear about it before it happens. And I don’t want to just know it happened, I want a diagnostic as to why it happened. I want a postmortem. What led us down that track? How did it start? Was it personnel-based? Process-based? Because of a malfunctioning system? Did we have the wrong strategy? Or what?
C. Warren Neel, 68
Executive Director of the Corporate Governance Center, University of Tennessee, Knoxville
Healthways Inc., Saks Inc.
I say a word that should not be printed in your dignified publication. Then, after calming down for a week, I say, “Let’s put our heads together and make sure something like this doesn’t happen again and we get an early warning, not a late surprise.”
Peter T. Kissinger, 62
Chairman and Chief Scientific Officer, Bioanalytical Systems Inc., West Lafayette, Indiana
I would bring in an outside consultant immediately.
Frank Martin, 70
CEO, Corindus, Auburndale, Massachusetts
NMT Medical
You have to step back and say, “Is this an isolated case? Was it an oversight? Was it relatively minor? Or is this a pattern?” Look for the signals and then voice greater concern, either at executive sessions or with the CEO directly.
Craig G. Matthews, 64
Former Vice Chairman and COO, KeySpan Corp., Brooklyn, New York
National Fuel Gas
If you see a red flag, you must get your hands around that red flag immediately. In general, directors shouldn’t micromanage, but when a red flag is hoisted and the board knows about it, then everything about that issue should be brought forward to the board. And I believe that the moment there’s something questionable, you get the information and you make it public. The longer you delay, the bigger the problem. Problems are like ice cream cones—if you don’t lick them quickly, it becomes very messy.
Alan G. Hassenfeld, 58
Former Chairman and CEO, Hasbro, Pawtucket, Rhode Island
Hasbro, Salesforce.com
We had some things—I won’t say at which company—where we had to pull in outside investigators and look at the situation, and understand it in detail so we could either be comfortable with it or take some action against management. In the end, everything proved to be aboveboard and nothing was drastically wrong, and the whole board signed off and away we went. But you had to make sure that if it was sitting in Sunday’s newspaper as a headline, you knew about it and had an answer.
Wallace W. Creek, 68
Former Corporate Controller, General Motors, Detroit
CF Industries Holdings Inc., Columbus McKinnon Corp.
Have you ever had to question a company's ethics?
Many of us have—and have cracked down hard.
I haven’t, but when you go into a company, you have to be careful to monitor the corporate culture. Does the company give guidance to an analyst, or not? Does it supply little code words to the analyst? Little things like that. Just because there is a corporate philosophy in place doesn’t mean it’s ethical.
Guy W. Adams, 56
Founder and Managing Director, GWA Capital Partners, Pasadena, California
Exar, Mercer International
Yes, but it wasn’t a company I was serving as a board member. I was the acting CEO at an insurance company. I was brought in by the insurance commissioner with the board’s agreement. I found out that the previous CEO, who still had a role at the company, and the CFO had been stealing. I raised questions very quickly, both resigned very quickly, and both were sentenced to prison.
Matthew W. Kaplan, 49
Management Consultant, Los Angeles
Penn Treaty American Corp.
Yes—and it resulted in two and a half years of lawsuits. Directors weren’t sharing information, so I brought litigation against various members of the board. The litigation was resolved through a settlement, and we had a change of the board structure. I had considered leaving the board, but you’re there on behalf of the shareholders, so if there’s any chance you can resolve it you have to try. It certainly wasn’t pleasant, but we got there.
Donald Pierce Moore, 44
Senior Counsel in the Miami Office, Holland
& Knight LLP
Zi Corp.
Yes, I have, on numerous occasions. How do you handle it? You get rid of the person whose ethics you question. It’s not easy, but that’s what you sign up for when you sign on to be a board member. You call the person up, you say “I want to meet you at 8 a.m.,” and at that hour you tell him or her that his or her services are no longer required and escort them to the door. It’s as simple as that. It’s not easy. But you do it.
Michael J. Myers, 67
Former President and Director, Smith Barney Venture Corp., New York City
Office Depot
Yes. We employed an independent law firm to do a review, and we established a special independent committee on the board to have oversight of the investigation. What happened next? Management was changed.
Thomas A. Cooper, 71
Chairman and CEO, TAC Associates, Marco Island, Florida
Bisys, Renaissance Reinsurance
One of my companies runs a very large global business, and we’ve had a couple of instances where people in international offices have done some things that were counter to our written policies. One time we sent an internal audit team, an attorney, and an internal security person to investigate. As a result, we had to take some actions with employees.
George F. Raymond, 70
Former CEO, Automatic Business Centers Inc., Moorestown, New Jersey
BMC Software, Heartland Payment Systems, NationsHealth
As an accountant, I dealt with a company that was committing a very significant fraud—using accounting tricks to hide the fact that it had losses equal to 50% of its entire equity. It took a couple of months to figure it out, but then we issued new financials. The bank foreclosed about six months later. Instead of dealing with the issues, it had tried to take the easy way out and fudge the numbers. The lesson: You have to run your company efficiently. You can’t hide things, because they’ll eventually surface.
Gary Freeman, 39
Partner, Bandari Beach Lim & Cleland LLP, Los Angeles
Blue Holdings, GVI Security Solutions Inc.
