One of the most revealing questions dealing with pension funds and lack of better corporate governance is: Why are pension funds wasting time with non-binding shareholder resolutions when they could, under current SEC rules, nominate slates of Director-candidates by running low cost, effective proxy contests?  The filing of a bare bone proxy statement and making about 30 vote soliciting telephone calls to institutional proxy voters could have a substantial impact.  We speak from personal experience.  Our group of individual investors, who met on a Yahoo financial message board, ran such a campaign against a NYSE listed company, contacted 80% of the eligible voters, won 24% of the vote for our slate of Director-candidates and caused the departure of a CEO of questionable competence.  Our out-of-pocket expenses were less than $15,000.  One would think that well-financed pension funds could do even better with companies that are in need of better corporate governance and are among the 14,000 companies that have publicly traded securities.  Their campaigns could start with smaller corporations and work up the food chain.  The bigger fish would soon take serious notice.  Fear is a great motivator.

        "Vanguard Group founder John Bogle says that direct ownership of stocks has shifted from control by individuals to mutual funds and institutions that often fail to act in the best interests of small investors." (MarketWatch, 10/13/05, "Bogle battles the fund business") "Some investors …  have for years taken on lackluster management, while public pension plans and others have leveled criticisms over lax corporate governance issues, excessive pay and cronyism on their boards.  But today, activists are having more impact because they are more willing to engage in proxy fights to replace executives or other steps, something pension plans shied away from.  Bernard Black, a professor at the University of Texas at Austin, argued in a 1998 paper that previous activists 'don't conduct proxy fights, and don't try to elect their own candidates to the board of directors ... the institutions achieve the effects on firm performance that one might expect from this level of effort -- namely, not much.'"  (WSJ, 11/23/05, "Big Shareholders Are Shouting Ever Louder --- Activists Pressure Executives To Unlock Value, Even Using Pirate, Bulldog in Their Monikers")  

        Even without proxy contests, institutional investors have the power to hold BODs accountable. "[T]hose in charge of our retirement accounts, pensions and savings: mutual funds and professional money management firms that, as institutional investors, control 70 percent of the shares of large public companies today. Such an outsize stake means that the institutions wield great power and influence over corporate America. Yet, as Mr. (John C.) Bogle points out, few institutions have played an active role in board structure and governance, director elections, executive compensation, stock options proxy proposals or dividend policies at the companies they own. 'Given their forbearance as corporate citizens,' Mr. Bogle said, 'these managers arguably played a major role in allowing the managers of our public corporations to exploit the advantages of their own agency.'  ... 'The funds should demand with all their voting power that the companies they own are putting the interests of their shareholders first,' he said. 'This would have implications for executive compensation, nominating directors, and other corporate governance matters. Mr. Bogle doesn't think that the mutual fund industry will rush to embrace his idea. The powerhouses in the business have battled fiercely against attempts to shine sunlight on their practices or rid their operations of conflicts."  (NYT, 4/12/09, "He Doesn’t Let Money Managers Off the Hook")




        Our lengthy website contains a Table of Contents with many links.  However, many of our comments/opinions on specific topics, e.g. "Financial Statement Analysis," "Disney," "Buffett," "Fannie Mae," "Minutes," "Lipton," may be scattered throughout the website.  Ideas on how to better search for specific topics can be found at "Topic Search And Index."   Further, it may be helpful to return to this website from time to time as its content is updated frequently.








I.          History of the Committee

II.        The Real Problem With Corporate Governance

            A.    Directors Are Beholden to CEOs And Consensual

                    1.    Shareholders Should Be Concerned As To How Board Members Magically Appear

                    2.    CEOs Seek "Consensual" Directors And Shorten the Longevity of Directors Who Are Otherwise

                    3.    BODs And Management Engage In Reciprocal Enrichment At Shareholders' Expense

                           a.  CEOs Get Theirs   

                           b.  Reciprocal Enrichment  

            B.    The Director Clique

            C.    Directors Have Been Asleep At The Wheel

                    1.    Unprepared For BOD Meetings

                    2.    Allowing Improper Compensation and/or Pay Without Performance

                           a.  Improper Backdating of Stock Options 

                           b.  Retention Bonuses in Bankruptcy Proceedings

                    3.    Unwilling to Challenge Management

                    4.    Reliance Upon Suspect Information

                    5.    No Shame

                    6.    Failure to Understand or Use Financial Statement Analysis

                    7.    Failure to Understand Transaction

            D.     "Certain Relationships and Related Transactions"

            E.    Lame Excuses

            F.    Lame Ideas

            G.    Unworkable Purported Safeguards

                    1.    Director "Independence" Is A Myth

                    2.    Former Directors Won't Spill The Beans

                    3.    Current SEC Rules Rule-Out Effective Proxy Campaigns By Individual Investors 

                    4.    Shareholders Cannot Rely Upon Institutional Shareholders

                           a.    Just Vote "Withhold" Is For Wimps

                           b.    Majority-Vote Standard Is A Sham

                           c.    Institutional Shareholders Might Form Groups, But Companies Can Promptly Cause  Defections

                           d.    Promises, Promises

                           e.    Glass Houses

                           f.    Advisors to Institutional Shareholders Are Conflicted

                           g.    Exceptions Prove The Rule

                                  (1)    Corporations Fight Back With Take Over Defenses 

                                  (2)    Exceptions to Exceptions

                    5.    Corporate Attorneys Decry Potential Evidence

                    6.    Lawsuits, But No Director Accountability

                    7.    Internal Investigations Are Riddled With Conflicts of Interest

                    8.    SEC Is Reluctant To Act Against Non-Executive Directors

                    9.    Media Stunts Mask Maintaining Status Quo

                  10.    Lawsuits and Political Pressure and Distant Meeting Silence Critics

                  11.    Non-Binding Shareholder Proposals Are A Waste Of Time

                  12.    Criminal Sentencing Guidelines Will Not Motivate Directors

                  13.    "Fairness Opinions" Are Unfair

                  14.    Ballot Box Capers

                  15.    Bankruptcy Court Cover-Up

                  16.   Call For Moral Responsibility Is A Joke 

                  17.   Better Disclosure of CEO Compensation Adds Fuel to the Fire

                  18.   Ask Questions of Directors at Annual Meeting of Shareholders

                  19.   Demand to Inspect the Company's Books and Records

                  20.   Former Outside Auditors Won't Spill The Beans

                  21.   How Public Fund Managers Have Sold Out

            H.   A Very Viable Solution

III.       A Simple/Effective Solution

IV.       Other Plans (UNequal "Equal Access") Are Flawed

V.         Sarbanes-Oxley Act Is Not Effective

VI.       Problems With The New Rule

VII.      Problems With SEC Disclosure Requirements

VIII.    Big Business Opposes The SEC's Minimal Efforts

IX.       Sample Responses From Individual Investors

X.        Shareholders Unite! - Petition for Rulemaking (SEC File No. 4-461)





History of the Committee



        The Committee of Concerned Shareholders ("Committee"), formerly known as the Committee of Concerned Luby's Shareholders, consisting of individual shareholders who met on a Yahoo! Finance Message Board in 2000, and is the first grass-roots shareholder group to conduct a formal proxy fight.  Luby's, then headquartered in San Antonio, Texas, was a 235-unit cafeteria chain with annual sales of approximately $500 million.  Its shares are listed for trading on the New York Stock Exchange ("NYSE").


        The Committee's Director-nominees received 24% of the votes cast and two (2) of the Shareholder Proposals that it supported (i.e., removal of all anti-takeover defenses, annual election of all Directors) received approximately 60% of the votes cast.  Luby's acceded to the Committee's demand that any board of director ("BOD") member be allowed to place an item on a board meeting agenda.  Previously, only the Chairman or CEO could set agenda items.


        The Committee's out-of-pocket expense was less than $15,000. (A member of the Committee, with a legal and computer background, provided services without charge.)  The Committee was able to solicit approximately 80% of the potential votes. Luby's expended more than $250,000 of corporate assets to oppose the Committee's efforts.


        Some have said that the Committee's efforts with Luby's caused the departure of its former Chief Executive Officer ("CEO") and President, the nomination of a Director-candidate with hands-on restaurant experience, the entry of a restaurant experienced white-knight/investor and the relinquishment of position by the former Chairman of the Board.


        The Committee's proxy contest efforts revealed the substantial difficulties that individual Shareholders would face in attempting to hold Directors accountable.  Further, it showed that the extent of Shareholder dissatisfaction is not necessarily proportional to the size of stock holdings of Director-candidate nominators.  Even though our Director-candidate nominators held 1/4% of the outstanding stock, our candidates garnered 24% of the votes cast!


         The Committee has responded to SEC requests for comments on various proposed rules, e.g., "Security Holder Director Nominations," and rebuttal to comments by Wachtell, Lipton, Rosen and Katz; "Internet Availability Of Proxy Materials"; "Possible Changes to Proxy Rules" and rebuttal to comments by the AFL-CIO; "Executive Compensation And Related Part Disclosure"; "Disclosure Regarding Nominating Committee Functions and Communications between Security Holders and Boards of Directors"; and "Facilitating Shareholder Nominations."  In response to the Business Roundtable's Petition for Rulemaking Concerning Shareholder Communications (SEC File No. 4-493), the Committee's comments to the SEC describe our efforts to obtain Shareholder lists from Luby's and asked the SEC to "thoroughly consider eliminating the unreasonable hoops through which corporations cause Shareholders to jump in order to obtain Shareholder lists."


       A background paper prepared by the Council of Institutional Investors, which represents more than 130 pension funds with more than $3 trillion in assets, stated that the Petition for Rulemaking (SEC File No. 4-461), jointly filed on August 1, 2002 with the SEC by the Committee and James McRitchie, Editor of CorpGov.Net, has "re-energized" the "debate over shareholder access to management proxy cards to nominate directors and raise other issues."  (CII, "Equal Access – What is It?" California Public Employees' Retirement System ["CalPERS"], Investment Committee, Agenda Item 8d, 3/17/03)  The SEC is considering various changes. "[I]n filing the original rulemaking petition (SEC File No. 4-461) with the SEC that set this change in motion." (, 10/9/03, "SEC Opens Proxy to Shareowner-Nominated Directors, Critics Bemoan Triggers, Thresholds")  "Equal access is quickly becoming one of the fiercest corporate governance issues being debated...." (Financial Times, 3/25/03, "SEC under pressure on board nominations")


        The Committee and/or its activities have been mentioned in numerous publications, e.g., "Democratic Shift: Shareholders Demanding A Larger Role In The Running of Corporations" (San Antonio Express-News, 8/26/00), "Online Grousing Over Luby's Escalates to Proxy Solicitation" (, 10/25/00), "Luby's shareholders group making a move for changes" (San Antonio Business Journal, 10/27/00),  "Luby's Asks Shareholders Not To Vote For Dissident Slate" (Dow Jones News, 11/06/00), "A Place At The Table" (Christian Science Monitor, 11/20/00), "Luby's shareholders lose fight" (SAEN, 1/12/01), "Luby's Defeats Proxy Fight By Web-Connected Group" (, 1/12/01), "Luby's Proxy Fight Shows Readiness to Act" (USA Today, 1/14/01), "Get Outta Here!" (Corporate Board Member, Spring 2001), "Shareholders Unite!" (Kiplinger’s Personal Finance Magazine, 5/1/02)("Shareholders Unite! Fed up with falling prices, Luby's shareholders took matters into their own hands.... Their coup attempt holds lessons for activist investors."), "Mad as Hell --- What Can You Do About It: Voices in the Corporate Wilderness" (, 10/15/02), "Revenge of the Investor" (BusinessWeek, 12/16/02), "Shareholders Battle Corporate 'Coronations'" (Chicago Tribune, 3/30/03), "Heard Off the Street: Message posters take their dismay to the boardroom" (Pittsburgh Post-Gazette, 4/21/03), "Investors, Stirred Up by Scandals, Rally for Corporate Democracy" (WSJ, 7/9/03), "SEC May Aid Rebels Seeking Board Seats" (Washington Post, 8/6/03), "Heard Off the Street: SEC dabbles in democracy with changes in elections of directors" (Pittsburgh Post-Gazette, 10/13/03), "Watchdog Challenges CEO Pay" (LAT, 10/21/03), "Shareholder's Rights" (Sound Money, 7/24/04); "SEC plan may alter board elections" (Pittsburgh Post-Gazette, 5/31/09); "Shareholders won't use proxy access powers" (Pensions & Investments, 6/17/09).  

        Various publications have printed our Letters to the Editor, e.g."Director Accountability at Corporations" (CSM, Letters, 11/4/03), "Ruling on the Rule" (CFO Magazine, 11/08/04), "SEC Rules Won't Improve Boards Gone Bad" (WSJ, Letters, 12/6/04), "CalPERS Shake-Up Still Reverberates" (LAT, Letters, 12/8/04), "Executives Must Be Made Accountable" (LAT, Letters, 1/3/05), "Accountability of CEOs and Boards of Directors" (LAT, Letters, 4/29/05), "Fear Will Motivate Corporate Changes" (LAT, Letters, 5/12/05),  "Weakness in Disney Ex-Directors' Fraud Suit" (LAT, Letters, 5/15/05); "Proxy Voting Caveat" (WSJ, Letters, 12/03/05), "Institutional Investors' Attention To Governance Wins Approval" (WSJ, Letters, 4/15/06), "401(k)s and Costs to Savers" (LAT, Letters, 4/28/06), "Don't Blame Shareholders: They're Just Sitting Ducks" (WSJ, 6/6/06), "Company Directors Must Be More Accountable" (LAT, Letters, 8/6/06), "'Corporate Democracy' Ultimately Means Improved Shareholder Value" (WSJ, 1/04/07), "Direct Proxy Access Gaining Momentum" (National Post, 4/14/07); "Guest Commentary" (Corporate Governance News, 4/23/07); "Pappas Votes Help Luby's Survive Second Revolt by Shareholders" (Houston Business Journal, 1/18/08); "E-Proxy Fails to Ignite Proxy Battles" (Agenda, 3/10/08).

        Several books have mentioned the Committee's efforts, e.g., "A Practical Guide to SEC Proxy and Compensation Rules" by Goodman and Olsen, "Corporate Governance" by Monks and Minow, "The Edgar Online Guide to Decoding Financial Statements: Tips, Tools and Techniques for Becoming A Savvy Investor" by Taulli, "Meetings of Stockholders" by Balotti, Finkelstein & Williams, "Corporate Governance 2004: Preparing for the Next Wave of Disclosure & Board Changes" by Doty, "House of Plenty" by Dawson and Johnston, and "Money For Nothing --- How the Failure of Corporate Boards Is Ruining American Business and Costing Us Trillions" by Gillespie and Zweig ("[A] grass roots campaign ... success [that] has not been replicated. .... When Shareholders try to change a company's direction, sometimes commitment matters more than wealth. ... [T]he current proxy access measures are direct descendants of [Petition for Rulemaking 4-461]....")


        You may view a copy of the Committee's Proxy Statement and Fight Letters ("Luby's Needs Watchdogs On Its Board Of Directors," "Shareholders Need Their Own 'Watchdogs' On The BOD To Mind The Store And To Make Sure That Their Concerns Are Heard," "What Is The BOD's Understanding Of The Concept Of Accountability,"  "Now, More Than Ever, 'Watchdogs' Are Needed On The BOD," "What Is The BOD's Concept Of The 'Golden Rule'?") by clicking upon the respective links.


        Shareholders expressed gratitude for the Committee's efforts and the Committee expressed its thanks to its supporters.




The Real Problem With Corporate Governance



        We have entered into an age of widespread investor skepticism over nearly all aspects of corporate governance. Scandals are sapping investor confidence. With the financial shenanigans at Enron, WorldCom, Global Crossing, Tyco, Adelphia, Lucent, Xerox, Qwest, Ahold NV, Peregrine and other public companies permeating the news, many are seeking ways to improve corporate governance and, in particular, Director accountability to Shareholders. Solutions involving better disclosure and stiffer penalties miss the big picture. Additional disclosure has not caused Management and/or Directors to abandon acts of greed and conflicts of interests. Tweaking rules and regulations at the margins will only minimally improve the quality of corporate governance.


        The powers-that-be will vigorously seek to maintain the status quo. It took the sarcasm/wisdom of Molly Ivins to summarize the situation. "If you look around on almost any level, you'll notice that people who have special advantages almost always manage to convince themselves that they are entitled to those advantages. ... [P]eople will just get outraged if you try to correct even the most glaring inequities -- that sense of entitlement to special privilege is really tricky. Almost everyone who has previously enjoyed an advantage and is suddenly forced onto a level playing field will feel cheated, treated unfairly, singled out for undeserved punishment." (Working for Change, 9/25/03, "Greed and Grasso")


        The real problem with corporate governance is the lack of an effective procedure by which Directors can be held personally accountable for their actions, e.g., voted out of office and replaced by candidates nominated by Shareholders.  Shareholders (the true owners of Corporate America) should have the legal right to nominate truly independent Director-candidates and cause the names of those candidates to appear on the Company's ballot. "[S]hareholders have no meaningful way to nominate or to elect candidates short of waging a costly proxy contest." (The Conference Board, 1/9/03, "Commission on Public Trust and Private Enterprise - Findings and Recommendations")  For the most part, incumbent Directors have no real concern about their personal accountability to Shareholders.  "[I]t is especially difficult to remove a director for poor performance ... [N]on-performing directors ... were allowed to stay because the chairman felt it was not worth the effort or embarrassment to remove them.  ... '[O]ne of the most difficult tasks confronting boards now is what to do with underperforming directors'..." (Globe and Mail, 3/15/03, "The boardroom and its cast of characters") "'The biggest obstacle to a good board is arrogance,' Raber [Roger Raber, president of the National Association of Corporate Directors] said. 'With some directors, there is a sense of entitlement. ... "I'm here as long as I want to be."'" (LAT, 7/22/02,  "Crisis In Corporate America")


        "The problems of the Yahoo board are endemic in corporate America. Shareholders put their faith in and entrust their money to directors to manage the company and counter a chief executive if need be. But when things get tough, boards become captive of executives or bankers or they simply leave. The recent case of Dynegy illustrates this. Rather than stay to fix the mess the directors created, the entire Dynegy board resigned when shareholders rejected its efforts to sell the company. The reasons are interrelated. Too often directors don't have enough skin in the game to push the company in a strong direction. Directors' pay averages less than a $100,000 a year, typically far less than what they earn in their full-time jobs. They do not own substantial stock in their companies and face no risk if things go wrong. Even if directors are given incentives to take strong action, the corporate board is not set up for this type of decision-making. Directors work part time to manage the company. It's tough getting any group to agree on anything, let alone to challenge chief executives. Boards thus naturally tend to rely on the top executives and advisers. Board collegiality and friendships among directors and with the chief executive often also mean that no director takes a disruptive stance. All these factors work to prevent directors from taking charge of a company or forging their own vision, a sobering thought for those who advocate greater board power." (NYT, 9/20/11, DealB%k: "A Weak Board at Yahoo Stumbles in a Series of Missteps")


        "William Donaldson, (former) chairman of the Securities and Exchange Commission ... compared the current system of electing corporate directors, in which the incumbent board nominates a slate and the ballots it sends out have no other candidates, to elections in the Soviet Union.  'It's not really an election at all,' he said." (International Heard Tribune, 5/6/04, "Who cares if the bosses are angry?")


        Rich Koppes, coordinator of Stanford's Institutional Investors' Forum and Fiduciary College, member of the advisory board of the National Association of Corporate Directors and former General Counsel of the CalPERS, stated, "As a director of three public companies.... Too often, in my experience, boardrooms are full of directors that still don't understand that they have a fiduciary duty to shareholders at large. ... I think we have too much in boardrooms today a feeling that you have kind of a divine right to continue on the Board without anybody challenging that assumption." (TheCorporateCounsel.Net, 5/21/03, Webcast Transcript "Shareholder Access to the Ballot")  Hopefully, Koppes does not sit silently, but timely informs his fellow BOD members that they do have fiduciary duties to Shareholders.


        "[A] large proportion of U.S. investors believe financial and accounting regulations governing publicly held companies are still too lenient, according to a Wall Street Journal Online/Harris Interactive personal-finance poll. The online survey of 1,248 investors … found that 55% believe corporate governance regulations are too lenient, and that percentage jumps to 77% of investors ages 45-54. … This skeptism about the financial practices of public companies has led almost a third of investors to reduce or divest their holdings in a company due to poor governance… A majority of American investors believe responsibility for corporate governance lies primarily with the company's board of directors: … But the poll shows nearly two-thirds of investors surveyed don't believe boards of directors are effective in overseeing the companies they govern. …  42% of those polled say punishment for poor corporate governance should be directed at boards of directors… [S]ays Robert Fronk, senior vice president at Harris Interactive. 'They're saying, someone needs to take personal responsibility, someone needs to pay the price.'"  (WSJ, 10/14/05, "Investors Are Skeptical of Success Of Sarbanes-Oxley, Poll Finds")


        "Investor complaints about executive pay are getting louder and angrier, but CEOs are likely to keep raking it in for some time to come. They think they deserve their steep payouts even when their performance has been far from stellar. … Certainly, boards have become more independent in the past four years…. Yet, because CEOs have influence over who gets on the board -- the only board slate offered to shareholders is the one proposed by management -- directors are careful not to offend them. … Nothing will change until shareholders gain the ability to easily replace directors. Call it the fear factor: If directors knew they stood a good chance of losing their board seats -- and the prestige and valuable business connections these provide -- unless they aligned themselves with shareholders, they might stop forking over so much and narrow the gap between what CEOs and their managers and employees get. To get there requires changing corporate laws and practices. As a first step … shareholders gain the power to place director candidates on corporate ballots and to initiate and adopt changes in corporate charters. Under current rules, shareholders can only pass nonbinding resolutions and must wage costly proxy fights to nominate a dissident director slate."  (WSJ, 6/26/06, "Sky-High Payouts To Top Executives Prove Hard to Curb")


        "[S]hareholders deserve some rights of ownership.  If they can't elect the directors who represent their interests, what can they do?  Moreover, strong oversight by shareholders should reduce the need for regulatory oversight." (WSJ, 11/22/06, "Pivotal Fight Looms for Shareholder Democracy")

        Aficionados of corporate governance might view reports dealing with Director misconduct and preventive procedures at Worldcom and Enron ---  "Restoring Trust" by Richard C. Breeden, Corporate Monitor, Report of Investigation by the Special Investigative Committee of the Board of Directors of WorldCom, Inc. and /or Final Report of Neal Batson, Court-Appointed Examiner.


         A.      Directors Are Beholden to CEOs And Consensual


       Directors are very much beholden to Management and fellow Directors, as opposed to Shareholders!  The present system to select/nominate/retain corporate Directors is rife with conflicts of interests.


        "Instead of serving as watchdogs for shareholders who elect them, corporate directors too often act as lapdogs for the executives who handpick them. At a minimum, the breakdown of board accountability has resulted in stock losses for investors. At worst, it has contributed to corporate wrongdoing." (USA Today, 4/27/03, Editorial/Opinion - "Behind many errant CEOs hide weak corporate boards")


       The problem is that beholden and consensual Directors engage in "groupthink" and do not make the best decisions on behalf of Shareholders.  "The psychologist Irving Janis invented the word 'groupthink' in 1972 to describe the process in which a group makes foolish choices.  Each member of the group tailors his or her view to fit the consensus.  Signs of groupthink include the ignoring of expert opinion, selective use of evidence and the illusion of omnipotence. ... The price of groupthink is that, at some point, reality intrudes." (LAT, 6/3/04, Opinion)  "It isn't merely that members of the group think alike but that they come to overvalue the harmonious functioning of the group." (LAT, 7/11/04, Commentary: "'Groupthink Isn't the CIA's Problem")  "Numerous studies show that good people can make bad decisions when acting in groups, particularly in stressful situations.  … ('Group-think' pressures can be mitigated by involving) more people, and rotating in new people with fresh perspectives…. More critical eyes help root out potential problems and facilitate solutions. …Directors need to place a high priority on the airing of objections…." (Seattle Times, 6/15/04, "Good corporate ethics start with rooting out 'group think'")

        "In his classic 1972 book, 'Groupthink,' Irving L. Janis, the Yale psychologist, explained how panels of experts could make colossal mistakes. People on these panels, he said, are forever worrying about their personal relevance and effectiveness, and feel that if they deviate too far from the consensus, they will not be given a serious role. They self-censor personal doubts about the emerging group consensus if they cannot express these doubts in a formal way that conforms with apparent assumptions held by the group. ... From my own experience on expert panels, I know firsthand the pressures that people — might I say mavericks? — may feel when questioning the group consensus. ... I felt the need to use restraint. While I warned ... I did so very gently, and felt vulnerable expressing such quirky views. Deviating too far from consensus leaves one feeling potentially ostracized from the group, with the risk that one may be terminated. ... I feared criticism for gratuitous alarmism. And indeed, such criticism came. ... The notion that people are making huge errors in judgment is not appealing. In addition, it seems that concerns about professional stature may blind us to (what) ... we are witnessing.... We all want to associate ourselves with dignified people and dignified ideas. ... People compete for stature, and the ideas often just tag along." (NYT, 11/2/08, "Challenging the Crowd in Whispers, Not Shouts")


        "The firing of a CEO used to be a rare event -- even the worst of them often managed to cling to power with remarkable tenacity. In the past two years, however, CEO firings have become commonplace. … What has happened here is a sea change in the way American businesses are run. And it has happened in a stunningly short period of time. Just a few years ago, CEOs still handpicked most members of their boards, and most boards gave their CEOs a long leash -- or no leash at all. Today's boards look very different. Directors are picked by a nominating committee, not by the CEO. And increasingly, shareholders and their advocates have some say in that selection…. The end result: Boards are much less beholden to their CEOs, and much more susceptible to outside pressure, than ever before. … Add to that mix the anger of shareholders who are upset about low returns and inflated CEO compensation, and you have the makings of a revolution." (WSJ, 8/23/06, "Leash Gets Shorter for Beleaguered CEOs")  This story is overly optimistic, but still casts Directors as, in effect, benevolent dictators. However, since Directors control the proxy machinery and, thus, are not nominated or truly elected by Shareholders, they remain effectively unaccountable. There are over 14,000 corporations with publicly traded securities.  Events at a few does not a sea change make.


                1.    Shareholders Should Be Concerned As To How Board Members Magically Appear


         The process by which CEOs, in effect, select members of Boards of Directors is seriously flawed.  In order to mask details of the secretive process, news releases may vaguely state that the persons were "appointed," "joined," "brought on," "called," "chosen," "hired," "interviewed," "recommended" or "recruited." Why are CEOs permitted to "call" upon, "interview," "hire," "recommend" and/or "recruit" the persons who are supposed to be the Shareholders' "watchdogs" of his/her activities?  Even if Shareholders know the details and do not approve of the process by which board members are selected, for all practical purposes, there is currently nothing Shareholders can do to change it.  Those Directors are very much more beholden to the person who brought them to the dance than to Shareholders! 


       "During the last four-and-one-half decades I have spent sitting on five public and 16 non-public boards, I never once saw a board member being proposed by the nominating committee. Typically, one director alone along with the C.E.O., or, the C.E.O. alone proposed nominees. The nominating committee merely vetted. That, as they say, is life. /s/ Phil Johnson" (Corporate Governance Leadership Blog, 4/17/06, "Sing It Again, Frank ... That's Life ") What action, if any, did Mr. Johnson take when he observed that corporate nominating committees were being bypassed?  


       "Ms. Teslik [former Executive Director, Council of Institutional Investors] cites how difficult it is for shareholders to elect a director other than those handpicked by management --- even though the directors, in theory, represent the shareholders. 'Our system allows executives to pick the boards who are supposed to police them,' she says." (WSJ, 7/16/02,  "Wall Street Rushes Toward Washington, Flees Responsibility") For all practical purposes, Management and fellow Directors select Director-candidates and cause them to be "elected."  Management uses Shareholders' assets to conduct proxy solicitation efforts on behalf of the candidates selected by Management and fellow Directors. There is little likelihood that Management will desire, select or support candidates who are inclined to ask "tough questions" on behalf of the Shareholders.  Further, Directors, who do not cooperate with Management and/or fellow Directors, will not be asked to serve an additional term. Directors know the score. Yet, while dependent on Management and their fellow Directors for their longevity, Directors still have a fiduciary duty to ALL Shareholders to monitor Management's actions.


        Former Tyco International Director Wendy Lane discussed the Director selection process.  "How did you get on Tyco's board? ... I went to a Wharton conference, and Dennis (Kozlowski) was acting CEO in a case study.... We were role-playing a board meeting.... Apparently he liked my answer.  He asked me onto the Tyco board."  (Corporate Board Member, Special Legal Issue 2003, "Tyco Director Says, 'I've fallen Off the Cliff'")  

        The newly minted CEO of Tyco International decided to and did replace the entire BOD.  He used "hard-nosed salesmanship" to dispose of the former Directors.  One can only wonder what that euphemism really means.  "It was (Ed) Breen's first day at Tyco, and the new CEO had several important visitors. … [S]even major shareholders, representing 15% of Tyco's ownership … made a simple demand: that Breen replace the majority of the board of directors right away. … Breen decided to go further than that—and replace the entire board. 'To reassure investors, we had to go overboard on corporate governance,' he says.  But the process required hard-nosed salesmanship. … Breen asked the directors to vote that none of the veterans of the Kozlowski era could stand for reelection at the next annual meeting in early 2003. … With the vote deadlocked at 5-5, Breen cast the deciding vote to replace the entire board."  (Fortune, 11/15/04, "Mr. Cleanup")  This was not an instance of going "overboard on corporate governance," it was an instance of going overboard.  In effect, the entire BOD abandoned the ship.  Tyco's stock price has subsequently increased, but does the end justify the means with every member of the new BOD beholden to Breen?


        "WorldCom said it had not used an executive search firm to attract the board members and declined to provide information about how broad a pool of candidates it had been able to assemble." (NYT, 8/30/03, "Five Are Chosen to Join Board of a Reorganized WorldCom") "UTStarcom Inc. (Internet protocol networking concern) … hired Korn/Ferry for a board search…. Korn/Ferry … arranged interviews with prospects, who included Jeff Clarke and Allen Lenzmeier. … UTStarcom paid Korn/Ferry $75,000 after Mr. Clarke, chief operating officer of Computer Associates International Inc., joined its board…. Mr. Lenzmeier, a Best Buy Co. vice chairman, took his directorship… UTStarcom didn't pay the $70,000 promised Korn/Ferry for placing him." (8/16/05, WSJ, "Korn/Ferry Alleges Theft Of Confidential Client Data By a Former Star Recruiter")  


        "[N]ewly appointed director Jon F. 'Jack' Hanson ... says Mr. Scrushy invited him to join its board because they casually knew each other from serving ... on the board of the National Football Foundation and College Football Hall of Fame. Several months before Mr. Hanson got his HealthSouth directorship, the company donated $425,000 to the football foundation...." (WSJ, 4/11/03, "Board Members Had Lucrative Links at HealthSouth")  


        "Enron CEO Kenneth Lay called to ask him to fill a board seat expected to be vacant soon..." (WSJ, 12/24/02, "Ties to Two Tainted Firms Haunt a Top Doctor") "Jeff Rodek, CEO of software maker Hyperion Solutions, interviewed candidates for the company's board ….  Rodek … has hired one new director and is looking for another." (CFO Magazine, October 2000, “Corporate Governance – Empty Seats on the Board")  


        "Williams H. Webster … had until recently headed the auditing committee of a company that was facing fraud accusations…. At the center of the investigation and the suits … is … the company's chairman and chief executive, who recruited Mr. Webster and other prominent Washington figures to serve on its board...  The board members included George Mitchell, the former Senate majority leader, and Beth Dozoretz, the former finance chairwoman of the Democratic National Committee." (NYT, 10/31/02, "Audit Overseer Cited Problems in Previous Post")  "CEOs are scrambling ... to recruit fresh board members..." (WSJ, 11/19/02, "Building a Board That's Independent, Strong and Effective")  


        "(Question) In your experience, what kind of due diligence do potential directors normally do before accepting a position? (Answer by Morrison & Foerester partner Darryl Rains) Too often very little. When a friend or longtime associate asks you to serve on a board, it's sometimes difficult to ask probing questions." (Forbes, 2/17/05, "Q&A: How Directors Can Shield Themselves") Note that it was "asks you to serve" as opposed to "asks you to apply." Where did the "friend or longtime associate" obtain the authority to invite someone to serve on a BOD? The idea that an election by Shareholders is only a mere formality is very ingrained into the mindset of the corporate and news media.


        "When John J. Mack began his effort to recruit and promote new talent at Morgan Stanley, he did not have to stray too far a field — or off the fairway, for that matter. Two of the first directors named to the firm's board last summer are members of Mr. Mack's own club, the Golf Club of Purchase in Westchester County … [W]ith chief executives under increasing pressure to have independent boards, that old temptation to have a few golf pals on the board and in the executive suite might be less acute. Yet the practice appears to be alive and well, if not as visible. …  Mr. Mack has recruited other directors, as well as executives, who are diverse in makeup and background, and share no recreational ties with the chairman."  (NYT, 3/11/06, "A Path to a Seat on the Board? Try the Fairway") This is a blatant example of a CEO "recruiting" his own BOD members --- the persons who are supposed to supervise him on behalf of Shareholders.  Ethical handicaps seem to extend beyond the fairways.  The Boardroom has become the new 19th hole for good cheer and fellowship.  The word to Shareholders is: "Four!"

        "Michael Miles, a longtime ally of former Morgan Stanley Chief Executive Officer Philip Purcell, stepped down yesterday as a director of the blue-chip securities firm.  Mr. Miles … is one of a number of Purcell allies who have left or are expected to leave the board following Mr. Purcell's resignation….  John Mack, who succeeded Mr. Purcell on June 30, brought in three new directors last month. … As head of the nominating committee that chose new directors, Mr. Miles helped cement Mr. Purcell's hold on the CEO job….  Mr. Miles is the third Purcell ally to leave the board since the resignation."  (WSJ, 9/7/05, "Miles, Ally of Ousted CEO Purcell, Leaves Morgan Stanley’s Board")  Did the new CEO fire the Directors who "stepped down"?  It might have been instructive had the meaning and background facts of "brought in" and "stepped down" been explored in detail. "Brought in" seems to imply beholden to Mack vis-à-vis Shareholders, to whom Directors are supposed to owe a fiduciary duty. 

        "Michael A. Miles, a Morgan Stanley director with close ties to the former chief executive, Philip J. Purcell, has resigned from the board, the bank said yesterday.  The move, which was expected, is the latest signal that the new chief executive, John J. Mack, intends to reorganize a board that during the battle over Mr. Purcell's leadership became a lightning rod for criticism and remains the target of several shareholder lawsuits. … As head of Morgan's nominating committee, Mr. Miles was an architect of a board that included several former chief executives, many of whom lived in the Chicago suburbs, who defended Mr. Purcell in the years after the Dean Witter Morgan Stanley merger." (NYT, 9/7/05, "Morgan Director Resigns, a Sign That a Reorganization Is Likely") "Reorganize" seems to mean the selection of Directors who are beholden to the new CEO and, thus, would be compliant.  And, if they are not compliant, the Directors could expect that the BOD would be "reorganized" again.

        "Three more Morgan Stanley directors who served under former Chief Executive Philip Purcell announced resignations, in a year-end coda to the battle over the Wall Street firm's future that ended with the return of John Mack. The latest directors to step down are Miles Marsh, the lead outside director; Edward Brennan, the former chief executive of Sears, Roebuck & Co. who had the strongest ties to Mr. Purcell; and John Madigan, former chief executive of Tribune Co. … Mr. Mack, a North Carolina native, has recast the board, bringing in four outside directors, two of whom have North Carolina ties as well.  Roy Bostock, an advertising executive, like Mr. Mack graduated from Duke University and has served as a trustee. Erskine Bowles is president-elect of the University of North Carolina. Three former Purcell-era directors left the board in September. With yesterday's resignations, only four remain from the group of 10 outside directors elected at the annual meeting in March. … [O]ne or more new directors may be added next year to the total of nine…." (WSJ, 12/22/05, "Morgan Stanley Loses 3 Directors In Latest Exodus")  Is this an instance where a CEO informed Directors that they are "stepping down" so that the CEO can "recast" and "bring in" his own set of compliant cronies as opposed to engaging in the charade of a Director nomination process and election by Shareholders?  Where are all the Trumanesque Directors, who, on behalf of Shareholders, would dare to stand-up to the McAurthuresque CEOs? "The resignations of Edward A. Brennan, John W. Madigan and Miles L. Marsh … are the latest sign of a fundamental reshaping of the board by the firm's new chief executive, John J. Mack. The departure … is an open acknowledgment that all the control levers at Morgan Stanley are now firmly in Mr. Mack's grip.  … Mr. Mack has moved quickly to repopulate the board with executives more in his own image." (NYT, 12/22/05, "Three Morgan Directors Resign; All Were Allies of Ex-Chief")  "Fundamental reshaping," "repopulating," "control levers" and "own image" sound so much more acceptable than BOD lack of accountability and usurpation of Shareholder rights.


       "Fannie Mae appointed an accounting expert to its board days before a regulatory report is expected to criticize the company's directors for failing to ask tougher questions about how the mortgage-finance giant kept its books. The government-sponsored provider of funding for home loans said Dennis Beresford, an accounting professor at the University of Georgia , Athens, is joining the board and taking over as chairman of the board's audit committee. …. A Fannie spokesman declined to comment on whether the expected report from the company's main regulator, the Office of Federal Housing Enterprise Oversight, or Ofheo, was a factor in the board changes. Ofheo's report, recently sent to Fannie's management, is due to be made public Tuesday. The report is expected to blame the board and senior executives for failing to ensure that Fannie complied with accounting rules. … Mr. Beresford is a former national director of accounting at Ernst & Young LLP and former chairman of the Financial Accounting Standards Board. He also is a director of Kimberly-Clark Corp. and Legg Mason Inc." (WSJ, 5/20/06, "Fannie Mae Names New Director")  Please see Internal Investigations, below.


        "Over the years, Mr. (Maurice R.) Greenberg (former CEO of American International Group) connected with many of his outside directors in another way: by making big donations through the Starr Foundation, a nonprofit organization he controls, to institutions that some A.I.G. directors led or belonged to. Contributions to such outfits surpassed $44 million from 1998 to 2003, the most recent figures available. … According to the most recent filing, it had roughly $3.6 billion in assets, mostly in A.I.G. shares. …Did the foundation's contributions to the directors' favored organizations influence them as the recent crisis unfolded at A.I.G.?  None of the directors would comment on that. … [S]hareholders have a right to wonder if all those donations to the directors' favorite charities are clouding their judgment." (NYT, 4/10/05, "Charity Begins at the Board. Just Ask A.I.G.")  Did this involve an instance where the BOD's fear that AIG would be criminally indicted (and, thus, become extinct) trump greed?  On the other hand, was personal greed the trump card?  If AIG ceased to exist, those cushy BOD jobs would do likewise.  "The six-paragraph letter ... represents an opening salvo ... pitting the former chief executive (Greenberg) against the ... board members he picked." (WSJ, 5/5/05, "Greenberg Takes AIG to Task")  The CEO "picked" the BOD members!  There is not the barest pretext that Shareholders are involved in the process, except to rubber stamp those "picked" by the CEO --- the person supposedly supervised by the BOD. "When Mr. (Frank) Zarb left Nasdaq in 2001, Mr. Greenberg asked his friend to join AIG's board, a plum directorship at one of the nation's leading companies." (WSJ, 5/20/05, "Casualty of AIG Mess: Two Financiers' Long Alliance")


        "Many more corporate directors are independent of management these days, but boards have more work to do before they can persuade shareholders that they are acting as good stewards, says Julie H. Daum, who leads the board practice at the executive search firm Spencer Stuart in New York. The firm says her practice conducts about 60 percent of all board member searches in the United States. Following are excerpts from a recent conversation: Q. So the notion that directors are just captives of C.E.O.'s is not based in reality? A. … Now companies have to put into their proxies where the idea for a new director came from. I think boards also are very cognizant now of having anything that can be perceived as a conflict. If you and I serve on a board together, it probably means that neither of us should serve on another board with each other. Boards are very conscious of the concept of interlocking boards. It used to be that's where the ideas for candidates came from. You knew somebody from another board and you'd recommend them. Q. What is an example of a company where the independence of directors has been questioned? A. Home Depot is a good example. The relationships among directors, those were not situations where someone was getting compensated by the other. But they were serving on the boards of other organizations. … Q. What do you think of the assertion by Bob Nardelli, Home Depot's C.E.O., that his board is the most independent in America? A. … But there's independence and then there's independence. I could be your next-door neighbor and best friend, but I qualify as independent because we don't have a business relationship. I'm not serving on your board. You're not setting my compensation. We're not doing consulting work together. We would meet the stock exchanges' criteria for independence, but obviously we have a less-than-independent relationship. That's what you can't quantify." (NYT, 8/27/06, "The Pros and Cons of Independent Boards")


        "Over more than 20 years, Duke (University) transformed itself from a Southern school to a premier national institution with the help of a winning strategy: targeting rich students whose families could help build up its endowment. … Both schools (Duke and Brown University) had a behind-the-scenes power broker, a go-to man for prominent parents seeking to fast-track their children's applications. Duke had Joel Fleishman, 72 years old, a wine connoisseur who sits on boards of companies run by Duke donors and the parents of Duke students.  … Celebrity students generally lag behind their classmates in academic honors. … Duke has acknowledged the existence of development admits. …  Mr. Fleishman's friendships with Duke donors gave him a valuable entrée into businesses far a field from academia. Take, for example, Ralph Lauren. Two of the famed designer's children, David and Dylan, graduated from Dalton School in Manhattan in 1989 and 1992 respectively and enrolled at Duke while Mr. Fleishman ran the fund-raising campaign. A person familiar with their Dalton records describes David as a 'B-plus' student with SAT scores in the 1100s. Dylan had better grades and SATs in the 1200s. In that era, Duke's average SAT score was close to 1350. …  In 1999, Mr. Fleishman became a director of Polo Ralph Lauren Inc. As of the company's most-recent filing, he was earning $35,000 a year as a director plus $7,500 as chairman of its compensation committee and $2,000 per meeting. He also owned or held options to buy 37,500 shares of Ralph Lauren stock, worth at least half a million dollars, public filings show. … Mr. Fleishman also sits on the board of Boston Scientific Corp., whose chairman, Duke alumnus Peter Nicholas, is one of Duke's biggest donors. His three children graduated from the university. Mr. Fleishman sits on more corporate boards "than a lot of people, especially nonpresidents," says J. David Ross, a former vice president at Duke. Mr. Ross says he believes the directorships weren't payback for admissions."  (WSJ, 9/9/06, "How Lowering the Bar Helps Colleges Prosper")


        "Google Inc. Chief Executive Eric Schmidt is joining Apple Computer Inc.'s board of directors…. Schmidt was elected Tuesday…." (Reuters, 8/30/06, "Apple Board's Search Ends With Google CEO")   "Apple Computer Inc. said Google Chief Executive Eric Schmidt joined its board of directors…. Some analysts interpreted the appointment … as an event that could help Apple…. " (WSJ, 8/30/06, "Google CEO Schmidt Joins Apple Computer Board") Two well respected financial publications differ as to whether  "joining" is the equivalent of being appointed or being elected. How could mere mortals, e.g., Shareholders, reasonably be expected to recognize and correctly interpret this corporate governance obfuscated code?


        "[M]r. (Stanley) O'Neal's board (at Merrill Lynch) is largely handpicked. He has recruited people like John D. Finnegan, the chief executive of Chubb and a friend for more than 20 years. The two men worked together in the General Motors treasury department. Mr. O'Neal is also close to another director, Alberto Cribiore, a private equity executive who runs his own firm, Brera Capital. In the late 1990s, Mr. Cribiore came close to persuading Mr. O'Neal to join his nascent private equity firm." (NYT, 10/27/07, "Merrill Lynch Weighs Ouster of Top Officer")  With a $9 billion write-down of sub-prime investments, the BOD became somewhat less consensual.

        "Merrill Lynch's board members dropped the ball during the almost-five-year reign of the now-ousted Stan O'Neal. ... Directors also should recognize that their previous hands-off approach didn't work. Mr. O'Neal's ruthless response to anyone who challenged his authority might have made sense as he consolidated his position. Still, it left him holding the firm's top four positions for a time: chairman, chief executive, president and chief operating officer. ... The directors now have to put one of their own in charge as interim nonexecutive chairman. The nonexecutive chairman post is something they should consider keeping. ... That might put off some potential CEO candidates. But Merrill's travails stem from inadequate oversight, and a CEO who insists on all the leeway granted Mr. O'Neal might not be the right choice. The presence of a nonexecutive chairman could reassure investors the board is back on the case." (WSJ, 10/31/07, Comment: "Merrill Board's 2nd Chance")

        "Merrill's board was packed with people picked by Mr. O'Neal, and he was reportedly someone who resisted constructive criticism and stifled genuine debate. In this, he resembles plenty of chief executives, and there's nothing in Sarbanes-Oxley to prevent it. But it's not good governance or effective leadership. As a result, Mr. O'Neal and his board may have failed to engage in the kind of debate that would have prevented this tragedy. To be specific, what was Merrill's board asking Mr. O'Neal when Merrill was earning record profits on the outsize success of its huge investment in subprime mortgages and related collateralized debt and loan obligations? I know it's hard to ask tough questions in the face of success. It's not a strategy for winning popularity contests. But it's essential in the worlds of business and investing. ... [R]eward is correlated with risk. You can't earn massive returns without assuming tremendous risk. We now know that was true for Merrill. Amid the big gains in its fixed-income operations, it was assuming far more risk than anyone there apparently realized." (WSJ, 10/31/07, "Merrill's Board Needed To Question Success")  


        "Fremont General Corp., the Santa Monica (California) lender forced to exit the sub-prime mortgage business, replaced its entire board of directors except for its chief executive and president. Stephen Gordon, named chairman and chief executive in November, brought in five new directors...." (LAT, 1/10/08, "Fremont replaces most of its board")


        "The Obama administration said Monday that the embattled auto maker (General Motors) aims to replace 'a majority of the board over the coming months.' Federal officials also confirmed the appointment of Kent Kresa, a GM director since 2003, as its interim board chairman. Mr. Kresa, 71 years old, was CEO of defense contractor Northrop Grumman Corp. between 1990 and 2003, and previously served on the board of Chrysler Corp. One person close to the company described him as 'a safe choice,' because he was one of the few GM directors who had run a major industrial company. ... The decision by President Barack Obama's auto task force to replace most GM directors came amid some pressure by company bondholders and other industry experts who had advised the task force in recent weeks.... During one meeting, the board was described as 'a collection of failed CEOs,' and the group was blamed for not prompting GM management to move faster in restructuring the company. ... Some governance experts consider GM's board fairly weak because it lacks individuals with auto-industry expertise and includes several retirees without recent corporate-management experience. ... It may be easier to remove directors than to replace them, however. The government may encourage GM to add directors with more automotive or industrial know-how, some observers believe." (WSJ, 3/31/09, "GM Will Replace at Least Six Others on Board") Shareholders still have no say in the selection of Director-candidates. The more things change, the more they stay the same. Now, the US Calvary is galloping to the rescue.  However, the US Calvary, with sabers held high, may lack pertinent experience.


        "Spencer Stuart, one of the largest U.S. executive search firms, has advised or is advising board searches taking place at several companies accepting Treasury funding in recent months. Those companies include Citigroup Inc., American International Group Inc. and GMAC LLC. (Interim GM Chairman Kent) Mr. Kresa has a deep base of contacts after several years on GM's board, a tenure as chief executive of Northrop Grumman Corp. that ended in 2003, and a stint as a director at Chrysler. He had planned to rely on his professional network to conduct the search. But officials at the Treasury, which has lent GM $15.4 billion, 'strongly' suggested that Mr. Kresa choose Spencer Stuart for GM's board search, telling him that the search firm 'can do it quickly,' said a person close to the matter. They told Mr. Kresa he would be contacted by Tom Neff, head of the firm's U.S. operations...." (WSJ, 5/11/09, "GM Hires Search Firm for New Board") Did the government provide Mr. Neff with marching orders?


                2.    CEOs Seek "Consensual" Directors And Shorten the Longevity of Directors Who Are Otherwise  


        Should the BOD motto be "Go along and get along or get out before we throw you out"?  "Too many boards are stuffed with yes men who question little that their chief executives suggest. ... Chief executives tended to dominate the choice ... of board members (where search committees are usually encouraged to look for 'consensual' candidates who will not rock the boat)...." (The Economist, 1/9/03, "Corporate boards: The way we govern now") 


         "It was promoted as the chance of a lifetime: Mom-and-pop investors could buy shares in celebrity businessman Donald Trump's first public company, Trump Hotels and Casino Resorts. Their investments were quickly depleted. The company known by Trump’s initials, DJT, crumbled into a penny stock and filed for bankruptcy after less than a decade, costing shareholders millions of dollars, even as other casino companies soared.  … The company lost money every year of Trump’s leadership, and its share price suffered. … Company decisions were, as in most public companies, approved by a board of directors. None of the original directors responded to requests for comment. Trump wrote in his book ‘Trump: Surviving at the Top' that he ‘personally didn't like answering to a board of directors.' Charles Elson, the director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, said that Trump exemplified the­corporate-American role once known as the 'imperial CEO': an unchallenged, dominant leader who single-handedly steered the company. 'The CEO ran the show ... and the board was the creature of the CEO,' Elson said. 'These days, it's very different,' he added, because of a shift toward greater oversight from company directors and the increasing presence of activist shareholders. One later director was close to Trump: his daughter. Ivanka Trump was named to the board of directors in 2007, when she was 26 and had been working for two years at her father's private company, the Trump Organization. The public company paid her $188,861 in cash and stock awards that year, filings show. Representatives for Ivanka Trump declined to comment. Ivanka and Donald Trump both resigned from the company in 2009, after Trump declared in a statement that he strongly disagreed with bondholders who had been pushing the company to file again for bankruptcy." (6/12/16, WP, "As its stock collapsed, Trump’s firm gave him huge bonuses and paid for his jet") Why not identify "the original directors"? How much were they compensated for their stellar BOD service? It will only be different when the BOD's personal assets are on the line. Countries headed by "imperial CEOs" are known as kleptocracies. 


        "[D]eparting director Andrea Van de Kamp --- who emerged last year as one of (Disney Chairman and CEO Michael D.) Eisner's harsher board critics --- vehemently objected and accused the chairman of orchestrating her removal … Directors said the names of the four leaving the board were submitted by the nominating committee, which was acting on the recommendation from Eisner."  (LAT, 1/31/03, "Eisner Critic Losing Seat on Board of Directors")  "She argued that Eisner's behavior undermines efforts to strengthen the board's independence and 'gives the appearance that rubber-stamping Michael's decisions is an unwritten prerequisite for continued board membership.'" (LAT, 2/15/03, "Exiting Board Member Says Eisner Bullied Her")  "She recalled a meeting with him in the midst of the board turmoil ... nominally over new ideas, where she said he recited every instance in her four years as a board member where she disagreed with him. 'It appeared that Michael was focusing more on staying in power instead of focusing on the best interests of the company,' she said." (NYT, 12/8/03, "Criticism of Disney Chief Grows Bolder")  "Things got so testy between the two, according to the book (‘DisneyWar: The Battle for the Magic Kingdom' by James B. Stewart), that Mr. Eisner told Ms. Van de Kamp, 'You're a terrible director. You are so loyal to Stanley (P. Gold), it's like you've carried his babies.' The comment stunned Ms. Van de Kamp, who was not reinstated to the board in a vote of 12 to 4, with 2 abstentions." (NYT, 2/10/05, "Eisner Said to Be Open to Staying at Disney")  This guy definitely knows how to charm the ladies!  Minnie is especially fond of him.

        "(Roy O.) Disney ... accused Eisner of maneuvering to have the board's nominating committee leave his name off the slate of directors that will be elected in the coming year --- 'effectively muzzling my voice.'" (LAT, 12/1/03, "Roy Disney Quits, Urges Eisner to Resign for Good of Company")  "In the last year, other board members (other than Director Roy E. Disney) critical of Mr. Eisner's management style either left or saw their influence diminished. ... Mr. (Stanley P.) Gold, who was once very influential on the board, was stripped of crucial posts because of his status as the investment adviser to Mr. Disney."  (NYT, 12/1/03, "Leaving Board, a Disney Heir Assails Eisner")  "Mr. Eisner has proved himself a skilled corporate politician who has been shrewd about using the idea of better corporate governance as a shield against critics who threaten his reign." (WSJ, 12/1/03, "Roy Disney Quits Company Board And Calls on Eisner to Resign")  "Mr. Gold's (letter) criticized the other directors for serving as a rubber stamp for management, saying that they enacted policies that muzzled dissenters and shielded Mr. Eisner from 'criticism and accountability.' ... 'Unfortunately it has been extremely difficult to have debate on a board which considers disagreement with management as "destructive."'"  (NYT, 12/2/03, "2nd Member of Board Resigns at Disney")  

        "The University of Delaware's Charles Elson, another leading corporate-governance expert, would go even further.  'That board is such a rat's nest of conflicts that the only thing to do is to clean the whole thing out.  Let is start all over again."  (BusinessWeek, 12/02/03, "Stalking a Wily Prey at Disney")  The latter suggestion sounds great in theory.  However, implementing such a plan still disenfranchises Shareholders --- Directors select a new CEO and resign and, thereafter, the new CEO selects/appoints new Directors, who would be beholden to the new CEO.

        "A prominent investor-advisory firm recommended against the re-election of four Walt Disney Co. board members who sit on its governance committee, in response to the board's decision to give Chief Executive Robert Iger the added title of chairman. In a new report, Institutional Shareholder Services Inc. accused Disney's board of reversing 'an earlier commitment to independent board leadership' by making Mr. Iger chairman—and criticized it for doing so— without seeking shareholder input. The report also raised concerns about his compensation. ... The board's decision to grant Mr. Iger the dual roles is 'an about-face from governance reforms adopted following a highly public 'vote no' campaign at Disney in 2004,' the report said. That campaign, the report said, resulted in a 45% 'withhold' vote on former Disney Chairman and CEO Michael Eisner, who soon after stepped down as chairman. The company subsequently adopted corporate-governance guidelines calling for an independent chairman, 'unless the board concludes that the best interest of shareholders would be otherwise better served.' The board members that the report advised against re-electing make up the governance committee: Judith Estrin, Aylwin Lewis, Robert Matschullat and Facebook Inc. Chief Operating Officer Sheryl Sandberg. ... The report also questioned Mr. Iger's compensation, valued at $31.4 million for 2011...." (3/2/12, WSJ, "Disney Governance Panel Assailed Over Iger's Dual Role") The King is dead, long live the King.


        "After Cablevision Systems Corp. Chairman Charles F. Dolan replaced three directors with four of his friends this week, corporate governance experts, legal experts and investors cringed. … What made Charles Dolan's actions all the more extraordinary was that they flew in the face of a trend toward more board independence, prompted by accounting scandals at such companies as WorldCom Inc., Enron Corp. and Adelphia Communications Corp. … Some investors said Dolan's power play was the latest reminder of the dangers of a system of dual-class shares, under which special stock carries disproportionate voting clout. Though Dolan and his family own less than 2% of Cablevision's equity, special voting stock enables them to call the shots. … Critics say these dual-class structures leave equity shareholders vulnerable to abuse…. [T]he new directors had the same fiduciary responsibilities as the ones they replaced. Analysts said it behooved those new directors to take a hard look.… [T]he new directors would also be open to shareholder lawsuits because (of what) their predecessors had just determined…"  (LAT, 3/4/05, "Cablevision Power Play Alarms Wall Street, Governance Experts")


        "A Tenet Healthcare Corp. director who abruptly resigned last month has accused the company of failing to change its corporate culture, stirring up old issues as the large hospital concern struggles to put its house in order. ... Tenet Chairman Edward A. Kangas and two other directors counter that Mr. (Robert C.) Nakasone resigned after he was asked to leave because he was disruptive and wasted the board's time. ... [T]he company announced his resignation without giving a reason for it. ... Repeated efforts to revisit decisions and even 'to argue about the minutes' distracted the board, hurt its efficiency and explains 'why we asked him to step off the board,' Mr. Kangas said."  (WSJ, 4/12/04, "Tenet Ex-Director Sees No Progress")  Certain questions arise.  Did Tenet issue a misleading explanation for the resignation?  Why did the Directors not agree as to how the BOD Minutes would describe their past actions?  What is inherently wrong about revisiting past decisions?  Should it not be for the Shareholders to decide whether a Director's efforts to protect their interests are "disruptive and wasted the board's time"?     


        "Last week, the Securities and Exchange Commission charged HealthSouth and its chairman and chief executive, Richard M. Scrushy with 'massive' accounting fraud…. Mr. Scrushy confronted Mr. (Robert P.) May … and told the director he was going to 'fire' him …. unhappy with Mr. May's efforts to replace certain longtime board members...." (WSJ, 3/25/03, "HealthSouth Turns to Outside Help")    


        "Former director E.T. Summers III, a retired president of Coca-Cola of the Southwest, notes he was asked to resign in 2001 after 'Jud (Alfred "Jud" Schroeder, major shareholder and Chairman of Lancer) and I reached an agreement that I wasn't good for the board because I was too independent.' Besides, Summers says, his advice was ignored." (USA Today, 8/20/03, "Big problems bubble up for Coke's little partner Lancer")  "Too independent"?  Hmmm.


        "The former chief executive of Westar Energy, David C. Wittig, who has been convicted of bank fraud and a former lieutenant have been indicted in what federal prosecutors called a scheme to loot the company that pushed it to the brink of bankruptcy with $3 billion in debt. ... The indictment charged that through 'fraud and outright intimidation, Mr. Wittig and Mr. Lake devised a scheme to loot the company of tens of millions of dollars,' ... It further contends that the two men forced out board members who objected to executive compensation plans..." (12/5/03, NYT, "Former Executive Convicted of Bank Fraud")  "A resignation letter ... dated March 28, 2001, from Jane Dresener Sadaka (a former director of Westar Energy) ... was one of dozens of Westar documents made public by the Kansas Corporation Commission despite objections from the company.  ... Sadaka ... said she resigned from the board because management and other directors didn't share her concerns about ... what she believed were excessive salaries....  She also complained that management failed to supply board members with sufficient information to make decisions." (The Topeka Capital-Journal, 6/28/02, "Westar management, salaries denounced")  Ms. Sadaka did not utilize SEC Rule 14 to cause Westar to inform its Shareholders of her concerns. SEC Rule 14, Schedule A --- Information Required in Proxy Statement, Item 7g states, "If a director has resigned ... because of disagreement ... on any matter relating to ... operations, policies or practices, and if the director has furnished ... a letter describing such disagreements and requesting that the matter be disclosed, the registrant shall ... summarize the director's description of the disagreement." 

        "In a trial that began this month in Kansas City, federal prosecutors are seeking to seize the assets of Mr. Wittig, a Kansan who rose to stardom as an investment banker on Wall Street before returning nearly a decade ago with multinational ambitions for Westar. … Mr. Wittig says Westar still owes him more than $40 million in compensation; Mr. Lake is seeking more than $16 million.  Adam Hoffinger, Mr. Wittig's lawyer, said he expected to win the case since most of Mr. Wittig's actions as chief executive were approved by Westar's board."  (NYT, 10/30/04, "This Kansan Made Good, Maybe Too Good, Some Say")  "The good people of Topeka don't much like David Wittig, who stands accused of looting the local utility in a case known as the ‘Kansas Enron.’ … Like many staid utilities, Westar wanted to diversify into fast-growing, unregulated businesses.  In 1995, it tapped Wittig to head corporate strategy. … But his deal making backfired… Westar's highflying stock plunged, its rates rose and its debt load raised bankruptcy concerns.  Wittig resigned at the end of 2002, after a grand jury had subpoenaed corporate records. He demanded tens of millions in unpaid compensation. Westar balked, commissioning a 367-page internal report that detailed much of the alleged wrongdoing in the indictment. … He used company resources to force out his enemies on the board and to investigate a local reporter who was asking uncomfortable questions, the indictment alleges. … [T]he case is no slam-dunk. … Wittig and Lake contended the excesses at Westar amounted to no more than poor corporate governance, largely ratified by the board of directors." (Chicago Tribune, 6/19/05, "Kansas Enron' case stirs wrath")  Sound familiar?  Was the CEO's game plan one of stacking the BOD with compliant cronies and, when push came to shove, blaming the BOD for agreeing with the CEO's improper actions?  Perhaps, BODs, if they feared any sting of accountability, would adopt the mantra of "trust, but verify" when dealing with the hired help. "A federal jury found former Westar Energy Inc. Chief Executive Officer David Wittig and another executive guilty of looting the electric utility of millions of dollars. ... Wittig and Lake have denied the charges, saying that their actions were legal, approved by the company's directors, and disclosed in corporate filings." (WSJ, 9/13/05, "Jury Convicts Westar Ex-Officials Of Looting Millions From Utility") One may wish to view an excerpted copy of "Report of the Special Committee to the Board of Directors."

        "In a stunning reversal of a high-profile government prosecution, a federal appeals court in Denver overturned convictions of two former executives of Westar Energy Inc., a large Kansas utility. The three-judge panel ruled that prosecutors presented insufficient evidence to support convictions of former chief executive David Wittig and former executive vice president Douglas Lake, on charges of wire fraud, money laundering, conspiracy and circumvention of internal financial controls.  ... In reversing the convictions, the appellate court ruled that all the counts hinged on the government's ability to prove that Messrs. Wittig and Lake tried to hide from the Securities and Exchange Commission their personal use of corporate aircraft. However, the panel said, SEC regulations only require the reporting of such activity when it costs the company an amount above a certain threshold.  Because 'the government offered no evidence that the additional cost to Westar of either defendant's personal travel ever exceeded this threshold . . . the jury could not possibly determine that the reports' were false, the court said. The court ruled that the defendants could not be retried on the fraud or money laundering charges, but that they could be retried on the lesser charges of circumvention of internal controls and conspiracy." (Emphasis added.) (WSJ, 1/6/07, "Convictions Overturned in Westar Case")  The Court's opinion states, "The defendants sought from the district court an instruction to the jury explaining that the proper consideration was not the value of the travel to the defendants but the (much lower) additional cost of the travel to Westar. The court refused to give the instruction. ... There was no evidence that the value of personal travel ever exceeded the reporting threshold." (Emphasis added.)  With 20-20 hindsight, one could observe that the prosecutors really blew it!


        "The NYSE Governance Structure And Grasso's Regulatory Authority Over the NYSE's Directors Created Actual And Apparent Conflicts Of Interest. ¶ 25.  Grasso had the authority to select those who served on the Compensation Committee.  He also regulated most of them.  This conflict allowed Grasso to influence directors who might have wanted to pay him less, and to reward directors who would pay him more.  For example, one former Compensation Committee member was confronted by Grasso after he had privately expressed concern to Ashen about a component of Grasso's proposed compensation in 2002.  The director testified that 'he was a little taken [a]back that there was an ear to the committees ... and that my hesitancy was reported immediately.'  The Committee member, who ultimately approved Grasso's proposed compensation for that year recalled thinking 'thank God I escaped that one.  This man was also our regulator, and I'm a member of the New York Stock Exchange ... And when he's kind of indirectly your supervisor or your regulator, you have to be careful.'" (Complaint, People of the State of New York, etc. v. Richard A. Grasso, et al., 5/24/04)

        "John Reed's plan to reform the New York Stock Exchange ... (with) his handpicked board of directors is a bad way to start. ... The new board ... (includes) Robert Shapiro, former CEO of Monsanto....  Shapiro tapped Reed to serve on the Monsanto board and Reed, in turn, asked Shapiro to the board of Citicorp, the bank where Reed was chief executive. ... [T]he appointment smacked of 'cronyism'."  (CBS.MarketWatch, 12/16/03, "NYSE board picks challenged")  "In the midst of the search for a permanent chairman, Mr. Reed said, he impulsively offered the chief executive job to Mr. (John A.) Thain.... Mr. Reed walked up to Mr. Train, whom he knew as a fellow trustee of the Massachusetts Institute of Technology....  'I don't know what caused me to do it,' said Mr. Reed....  Mr. Thain would have the power to veto other prospective chairmen. ... '[T]he C.E.O. should not have a veto over the chairman of the board,' Mr. (Charles M.) Elson, who teaches corporate governance at the University of Delaware's business school, said.  (NYT, 12/21/03, "Next for the Big Board: To Sue or Not to Sue?")  It appears that Reed has admitted that he did not have advance authorization from the BOD to make the employment offer to Thain.  Did the "handpicked" BOD later ratify Reed's impulsive act by its silence?  (Thain went on to become CEO of Merrill Lynch and, when the bumbling herd stumbled over a cliff into the arms of Bank of America, was terminated.  It was reported that he reimbursed Merrill Lynch for the near $1 million he spent to refurbish his office.)


        Prospective Directors understand that their appointments to BODs are conditional upon the approval of the respective CEOs.  "Management still should be consulted on the (nominating) committees' choices, experts say.  'I think as a practical matter, few new directors would accept without knowing that the CEO is enthusiastic about the decision,' says James Ukropina, a Los Angeles-based lawyer who has served on the boards of several public companies.  'No one likes to go to the boardroom thinking they have been imposed on the CEO, especially if the CEO is a responsible person.'"  (WSJ, 10/27/03, "Opening the Board")  How, in the eyes of the appointee, could a CEO approve the person's appointment and not be "a responsible person"?  Didn't that CEO have the perspicacity to make/approve the appointment?


        "And the directors inherited from Compaq clearly know how to build shareholder value. … Less of an argument can be made for others, such as Robert Knowling Jr.  A former telecom executive, he was pushed out of Covad Communication Group shortly after (Carly) Fiorina named him to the board.  At the time, his allegiance seemed inclined far too much to Fiorina, rather than to HP's investors.  As he told BusinessWeek at the time, 'I didn't join HP.  I joined Carly. If she left tomorrow, I'd resign tomorrow.'" (BusinessWeek, 2/17/05, "Where the Buck Stops at HP")


        Some BODs may be so beholden to the CEO that regulators have to put a gun to their collective heads to get them to do what is in Shareholders' best interests.  "[T]he Securities and Exchange Commission's staff found that Fannie had violated accounting rules and would have to restate results for the past four years. In a securities filing yesterday, Fannie said its financial statements from 2001 through the third quarter 'no longer should be relied upon' because they were prepared with practices that didn't comply with generally accepted accounting principles.  Fannie previously had estimated that the restatement will require it to recognize losses on derivative contracts, used for hedging interest-rate risks, of about $9 billion…. [S]ome directors were hesitant to ditch the widely respected Mr. (Franklin D.) Raines, who had carefully cultivated personal relationships with the directors over many years … taking them to dinner at a Four Seasons hotel in Washington on the eve of board meetings.  The directors came to no conclusions about Mr. Raines's fate Thursday, but agreed to hold a formal meeting on Sunday. … The board met for most of Sunday.  Directors … still didn't come to a conclusion on whether to force Mr. Raines out.  One idea advanced by Mr. Raines, according to a person close to the discussions, was for him to announce a retirement effective at some later date, which would have created the appearance that he wasn't to blame for the accounting fiasco.  A final decision didn't come until Tuesday, when Mr. Falcon (Office of Federal Housing Enterprise Oversight Director Armando Falcon Jr.) told the board that without action he would issue a formal declaration that Fannie was 'significantly undercapitalized,' a move that would allow the regulator to force changes in management and operations whether or not the board went along. Mr. Raines was out within hours… " (WSJ, 12/23/04, "After Fannie Shake-Up, Regulators Focus on Pay")  It's amazing what a little schmoozing and a few dinners at a Four Seasons Hotel can buy these days!  (Fannie was subsequently placed into a conservatorship where it was forbidden to continue to make political contributions and to conduct lobbying efforts.) 


        "How can you have independent directors when the board chairwoman feels free to order investigators to spy on the directors? If you dissent on this board, we'll nail you. … If I were a board member of any company, I would seek a promise from my company that it would not seek access to my confidential telephone or other records without my permission, even if I vote the wrong way or am suspected of disclosing secrets. If company officials think I violated the law, they can call the cops." (NYT, 9/7/06, "Don't Like A Director? Spy on Him ") 

        "[T]he board reviewed the results of an extensive investigation into press leaks that was undertaken by new board Chairman Patricia Dunn…. The report, which relied in part on private telephone records, fingered George Keyworth, a longtime director and former science adviser to President Reagan, as the source of many of the leaks about board deliberations. A boardroom showdown ensued, during which the board voted to ask Mr. Keyworth to resign, and he refused, saying he was elected by the shareholders. Venture capitalist Tom Perkins, a friend of Mr. Keyworth, quit the board on the spot in anger. … In response, the Hewlett-Packard board plans … that Mr. Keyworth will not be nominated for re-election to the board at its annual meeting next March. … Ms. Dunn said she regularly informed the board of the investigation, but provided few details, at the investigators' request. … Outside board members have long leaked information to the media, often because they're at odds with the CEO and want to promote their own views. … As it became clear the board was going to ask Mr. Keyworth to leave, Mr. Perkins got angry. … He also attacked Ms. Dunn, saying, 'Pattie, you betrayed me. You and I had an agreement we would handle this offline without disclosing the name of the leaker.' (Ms. Dunn says she never had such an agreement. 'I always knew it would require advice of counsel. Counsel was explicit the matter needed to go before the full board,' she says.) Finally, Mr. Perkins rose from his seat, slammed his briefcase shut, and said, 'I quit and I'm leaving.' … The board then began a discussion of its responsibility to disclose the event. The law requires that when a director resigns, the company has to disclose whether it was the result of a fundamental disagreement. … Mr. Perkins reportedly said: 'Just don't make it for personal reasons. I don't want people to speculate about my health.' Board members say they concluded Mr. Perkins had no disagreement with the company, only with Ms. Dunn. Therefore they decided they had no obligation to file details with the SEC. Instead, the board issued a statement on May 19 that simply said Mr. Perkins had resigned, effective immediately. …. Mr. Perkins was concerned with the way his resignation was portrayed by the company, however, and subsequently contacted the SEC with his concerns, according to people familiar with the situation. Mr. Perkins has also been critical of the investigation, which he suggested involved illegal surveillance. Board members acknowledge some discomfort with the methods used by the private investigator who obtained the phone records, but H-P says it was assured by the investigators that the methods were legal." (WSJ, 9/6/06, "Directors Cut H-P Board Clash Over Leaks Triggers Angry Resignation")  Does it make sense for Tom to have committed hara kiri, as opposed to staying on the BOD and fighting, when George, his friend and fellow Director, was being sent to the pillory?  Assuming that the BOD provided any hearing of the allegations against George, he could have defended against his removal on the ground that the BOD had acted with "unclean hands" in acquiring its alleged proof.  What is the value of the private investigator's assurances?  Would anyone expect an admission of illegal activities?  The other message is that Directors are under pressure to conform and keep quiet, or else…. 

        "Former Hewlett-Packard Co. director Tom Perkins, who helped expose the company's spying scandal last year, said in a CBS '60 Minutes' interview that he regretted his 'emotional' resignation from the board." (LAT, 11/3/07, "HP board member regret resignation")  Does that mean that he regrets the way he acted when he resigned, but not that he did it?  Or, does it mean that he regrets abandoning his friend and fellow Director in in his time of need?  

        Perkins sent a letter to Hewlett-Packard wherein he set forth his version of the events surrounding his resignation, his follow-up efforts and various allegations of misconduct.

        "H-P moved to distance itself from the growing scandal, which centers on the use of 'pretexting' to obtain directors' private phone records in an effort to identify the source of the leaks. Pretexting, or posing as a person in order to obtain private phone or other information about them, is illegal in California . … H-P spokesman Mike Moeller said the company told the investigators conducting its internal probe that only legal means were to be used to obtain information. He added that H-P didn't know pretexting would be involved. 'We have determined pretexting will not be used in any future investigation if we have to do another one of these,' Mr. Moeller said. H-P declined to disclose the name of the private-investigation firm it retained or the 'pretexting' firm that firm employed as a subcontractor. … In its SEC filing yesterday, H-P said it has decided not to renominate Mr. Keyworth for another term as director. The company is scheduled to hold its next board elections in March 2007. … Two members of the H-P board said earlier this week that the board asked for the company's leak investigation to be reviewed after the fact by the law firm of Wilson Sonsini Goodrich & Rosati, which has long represented H-P's board. The law firm had concluded that the methods used were legal, these board members say. But the law firm says it made no such conclusion on its own; it simply reported that the private-investigation firm involved and that firm's lawyers claimed their methods were legal. Larry Sonsini, the attorney for H-P's board, yesterday declined to comment." (WSJ, 9/7/06, "H-P Faces Probe Over Its Inquiry Into Board Leaks; California Seeks to Determine Whether Method of Tracing Directors' Calls Violated Law")  Isn't it strange to have so much faith in one's investigator's competence/integrity to specifically request that only legal means be employed?  When does a high-powered law firm reasonably rely, in matter crucial to its client, upon the favorable legal opinion of other (and, likely, lesser powered) law firm of their client's investigator?  For what has the BOD paid?  A major issue remains whether and to what extent there is a semblance of due process in the board room before the death penalty is imposed upon a member who is invited, but refuses, to resign.

        "[T]he relationship between Mr. Perkins and Mr. Sonsini's firm has grown strained. A Wilson Sonsini lawyer, Boris Feldman, accused Mr. Perkins of discussing internal Hewlett-Packard deliberations with others last month. The lawyer went on to demand that he name those he spoke to and what documents he gave them. Mr. Perkins's response was just as rough. Mr. Dinh accused the law firm of conflicts of interest. He accused the company of 'sanitizing' the minutes of the board meeting in which Mr. Perkins resigned. He told the company that Mr. Perkins was a victim of possible fraud, identity theft and misappropriation of personal records.  … A spokesman for the attorney general said that two possible felony charges were being considered: the unauthorized use of personal identifying information for unlawful purposes and the unauthorized access of a computer database. …The search warrant affidavit, on file in Marin County in California, where Mr. Perkins lives in an expansive hilltop home with ocean views, also reveals that the attorney general and AT&T are considering civil lawsuits as well." (NYT, 9/7/06, "Leak, Inquiry and Resignation Rock a Boardroom")


        Sometimes, CEOs make consensual Directors disappear.  "By acceding to some activist demands, companies can often avoid a nasty proxy fight. Hollinger International … did that late last year. Shareholders like (president of hedge fund Providence Capital, Herbert) Denton … wanted three of the firms' directors to step down.  At a breakfast meeting at Michael's Restaurant in New York City last November, (CEO Gordon) Paris asked Denton for time to convince the directors not to seek reelection.  … The directors agreed to step down…." (Forbes, 7/13/06, "How To Fight Off Shareholder Activists")


        "In the restrained world of America's corporate boardrooms, the letter sent earlier this week to five independent directors of Affiliated Computer Services Inc. was the equivalent of a back-alley smackdown. ... ACS Chairman Darwin Deason, a flamboyant entrepreneur who built the company, teamed up with Cerberus Capital Management LP during the buyout frenzy earlier this year to take the company private. Some investors objected early to the $6.2 billion proposal, reasoning that the board could get a more lucrative offer. But such a bid never materialized, and earlier this week Cerberus pulled its offer, citing turmoil in credit markets. ... ACS management along with some of its biggest shareholders, including Oppenheimer Funds, blamed the independent directors for allowing the deal to slip out of their hands -- by refusing to set a vote on the bid before pursuing alternatives. The directors say they had a duty to look for other potential bidders, given that Cerberus's proposed deal included the participation of ACS's chief insider: company founder Mr. Deason, who controls 42% of its shares and still exerts strong influence. ... The dispute is all the more extraordinary given the close, even cozy, relations Mr. Deason once enjoyed with a number of the independent directors -- Robert B. Holland III, J. Livingston Kosberg, Frank A. Rossi, Dennis McCuistion and Joseph P. O'Neill. Several of them enjoyed business or personal ties with Mr. Deason in past years. ... The confrontation began Tuesday during a six-hour board meeting, when Mr. Deason demanded the directors resign immediately. He threatened to nominate a new slate of independent directors for election at the next shareholder meeting, in May, if they refused... He also said he would issue a news release accusing them of neglecting their duties if they didn't comply by yesterday, these people said. ... The directors responded in their own sharply worded letter: 'Your ultimatum: resign in one hour or I will go to the press and smear your reputations -- was a remarkable piece of bullying and thuggery, and it almost worked.' The five directors said they would be willing to resign, but only after vetting their successors.  Late yesterday, the independent directors filed a lawsuit against Mr. Deason and other ACS executives in Delaware Chancery Court asking for a declaratory judgment that they haven't breached their fiduciary duties."  (WSJ, 11/2/07, "A Failed Deal At ACS Sets Off A Board Brawl")  Guess who will ultimately have the honor of paying for the high costs of this school yard squabbling?


       "Nearly half of Williams Cos. board members quit Thursday after they failed to oust the company's chief executive following its collapsed merger deal with rival pipeline operator Energy Transfer Equity LP….The resignations came during a closed-door session in which the bloc sought to replace Chief Executive Alan Armstrong, who they felt was ill-suited to lead an independent Williams as it sets out a new course, the people said. Chairman Frank MacInnis was among those who resigned, as were a pair of activist hedge-fund investors, Keith Meister and Eric Mandelblatt, who joined the 13-member board following a public campaign in 2014, the people said. All three had championed the merger with Energy Transfer, which Mr. Armstrong had opposed and continued to oppose even after it was agreed. … Last week, a Delaware judge ruled that Energy Transfer could walk away from the takeover…. Williams's board met Thursday to discuss the company’s strategy going forward, the people said. The discussion turned to whether Mr. Armstrong was the best person to remain at the helm. The directors not including Mr. Armstrong were split evenly, with six supporting Mr. Armstrong and six opposed. Mr. MacInnis, who had been Williams's chairman since 2011, was opposed to Mr. Armstrong remaining as CEO, but resigned largely for personal reasons…. Five others followed suit, including Laura Sugg, a former executive at ConocoPhillips; Ralph Izzo, CEO of utility giant Public Service Enterprise Group Inc.; and Steven Nance, president of a privately held oil and gas company. All three had been supportive of the merger." (7/1/16, WSJ, "Nearly Half of Williams Directors Resign") Why did the CEO prevail when the Director-vote was tied? Did the newly departed leave with some benefits?


                3.    BODs And Management Engage In Reciprocal Enrichment At Shareholders' Expense  


            Does one hand wash the other?  Do CEOs and Directors say to one another, in substance, "I won't tell on you (to Shareholders), if you don't tell on me"?  A conflict of interests arises when Directors set their own compensation, e.g., cash, stock options.  It is just another conflict of interest for which there is no real accountability.


                        a.    CEOs Get Theirs


        "As outrage mounts over executive paychecks, federal regulators are pushing for clearer disclosure of the pay received by the board members who approve CEO pay. Corporate governance watchdogs fret that CEOs use lucrative pay packages to co-opt board members. … The typical director of a mid-sized company made $104,000, while median pay for the director of a small company was $82,000. Still, that's not bad for a part-time job that requires attending a handful of meetings a year. … [T]he typical director devoted 3.7 hours a week to board duties. … Office Depot Inc. … will pay directors $250,000 this year in cash, stock and options. …[C]ritics say big paychecks can discourage directors from asking tough questions. '$250,000 a year is a lot of money for a part-time job,' said Michelle Leder, who runs, a Web site that examines company filings." (Palm Beach Post, 6/4/06, "Spotlight starts to shine on board members")


        "Given human nature, few expect executives themselves to lobby for lower pay.  And because boards seem reluctant to rein in compensation, some critics conclude that the system is irreparably broken. … His (James D. Sinegal of Costco Wholesale) pay package seems a throwback to another era, especially when compared with the lavish compensation of Henry R. Silverman of Cendant.  … (Each member) of Costco's compensation committee … makes $30,000 a year for serving on the board and receives options on 12,000 shares of stock, as all Costco directors do. … If Mr. Sinegal's compensation is skinny, then corpulent is the word that comes to mind when considering the pay bestowed on Mr. Silverman, the chairman and chief executive of Cendant, the travel, real estate and direct marketing concern. … Along with other Cendant directors, the members of the compensation committee receive $160,000 a year, half in cash and half in Cendant stock, which is put into a deferred compensation plan. The company has also bought a $1 million life insurance policy for each director, as well as a $100,000 term life policy. … [C]hairman of the compensation committee, makes an extra $20,000, while the other members of the committee make $10,000 each, again divided equally between shares and cash."  (NYT, 4/4/04, "Two Pay Packages, Two Different Galaxies")  


        "A new study by academics at Baruch College, part of the City University of New York … confirmed other academic research showing that options are very often granted to executives just before good news about the company is disclosed or directly after bad news. … The study also found that … timing opportunism was more pronounced when directors on the compensation committee received a larger proportion of stock options in their pay package. … [A] heavier reliance on stock options in the pay of independent directors more effectively aligns their interests not with the shareholders to whom they have a duty, but with top management.    The trouble, at least from a shareholder's perspective, is that stock options are growing as a percentage of the compensation that outside directors receive for serving on a board. … The Securities and Exchange Commission has recently started investigating the timing of stock option grants…."  (NYT, 12/12/04, "Are Options Seducing Directors, Too?")


        "The mergers (SBC and AT&T, Procter & Gamble and Gillette) are almost certain to win shareholder approval. … [B]oth deals demonstrate a problem that is all too common to mergers: that executives are conducting extensive merger negotiations without adequate participation from company directors.  The fear, of course, is that corporate executives, who have oodles to gain from mergers, have too much say about the terms, structure and consummation of the transactions. When management is at the controls, as often seems to be the case, directors are asked mostly to rubber-stamp the deals. … ‘We've all read a great deal about the importance of having independent directors, but it doesn't make any difference whether the directors are independent, non-independent or from the planet Mars unless they are really going to get involved in transactions of this magnitude,’ said James P. Melican, president of Proxy Governance.   Mr. Melican, an executive vice president at International Paper from 1991 to 2003, was involved in many of that company's mergers. … Typically, he said, directors are called to an urgent meeting on a Sunday afternoon and are told that the deal must be done quickly, to avoid news of it leaking out. ‘There is a lot of very subtle pressure applied on directors to come along and vote unanimously,’ he said. ‘The lawyers sit there and say: "You recognize if you don't go along when we file the proxy with the S.E.C., the S.E.C. will require that we make that disclosure. And because there are going to be shareholder lawsuits, you can pretty much assume you'll be in depositions for many years."' "Management's control of the merger process is especially rife with potential conflicts, Mr. Melican said, when executives of the acquired company are promised high-ranking jobs at the combined entity, postmerger. … In any deal, Mr. Melican says, boards have to get in early. … As soon as a board of directors hears a C.E.O. say 'Maybe the best solution is to sell the company,' they ought to get involved." …  Asking tough questions about a proposed merger may not win smiles from the C.E.O.  But hey, that's what being a fiduciary means."  (6/26/05, NYT, "A Merger? Anyone Tell the Board?")  Perhaps, if the BODs were more involved, such might only assure a bigger payoff and/or continued employment for BOD members.  Or, the BOD might directly hire non-conflicted negotiators with detailed instructions to keep Shareholders' interests first and a compensation/bonus structure for those negotiators based upon benefits obtained from the merger by Shareholders.  Where there is a will, there is a way!  


        CalPERS is "concerned by the timing of a decision in May by PacificCare's board to boost payout that executives would get if the company was sold.  At the time of the board's decision, PacificCare had been talking for five months with United-Health Group Inc. ... about a possible purchase.  The $8.1-billion deal was announced seven weeks after the compensation change. ... Typically a board would know whether high-level merger talks had been occurring for months...."  (LAT, 11/15/05, "CalPERS Seeks Probe of PacificCare")  Who suggested the compensation adjustment?  When?  Upon what need for change was it based?  What are the odds that the BOD's decision was based upon a "fairness" or consultant's opinion, which issued by someone who was well-paid by Management?


        "Hank Paulson, Goldman's CEO, came under fire for the firm's environmental policies -- not as a corporate predator despoiling the earth, but for saving it at shareholders' expense. Steven Milloy … claimed that Goldman's policies are … designed to advance Mr. Paulson's personal causes. He objected to Goldman's gift of 680,000 acres in Chile to the Wildlife Conservation Society, calling it a conflict of interest because Mr. Paulson is chairman of the Nature Conservancy, which works with the society, and has a daughter, Merritt, who sits on the society's board of advisors. … According to several accounts, Mr. Paulson batted away the charges with a simple defense: The board did it, not me. He was not even part of the discussions of the Chilean land deal. … It's ludicrous to suggest that Goldman's board acted alone, as if directors didn't know of Mr. Paulson's involvement with the conservancy or his advocacy of environmental causes. No one who makes it into the board room of a place like Goldman is unfamiliar with the time-honored strategy of gaining influence by showing interest in the CEO's interests, be they golf or global warming. Why wouldn't directors rubber-stamp Mr. Paulson's green causes? … Much corporate philanthropy is far more aligned with their (CEOs) social ambitions than with shareholder interests. There are no studies to prove this, of course. But the society pages hold a clue: It's the CEO who is toasted at benefits and photographed for posterity. How often is the source of the funds -- the pockets of shareholders -- even mentioned?" (WSJ, 4/4/06, "Green Nosing")

        "Goldman Sachs Group Inc. is getting flak for a good deed: its donation of 680,000 acres of remote Chilean forest in 2004 to a conservation group. The Free Enterprise Action Fund, a tiny mutual fund with a conservative political bent, says the gift hasn't benefited Chile or Goldman shareholders. The fund petitioned the Wall Street firm on Friday to have its board review the gift as part of a broader study of Goldman projects supporting environmental causes, and seeks a shareholder vote on the proposal. … Henry Paulson, Goldman's then-chief executive and now U.S. Treasury Secretary, defended the donation at Goldman's annual meeting on March 31, saying it was something 'Goldman Sachs wanted to do.' … Goldman acquired and then donated the land to the Wildlife Conservation Society, whose outside advisers and trustees include Mr. Paulson's son, Henry Merritt Paulson. …[T]hat's a conflict. At the meeting, Mr. Paulson said he knew of the deal but recused himself from the decision, leaving it to the board." (WSJ, 10/28/06, "Rain on Parade")  Of all the cheap gin joints in this world, Goldman picked the right one without any direction.  Paulson's underlying assumption is that whatever Goldman wants is proper. 


        "The private-equity buyout boom has found critics in Congress and among some investors recently.  Now the country's most important court for corporate law has raised questions about some deals. I n recent back-to-back opinions, the Delaware Court of Chancery criticized two publicly listed companies that have agreed to sell themselves to private investors. The rulings expressed concern that Topps Co. and Lear Corp. hadn't disclosed enough information to shareholders about possible incentives the companies' managements may have to agree to the deals. ... The author of both opinions, 43-year-old Vice Chancellor Leo E. Strine Jr., is a colorful figure who has emerged as something of a public face of the court. ... In the case of Lear, an auto-parts maker that billionaire financier Carl Icahn is seeking to buy for $2.9 billion, Mr. Strine faulted the company's board for letting Chief Executive Robert E. Rossiter negotiate the deal with Mr. Icahn on his own. ...  The Delaware court's increased scrutiny of possible conflicts comes amid rising complaints, and more lawsuits, criticizing buyout deals for allegedly enriching corporate executives at the expense of the shareholders. ... In the current buyout craze, many buyout firms retain the management by offering rich pay packages and a stake in the newly private entity. These deals are being challenged in the courts by shareholders who allege that they are getting a meager payout for the company. They say boards are accepting deals based on factors other than the best-available price. In addition, shareholders are accusing boards of running into the friendly arms of private-equity buyers to escape activist hedge funds, who are trying to oust them through proxy battles. In the case of Topps, the New York producer of trading cards, collectibles and candy, shareholders have accused the board of breaching its duties to get the highest price for the company.... 'When directors bias the process against one bidder and toward another not in a reasoned effort to maximize advantage for the stockholders, but to tilt the process toward the bidder more likely to continue current management, they commit a breach of fiduciary duty,' Mr. Strine warned in his Topps opinion." (WSJ, 7/12/07, "Court Faults Buyouts")  Either BODs have no shame or consider the company's shareholders to be powerless persons whose intelligence needs insulting. 


         Not only do CEOs get theirs, but, when they do wrong, Shareholders foot the bill. "Ho-hum, another week, another multimillion-dollar settlement between regulators and a behemoth bank acting badly.  … As has become all too common in these cases, not one individual was identified as being responsible for the activities. Once again, shareholders are shouldering the costs of unethical behavior they had nothing to do with. … A different proposal comes in a new book by Claire A. Hill and Richard W. Painter, professors at the University of Minnesota Law School. In 'Better Bankers, Better Banks,' they argue for making financial executives personally liable for a portion of any fines and fraud-based judgments a bank enters into, including legal settlements. … If bankers aren’t willing to institute a system involving personal liability, regulators and judges could require it as part of their settlements or rulings, Ms. Hill said in an interview." (2/6/16, NYT, "Fining Bankers, Not Shareholders, for Banks’ Misconduct") The problem is that, if Directors encourage policies to hold CEOs personally responsible, someone might get the idea of holding Directors personally responsible.


                        b.    Reciprocal Enrichment


        "Excessive pay means top executives have had too much influence over their boards of directors. If that's the case, bad CEOs are able to hang on to their jobs long after they should be driven out. In a new study titled Pay for Failure: The Compensation Committees Responsible, Corporate Library researchers Paul Hodgson and Rick Marshall focus on 11 large corporations that paid their CEOs more than $15 million over the last two years even though their stocks had plummeted. … [T]he researchers found that incentive plans used performance targets that were too easy to hit. Few of the plans, for example, required that the company's performance be measured against its industry peers. … [C]orporate directors typically aim to set CEO pay at levels above the industry average. … If pay has to be above average but performance does not, pay will ratchet upward every year even if a company languishes. … Why do corporate boards, which are supposed to represent shareholders, keep pushing executive pay up? It's a matter of mutual back-scratching, as another recent study confirmed. It is titled CEO Compensation, Director Compensation, and Firm Performance: Evidence of Cronyism? The authors are John K. Wald, professor at the Smeal College of Business at Pennsylvania State University, and Rutgers Business School professors Ivan Brick and Oded Palmon. They found that companies paying CEOs excessive amounts also pay directors excessive amounts. Most important: Companies that pay too much also tend to perform worse than their peers.""When pay keeps going up even if performance does not"


        "Trying to counter prosecution claims that Mr. Kozlowski was exceptionally extravagant with company money, Mr. Campriello showed jurors an expense report Mr. (John) Fort submitted for his attendance at a single three-day board meeting.  He billed the company (Tyco) for more than $16,000, including $14,807 for round-trip airfare from Houston. 'That's what it costs to fly from Houston to New York and back?' Mr. Campriello asked 'This is the way we traveled,' Mr. Fort said."  (NYT, 2/2/05, "Director's Fee Didn't Violate Tyco Policy, Witness Says")  Does anyone doubt that so-called expense reimbursement information should be included on Proxy Statements?  Permitting extravagant expenses is the morale equivalent of bribery.


        "Fannie Mae increased the fees it pays its directors for attending meetings by as much as 150%, raised their annual stock-based compensation and gave each a one-time, lump-sum payout of about $192,000 in restricted stock late last year...  Fannie Chairman and Chief Executive Franklin D. Raines received salary, bonus and other compensation last year ... that was 61% more than ... he collected for 2002...."  (WSJ, 4/29/04, "Fannie Mae Lifts Fees and Payouts For Its Directors")  Such vague reporting makes it sound as if Fannie Mae is the person who decided to enlarge the pay packages.  However, Fannie Mae is not a person.  Either Mr. Raines and/or the BOD members themselves raised the BOD's compensation.


        "Just when you thought you had seen the most outrageous transfer of shareholder wealth to executives through stock options, along comes a company that tops them all.  The Broadcom Corporation … shareholders are being asked to vote on a company proposal to increase by 12 million the number of shares authorized for grants under its 1998 stock incentive plan. In addition, a 'yes' vote will expand the types of stock awards that the company can offer executives and employees, as well as grant the compensation committee the right to reprice underwater options at any time. This objectionable repricing practice removes the risk for executives and employees that outside shareholders incur when their stock falls. … The plan's cost is equal to 12.2 percent of Broadcom's enterprise value… and would dilute existing shareholders' interests by 3.7 percent if put in place.  Had the proposed plan been in place last year, it would have cost shareholders an amount equal to about 75 percent of the company's revenue, the firm said.  Broadcom lost almost $1 billion in 2003. Its retained earnings totaled a negative $6.7 billion at year-end. … The 2003 repricing allowed the exchange of 20 million options, with an average price of $51, for 18 million options at about $35, giving Broadcom insiders a windfall of $250 million….  Broadcom directors are among the highest-paid in the country…; they receive $450,000 a year in options and cash and an additional 100,000 options granted every four years that would be worth about $2.5 million if awarded today. The average director at companies of similar size received $140,000 a year…."  (NYT, 4/18/04, "Bubble Lives on at Broadcom, Where Options Still Rain Down")


        How can a very well paid Director/consultant say, "No," to a CEO who is wise enough to recognize his/her unique abilities and to pay handsome compensation to engage that Director's services?  Who among us thinks that at least $36,666.66 per month is not enough to buy a rubber stamp?  "Joshua M. Berman had until 29 February 2000 been affiliated with a law firm that served as outside counsel to the Company and had since 1 March 2000 been engaged by the Company to render legal, regulatory and other professional services.”   “Mr. Berman was a director of Tyco until December 5, 2002.  From March 1, 2000 through July 31, 2002, Mr. Berman was engaged to render legal and other services.  During this period, Tyco compensated Mr. Berman at an annual rate of $360,000 and provided Mr. Berman with health benefits, secretarial assistance, a cell phone and electronic security services for his homes.    Board remuneration for fiscal 2003 was set at $80,000, payable at the monthly rate of $6,666.66 for each full month on the Board … and 20,000 stock options that will vest one year after issuance.” (Various Post-Scandal Tyco SEC Filings)  “(Mark) Belnick's lawyer, Reid Weingarten, said …  Joshua Berman, a director and former partner at Kramer Levin Naftalis & Frankel, consistently opposed Belnick.  Weingarten said the two clashed over several issues, including the amount of Tyco business sent to Kramer Levin for which Berman received referral fees."  (New York Law Journal, 5/7/04, "Trial Under Way for Tyco Ex-GC Mark Belnick")  "[Q]uestions have been raised about Tyco paying millions of dollars in legal fees to the former law firm of board member Joshua Berman, a Tyco vice president. …. Mr. Berman left the New York firm, Kramer Levin, in February 2000, but has been a Tyco executive since 1997."  (AP, 7/702, "As board probes Tyco, cynics point to conflicts --- Some members have received sweet deals")  "Mr. Berman, a lawyer who served on Tyco's board for 35 years, said that his $30,000 monthly payments were authorized by L. Dennis Kozlowski, Tyco's former chief executive, and were not approved by the board or disclosed in filings with the United States Securities and Exchange Commission."  (Bloomberg, 6/16/04, "Ex-Tyco Director Testifies That He Was Secretly Paid")


        "Dissident shareholders question (George) Mitchell's ability to oversee Eisner because of this vocal support of the executive.  He also has drawn fire from critics for having business ties to Disney in the past while sitting on the board.  … Critics argue that the move is merely cosmetic and that nothing short of his departure from the company would end the controversy."  (3/4/04, LAT, "Disney's Eisner Loses Top Post, Stays as CEO")  "Mitchell's law firm, Piper Rudnick, has received more than $2.1 million in fees and expenses from Disney....  Those payments ended two years ago amid an outcry from corporate governance experts.  While serving as a director, Mitchell has received about $300,000 in fees as a paid consultant to Disney, which terminated the arrangement in late 2001." (3/4/04, LAT, "Naming of Mitchell Draws Criticism: Independence of new chairman, who had sided with Eisner, is called into question.")  "Mr. Mitchell, 70, … who has little business experience, said … yesterday that he had no desire to play the corporate strategist, as many chairmen do.  Instead, he sees his main job as negotiating among factions of unhappy investors, other board members and Michael D. Eisner, the chief executive who lost the chairman's title in the wake of a resounding no-confidence vote at the company's shareholder meeting on Wednesday. … Mr. Mitchell's appointment is not sitting well with many of the investors … nor with corporate governance experts. They complained that not only does Mr. Mitchell have negligible corporate experience, but they say he is too closely allied to Mr. Eisner and his appointment does little to address investor discontent with Mr. Eisner's management of the company. … Mr. Mitchell takes umbrage at the notion he is beholden to Mr. Eisner.  He said he had only had three social dinners with Mr. Eisner at most. … Mr. Eisner actually approached Mr. Mitchell in 1995 to gauge his interest in joining Disney as president. 'I watched him in the Senate and I heard a speech he gave and I was blown away,' Mr. Eisner said. … Mr. Mitchell said because the decision was made only on Wednesday, the duties of the job had not been completely defined.  But he said the setup and his lack of business experience should not impede his ability to oversee Mr. Eisner." (NYT, 3/5/04, "For a Diplomat, Task Is Quelling Disney's Unrest")  "Beholden" is a much broader concept than "social dinners."  Mitchell, a person who admits to having little business experience, has Eisner to thank for his eight-year relationship with Disney, associated compensation, etc.  The most beholden Directors may live in states of denial.   

        "[A]fter Mitchell stopped receiving the fees from Disney, he continued to earn them from other boards on which he sat.  And that has prompted some governance experts and investment fund officials to question his sincerity toward reform and sensitivity to appearances. …  [T]he practice has drawn fire from some investors and corporate governance activists. Their concern is that directors may have competing loyalties between the shareholders they are supposed to serve and the executives who put them on the payroll. …  Mitchell said: 'I met and consulted with the CEO and with other members of Disney management on international business operations and made several trips on such matters, including visits to Tokyo and Paris.'  Several former high-level Disney executives familiar with the company's international operations said they never crossed paths with Mitchell in any of their overseas business.    Disney … wouldn't elaborate on Mitchell's consulting duties, saying the information was 'proprietary.'"  (LAT, 3/29/04, "Mitchell Consult Work Is Criticized")


        Some CEO's know how to win friends and influence Directors using Shareholder assets.  "[A]s Sovereign Bancorp's chief executive, Jay S. Sidhu has … become a national force in community banking by repeatedly triumphing over rebellious directors and shareholders. …  People familiar with the board say Mr. Sidhu has excluded directors from important deal deliberations or waits until the last minute to brief them. Some investors say his public statements about acquisition plans are misleading. Today, Mr. Sidhu has a board of supportive directors who have scant banking experience, are compensated unusually well and, in some cases, enjoy access to Sovereign loans and business opportunities. … Sovereign directors used to receive as much as $313,127 each a year, including bonuses tied to management's board-approved bonuses, Relational estimates. That's about $100,000 more than what directors at Citigroup Inc., the world's largest bank, receive. Following pressure from Relational, Sovereign in August lowered directors' pay to between $142,000 and $182,000. While that's more than directors at similar banks get, Sovereign justifies the pay by noting that its directors meet 14 times a year, five more times than its peer average. Sovereign has had business dealings with and made increasing loans to its directors in recent years. … Sovereign rents office space from a real-estate firm owned by director Cameron C. Troilo Sr., the compensation committee's chairman.  In the Monday filing, the bank said payments to the company are expected to total $487,454 this year. Sovereign added that the Troilo leases all have been at market rates. Mr. Troilo didn't return calls. In late 1999, the bank loaned $3.5 million to Mr. Troilo so he could buy a Lawrenceville, N.J., bank building from Sovereign for $2.8 million, upgrade it, and lease some of it back to the bank. To help secure the loan, Mr. Troilo used another Sovereign-mortgaged property, in Pennsylvania, that he also rented to the bank. Sovereign rejected a competing investor group's offer of just over $3 million. The Monday filing said Mr. Troilo's bid was better because it included 'no financing, inspection or due diligence' conditions."  (WSJ, 11/25/05, "Boardroom Survivor: Behind Sovereign's Growth: A Chief Who Plays Hardball")  Hmmm!  Now, Directors only receive $13,000 (182,000/14) per meeting.   Why would Troilo, as a reasonable real estate investor, waive "inspection" and/or "due diligence"?  Was Sovereign concerned that its building could not withstand "inspection or due diligence"?  Was any such concern worth $200,000 ($3 - $2.8 million)?  Upon what objective criteria was that decision made and by whom?   But, after all, it is just another instance of Shareholder assets being considered as chump change!

        "Loans to Sovereign (Bancorp) directors and executive officers have risen to $94.1 million, from $4.7 million six years ago. The bank offers no relevant disclosure about the loans, including terms, interest rates or performance. Relational (Investors) discovered the full extent of them only by cross-referencing Sovereign's Securities and Exchange Commission filings with records at the Office of Thrift Supervision. In its most recent quarterly SEC filing, Sovereign left off about $24 million worth of loans. Sovereign says the SEC filings excluded credit extensions that haven't been drawn down. … Sovereign and its subsidiaries for years have paid office-space rent to one of its directors, Cameron Troilo. The payments skyrocketed to $618,700 in 2001, from $68,544 in 1996. Since 2001, however, Sovereign's filings have included no specific figures, just vague reassurances. Mr. Troilo's independence is unaffected, its latest filing says, because ‘the amount of rent paid ... was not material’ to Sovereign or the director." (WSJ, 11/2/05, "Long & Short: Sovereign Bancorp's Takeover Deal Looks Like a Dis to Shareholders")


        ''Consider Visteon, the auto parts maker spun off from Ford in 2000. … Visteon is in a difficult financial condition, to put it politely. Wall Street is skeptical that a three-year turnaround plan will work, and Fitch has cut its bond rating to triple C, which is low even for junk bonds. Last year, Visteon's stock price fell by 36 percent. So far this year it is down another 27 percent. But there is little pain at the top. Michael F. Johnston … got a 50 percent increase in total compensation last year, to $7.7 million. …[I]t also shows that the board thinks he is doing a wonderful job. … The board explains the payouts to top management by saying they are based on performance and comparisons with the pay of bosses at similar companies. But there is no mention of internal equity -- of the justice of paying a lot to bosses when workers and investors are suffering. … [T]his board has decided to give itself a raise this year. Base pay goes up $10,000, to $70,000, and -- if shareholders approve at next month's annual meeting -- directors will get $70,000 a year in stock, up from $10,000. Perhaps board members think they deserve an increase because their past stock grants keep losing value.''  (NYT, 4/14/06, ''At Visteon, Bonuses Defy Gravity'')  Did the BOD and Management engage in reciprocal enrichment at Shareholders' expense?


        "Critics have long questioned the outsize pay packages and lucrative share sales of Countrywide Financial Corp.'s chairman and chief executive, Angelo Mozilo. But outside members of the company's board also have above-average compensation, and three of them have sold more than $2 million of Countrywide shares apiece since mid-2006. ... They face tricky choices in deciding how much to challenge 68-year-old Mr. Mozilo, who co-founded the company 38 years ago. ... Countrywide's nonemployee directors collect fees, shares that they must hold for at least a year, and perks that include health insurance and spousal travel, according to the latest proxy statement. Their total compensation ranged from $344,988 to $477,824 in 2006, according to the statement. (That excludes compensation of as much as $71,000 that some of the directors get for being on the board of Countrywide's savings bank.) The pay range is above median total compensation for directors of the 200-largest U.S. concerns, which was $204,975 in 2006, according to the National Association of Corporate Directors. Countrywide said directors review their compensation annually with the help of an independent pay consultant.... Countrywide rewards board members so well that 'at some point, you cross the line between paying for services provided and a very lucrative thing where board members aren't going to challenge management,' says Mark Reilly, a partner at 3C, Compensation Consulting Consortium. 'I do think they have crossed the line.' ... Corporate Library has long argued that Countrywide's board has done a poor job of designing Mr. Mozilo's pay package, guaranteeing him too much compensation regardless of performance. ... Pearl Meyer & Partners, a New York compensation consulting firm, was the independent adviser to the board's compensation committee during the board's 2004 contract-renewal talks with Mr. Mozilo. The consultants urged directors to slim his hefty contract, partly by revamping his annual bonus formula.... Directors kept the formula and decided to replace the consultancy....." (WSJ, 11/3/07, "Countrywide Directors' Dilemma")  "Mr. (Harley W.) Snyder, 75, is Countrywide's lead director.  Institutional shareholders who have tried to engage the Countrywide board on issues like Mr. Mozilo's pay say that Mr. Snyder, who has been a board member since 1991, prevents such dialogues from occurring. One complaint was that he does not share letters from stockholders with other members of the board."  (NYT, 11/11/07, "Countrywide's Chief Salesman and Defender")  Shareholders could easily cure the latter complaint by sending a copy of the letter to each other Director.


         "A surprising number of embattled CEOs, forced out for poor performance or legal problems, find a warm reception from outside corporate boards on which they sit. Charles Prince, for instance, who stepped down under fire as Citigroup Inc.'s CEO in 2007, is a five-year member of the Johnson & Johnson board. Corporate-governance policies at J&J and many other U.S. companies require outside directors to offer to resign if their "professional status" changes— meaning they lose a post, take a new one or retire. The rules are in place to allow boards to retain an appropriate mix of retired and active executives and push out members who no longer have the time for outside directorships because of more demanding new jobs. ... Still, many governance watchers and veteran directors say boards rarely accept a resignation after a member loses a CEO spot—no matter the reason. ... The median direct compensation for directors at the top 200 companies on the Standard & Poor's 500 is $228,058, according to a study released this year by the National Association of Corporate Directors. ... Another former chief who kept a directorship is Richard Syron, ousted as head of Freddie Mac in 2008 when the U.S. government seized the mortgage giant. He recently received a warning that he may face civil action from the Securities and Exchange Commission as part of its investigation into whether Freddie Mac properly disclosed its exposure to subprime loans. ... Genzyme Corp., where Mr. Syron held a board seat, rejected his offer to resign. Mr. Syron didn't have to defend his actions to fellow board members. ... To be sure, boards occasionally drop a member after leaving a CEO post under fire. Advanced Micro Devices Inc. accepted the resignation of David Edmondson in February 2006, the same month that he admitted inflating his educational background and quit the helm of RadioShack Corp. AMD declined to comment." (6/6/11, WSJ, "Staying on Boards After Humble Exit") It's just part of the lack of accountability that is currently so pervasive in our society. I just could not resist the temptation. The devil made me do it. But, everyone lies. The other dude done it. It was my poor upbringing. Etc. Etc. Then, there is reciprocal back scratching. It would be so embarrassing at the country club to encounter a removed former fellow Director.

        B.      The Director Clique


        Additional conflicts of interest are caused by the existence of a Director clique.  


        "[A]n inner sanctum of friends, colleagues and partners ... sit on corporate boards together. ... [T]hat creates the potential for serious conflicts of interest and negates what is supposed to be an independent watchdog in Corporate America.... [T]he degree to which America's boards are connected shows that a lot of power is concentrated in relatively few hands." (USA Today, 11/25/02, "Web of board members ties together Corporate America")  Membership in the Director clique is by invitation only.  "'Getting on a board is like being invited into a secret club,' notes James Kristie, editor of Directors & Boards magazine.  'There's a collegiality that's required, so you aren't going to be invited in unless you've demonstrated that you can work within the system and the club.  No one wants a wild card.'" (USA Today, 11/1/02, "Good old boys' network still rules corporate boards")  "[T]here has developed a cadre of 'professional directors' who serve on numerous boards in their 'retirement years.' ... For these individuals a board fee of $50,000 to $100,000 per board amounts to a considerable retirement stipend.  It's not surprising that their objective is to get along." (WSJ, 2/18/03, "Manager's Journal --- Corporate Boards: A Director's Cut")


        Statistical analyses can go just so far in detecting links between Directors.  "[A]n analysis of more than 2,000 corporate boards and 22,000 board members by the CorporateLibrary shows.... 82 Directors on the boards of S&P 500 companies sit on the boards of four or more other companies ... 171 of S&P 500 companies have such [stacked with directors who sit together on another company's board] interlocks...." (USA Today, 7/30/04, "Corporate boards get a little less interlocked")  Is this a false sample?  What about the 13,500+ non-S&P 500 companies?  What about relationships between Directors through private companies, private charities and/or private country and/or yacht clubs?


        "[B]oards of directors are notoriously social organizations, where the goal is not to maximize profits but to avoid embarrassment while maintaining social cohesion within the board and the larger corporate community.  For directors, it is simply bad form to nitpick over a couple of million dollars with another member of the club, particularly one who helps set director fees or serves on the compensation committee of other corporations." (Washington Post, 4/30/03, "A Rigged Market For CEOs")


        Even legendary investor Warren E. Buffett was not immune to the collegiality.  He recently wrote to the Shareholders of Berkshire Hathaway Inc. on the subject of Director passivity.  "Warren Buffett ... confessed ... after sitting on 19 boards in the past 40 years: 'Too often I was silent when management made proposals that I judged to be counter to the interests of shareholders.'  In those cases, 'collegiality trumped independence,' Buffett said.  A certain social atmosphere presides in boardrooms where it becomes impolitic to challenge the chief executive, he wrote." (CBS MarketWatch, 3/8/03, "Buffett chides corporate boards")  Was he admitting to passivity or breaches of fiduciary duty to Shareholders?  "Berkshire's seven-member board includes Buffett's wife, Susan; his 48-year-old son, Howard; and three executives who have business ties to the company." (LAT, 5/5/03, "Buffett Applauds Wall Street Settlement")  "One governance-rating firm, Institutional Shareholders Services Inc., rated Berkshire Hathaway a paltry 1.5 points out of a possible 100."  (WSJ, 11/14/03, "In Tough Times for CEOs, They Head to Warren Buffett's Table")  Mr. Buffett is reputed to be the best of the best!  Thus, Shareholders have no reason to expect better representation from any other Director.

        "Warren Buffett told investigators that he asked the top executive of a Berkshire Hathaway Inc. insurance unit questions several times about a contentious transaction with American International Group Inc. but that he never learned any details, people close to the matter say. … Among the questions regulators wanted answered, which wasn't done under oath, was how much detail Mr. Buffet learned about the transaction, done in 2000 between the Berkshire unit, General Reinsurance, and AIG."  (WSJ, 4/12/05, "Buffett Didn't Get Deal Details")  What does this mean?  Buffet, the best of the best, found it necessary to ask a subordinate multiple times about a sizable transaction and walked away without getting the "details."  Why did he find it necessary to ask in this first place?  Was he suspicious when he had to ask a second time?  What about the third time?  Did the subordinate still retain his job?  Is there a letter of reprimand in the file?  What does the subordinate say he communicated to Buffet?  Did Buffet ask anyone else in his employ when his "top executive" could/would not spill the beans?  Why was the questioning of Buffet not done under oath?  Well, since he was questioned by regulators, if the truth not be told, there is always the obstruction of justice route.  Hopefully, Buffet does better where he serves in the capacity of a corporate Director. "Mr. (Ronald) Ferguson (then CEO of General Re) has told investigators that he did provide details to Mr. Buffet.... After his talk with Mr. Buffet, Mr. Ferguson wrote an e-mail to Joseph Brandon, then General Re executive vice president, describing the conversation with Mr. Buffet, saying that he asked Mr. Buffet whether the deal was proper.  Mr. Ferguson reported that Mr. Buffet said the deal was proper, but not by a large margin.  Mr. Buffet told regulators that didn't happen. ... Mr. Buffet told regulators that he asked Mr. Brandon several times whether General Re's accounting on the deal was okay, but didn't learn details." (WSJ, 4/13/05, "AIG, General Re Officials Knew Of Deal's Risk")  Did Ferguson and Buffet discuss how small "not by a large margin" actually was and why?  Did Ferguson want to know?  If not, why not?  Was a copy of the email transmitted to Buffet when it was written?  Did Buffet read it and not respond? When did Buffet first question Brandon?  What triggered the question?  If Brandon was not answering Buffet, perhaps Buffet could have asked his external auditors?  On the other hand, if one is suspicious, why alert the external auditors to look carefully at what might be a minefield?  Perhaps the issue of a Director's fiduciary duty to Shareholders was lost in an ethical haze?


        In March 2003, Arthur Levitt, Chairman of the SEC from 1993 to 2001, made some astonishing comments at the CFO Rising conference.  He stated, in part, "I've sat on enough boards and audit committees to understand the kind of culture of seduction that characterizes many boards.  It's a game that many CEOs played and played well by seducing their boards with perks and private attention and contributions to favorite philanthropies, and meetings that were short on substance and long on fluff.  The boards became willing accomplices.  And it's part of the American personality to go along and become more fraternal rather than more vigilant."  (CFO Magazine, May 2003, "You are the guardians")  Mr. Levitt did all that board sitting before 1993.  From 1993 to 2001, as Chairman of the SEC, what did he do or attempt to do to cure the specific problem?  Also, it appears that Mr. Levitt is claiming that it would be un-American to require Directors to be vigilant on behalf of Shareholders.


        Directors who served at failed companies may rate a red badge of courage and additional opportunities to employ their varied talents.  "Former board members of scandal-hit companies such as Enron and WorldCom once seem destined to become corporate pariahs, viewed as inept or worse. … Rather than being shunned, some have retained board memberships at other publicly traded companies and, in some cases, even added to them….  [M]ore than 20 individuals who were on the boards of Enron Corp., WorldCom Inc., Adelphia Communications Corp., and Global Crossing Ltd before the firms filed for bankruptcy protection … currently hold over 50 board seats of U.S. publicly traded companies. … [D]irectors of companies that enter into bankruptcy proceedings are required to disclose this fact to any new board they join for the following five years.  In some cases, however, companies have stopped passing on this information in proxy materials distributed to shareholders…." (Reuters, 7/25/04, "Scandal Firms' Former Directors in Demand")  This may be another example of the principle of collective unaccountability --- everyone was culpable, thus, no one was culpable.

        "The fates of failed executives such as Bernie Ebbers and Ken Lay are well known.  But what about the directors of companies like Enron, WorldCom, Adelphia Communications, Global Crossing, Waste Management, Tyco International and others who oversaw the implosion of hundreds of billions in market capitalization?  In many cases, they got better jobs. ... But many companies don't make it easy for shareholders to find out where their directors have been.  Sprint Nextel's biography for William E. Conway, for instance, mentions nothing about his stint at Enron."  (Forbes, 11/17/05, "Teflon Directors")


        "John L. Thornton (of Goldman Sachs Group) ... is an old prep-school pal of Mr. Ford's, someone with whom he shares several friends and even more interests. ... Mr. Thornton was appointed to the Ford board at the recommendation of the company's chief executive and chairman ...." (NYT, 12/8/02, "Ford and Goldman, So Cozy at the Top")  "The Ford Motor Company agreed yesterday to settle a lawsuit that accused its chief executive of improperly accepting shares of the initial public offering of the Goldman Sachs Group, which agreed to pay $13.4 million under the deal. The lawsuit … said the chief executive and chairman, William Clay Ford Jr., received an allocation of 400,000 shares in 1999 because he was the chairman of Ford, which had deep banking ties with Goldman Sachs. The suit said Mr. Ford's acceptance of the shares was a 'usurpation of an opportunity that belonged to the company'....  After shareholders complained in late 2002, the company formed a committee that concluded that Mr. Ford had not acted improperly.    Mr. Ford's purchase in May 1999 of 400,000 shares of Goldman Sachs, the largest allocation to an individual, drew attention after a lawyer for Ford shareholders wrote to the company's board, demanding an investigation. … Since 1996, Goldman has earned more than $90 million in fees from Ford.  The shareholders demanded that Mr. Ford return any profits and pay damages to the company for the lost investment opportunity.  When Mr. Ford bought the shares, Goldman's co-chief operating officer, John Thornton, sat on Ford's board. … Ford's board formed a committee of independent directors, which determined in February 2003 that no wrongdoing had occurred.  Nevertheless, Mr. Ford immediately sold his Goldman shares and gave the $4.5 million in profits to charity.  … The defendants said that as chairman, Mr. Ford had no significant say in the awarding of investment banking business. They also said … that Mr. Ford had a long personal banking relationship with the firm. ‘Shares in the Goldman I.P.O. were offered to Mr. Ford by Goldman … not as an inducement for future business from Ford Motor Company,’ the settlement said. (NYT, 11/04/04, "Ford Settles Investors' Suit Over I.P.O. of Goldman")  Goldman, not Mr. Ford, is to pay $13.4 million when Shareholders demanded return of Mr. Ford’s profit of $4.5 million.  Mr. Ford probably claimed a tax deduction for his charitable donation.  One can only wonder what the Shareholders’ attorneys learned during their discovery efforts and whether the settlement agreement deals with confidentiality and return/destruction of documents produced during discovery.  The net result was that Goldman returned a small part of the $90 million that it has received from Ford and, possibly, its charges for the next service that it renders on behalf of Ford will take that payment into account.  And, how does one determine that "no wrongdoing had occurred"?  "Ford Motor's outside directors found that Chairman Ford's decision to accept the Goldman IPO allocation didn't violate Ford Motor policies." (WSJ, 11/4/04, "Ford, Goldman Settle an IPO Lawsuit")  Perhaps, Ford did not have a specific "policy" on the subject.  Thus, Mr. Ford did not violate the non-existent policy.  Therefore, "no wrongdoing had occurred."


        "A Tribune study of the most recent annual reports from the 20 largest U.S. corporate foundations revealed they gave nearly $25 million to non-profit groups for which one or more directors was an employee, trustee or held another leadership position. In some cases, 10 percent or more of all donations went to these organizations.  Add in grants by the foundations of the two Chicago-based companies that rank among the nation's 50 largest foundations, and the total reaches almost $30 million--an average of more than $102,000 each for the 287 directors at the 22 companies. … How such donations affect what goes on in a director's mind is impossible to know. Companies, directors and non-profits routinely stress the importance of philanthropy and say the donations don't affect board members' independence. Critics, however, say big donations can create a clubby atmosphere that may make directors less likely to aggressively challenge management. … The Tribune study likely understates the extent of these donations. Although foundations detail their donations in annual tax filings with the Internal Revenue Service, companies are not required to disclose most non-profit affiliations of their directors, making it problematic for investors to know the full extent of such connections. … It's no secret in boardrooms that some directors are active in soliciting donations for their favorite charities, several corporate directors said.  'It is really, "You give to my favorite charity, and I'll give to your favorite charity,"' said Alice Peterson, a former Sears, Roebuck and Co. and PepsiCo Inc. executive and a longtime corporate board member."  (Chicago Tribune, 3/27/05, "Boards face a conflict of giving --- Gifts from corporate foundations to entities with ties to directors raise concerns about loss of independence")


        Incumbent Directors use company shares contained in the Employee Stock Ownership Plan ("ESOP") to keep one another in power.  "Management has used the ESOP shares to vote in concert with the stock controlled by Roy F. Farmer, the 87 year old chairman of the company....  Farmers, who are members of the board, along with other directors ... hold voting control over about 53% of Farmer Bros. stock, including (8% of the shares in) the ESOP." (LAT, 12/6/03, "Investor Sues Farmer Bros.")


        "Earlier this year, Scott Sipprelle, a disgruntled investor and former Morgan executive, sent board members and investors a critique of Morgan Stanley that included a diagram of all the directors' overlapping relationships.  Among other points, he suggested that their independence was compromised because several are members of the Augusta National Gold Club, home of the Masters." (WSJ, 3/31/05, "Purcell's Close Ties To Board Complicate Dissidents' Mission")  Four!  "The titans of business will gather this week, but it won't be at a summit on Wall Street. The coming-together will be at a town in Georgia where the main attraction is a 'gentleman's club' exclusive enough to garner members by invitation only. Augusta National Golf Club, which openly and proudly discriminates against women, will produce its Masters Golf Tournament with considerable help from the masters of corporate America . … It's hard to imagine this kind of corporate involvement with a club that flaunted its race discrimination. … A look at the relationships at Augusta provides a picture of how boards of directors perpetuate themselves and choose only the already chosen. … Fully 1,000 corporations and other national institutions have CEOs, senior executives, board members, or former officers who wear the green jacket of Augusta in an interlocking matrix that is breathtaking. … This situation perpetuates the exclusion of women.  It also makes a mockery of board independence, now required to protect stockholders and the public from cronyism in financial dealings. The cronyism that perpetuates gender bias against employees is every bit as harmful, and ought to be stopped just as forcefully." (WSJ, 4/7/05, Commentary: “Green Jacket Cronies”)

        "Morgan Stanley is one of few companies that require a 75 percent vote by directors to replace a chief executive…. At nearly all other companies, a simple majority will do. … It remains to be seen whether the close relationships that many of the directors have with Mr. (Philip J.) Purcell will color their judgment in any way.  Indeed, Morgan Stanley bankers, not to mention the dissident executives, have accused the board of coddling him. It is packed with former chief executives, many from the Chicago area, where Mr. Purcell lives. Some have golfed together; others have worked for one another.  … In recent years, the board has become more diversified… But its core members remain remarkably monolithic - and the ties that bind them go well beyond the shared experience of Mr. (Michael A.) Miles and Mr. (Edward A.) Brennan (CEOs who were targets of revolts at Kraft and Sears, respectively).  First, there is the Kraft connection. Mr. Miles, the chairman of the nominating committee and … recruited two former executives who worked for him at Kraft in the mid-1980's: Miles L. Marsh and C. Robert Kidder.  Then there is the McKinsey connection. Four directors were partners at McKinsey, the management consulting firm, as was Mr. Purcell himself.  And finally, there is the fact that a number of directors, notably Mr. Brennan and Mr. Miles, serve together on boards at other companies.   Mr. Miles, for example, serves on six boards, including that of the AMR Corporation, where he serves alongside Mr. Purcell and Mr. Brennan. Mr. Brennan also serves on six boards, and Charles F. Knight, a former chief executive of Emerson Electric, sits on five, including those of SBC Communications (where he serves with another Morgan Stanley director, Laura D'Andrea Tyson, a former top economist in the Clinton administration) and Anheuser-Busch, where he serves with Mr. Jacob. … Morgan Stanley's directors say their work as former corporate executives underscores their independent thinking and trumps any ties they may have with one another. … Others say such ties are not harmful if they are disclosed.  In a recent note to clients, Martin Lipton, the takeover lawyer at Wachtell, Lipton, Rosen & Katz who also advises companies on governance matters, criticized the new class of institutional investors and academic gadflies who say social and philanthropic ties among directors may compromise their independence. 'These types of requirement are the antithesis of the kind of collegiality and relationship with the C.E.O. that is necessary for the board and C.E.O. together to promote the appropriate tone at the top,' he wrote. 'The concept of the board as remote strangers and as the agency for discipline of management, rather than as partner of management in setting the strategic course for the corporation is contrary to all prior experience and will not lead to better performance.'  Strong words, to be sure, especially considering that Mr. Lipton advised Mr. Brennan during his battle with shareholders.  Mr. Lipton also famously earned $20 million for two weeks of work when he advised Mr. Miles and Kraft on its 1988 merger with Philip Morris, and he is now advising the independent directors at Morgan Stanley on a range of matters, including their strategy for dealing with their antagonists.  One point made by the retired executives is that until recently, no director - including Mr. Purcell - had ever operated a line of business for a securities firm. That set Morgan Stanley apart from nearly every other Wall Street firm."  (NYT, 4/24/05, "The Ties That Bind at Morgan Stanley")   The BOD as a "partner of management"?  (Partners have fiduciary duties to one another.)  So much for the concept that BODs have undivided loyalty to represent the interests of Shareholders!  Who is watching the supposed watchdogs of Management?  Do conflicts of interest disappear if they are disclosed to Shareholders who have no effective means to remedy the situation?  

        "When Morgan Stanley directors received a letter from a group of retired executives who argued for the ouster of Philip J. Purcell, their first call for help when to the superlawyer Martin Lipton. Already on the payroll as an adviser  to the board of governance, Mr. Lipton quickly donned a number of other legal hats - advising the board, Mr. Purcell and the company itself on tactics, legalities and, most controversially, severance pay to departing executives. ... Once Mr. Purcell stepped down, a compensation specialist at Wachtell, Adam D. Chinn, in tandem with the board's compensation committee, draft the controversial severance packages that awarded Mr. Purcell $113 million...In fact, Mr. Chinn's reputation for cobbling together generous severance awards for departing chief executives is such that the contracts are known as Chinn-ups.  As a result of these payouts, the board has been sued by shareholders and received irate letters from institutional investors who have decried the packages as a violation of the very governance practices Mr. Lipton was hired to improve. … In the battle over Mr. Purcell's leadership, many Morgan Stanley executives were never quite clear about Mr. Lipton's role. Several said they frequently asked each other: Was he advising the board? Mr. Purcell?  Or both?  The answer, people close to the board said, is that Mr. Lipton was, first and foremost, an adviser to the board. When it became clear that Mr. Purcell would depart, he hired his own lawyer to negotiate. While the very best governance practices would argue for the hiring of separate counsel on the compensation packages, time and confidentiality considerations led the board to stick with Wachtell. …  While shareholder gadflies have criticized Mr. Lipton for being an apologist for corporate management, that assertion misses the point - that Mr. Lipton's fiduciary responsibility is to best represent and advocate in support of his client's interests." (NYT, 7/28/05, "A Lawyer's Many Roles")  Lipton may be the "best … in support of his client’s interests," but he seems to have difficulty determining who his clients are.  If Lipton represented only the BOD and, thus, the Shareholders, his fiduciary duty was to get the executive to leave for the lowest amount.  It is fair to assume that he, at the least, did not discourage the BOD from appointing Chinn while knowing that he (Chinn) does Chinn-ups.  Lipton and Chinn are members of the same law firm.  Lipton probably benefits from each fee Chinn earns for the firm.  The BOD tries to justify its act of hiring Chinn by claiming "time and confidentiality" considerations.  "Time"?  Does Lipton's rolodex contain the name of at least one competent non-Wachtell attorney who has a reputation for being parsimonious when dealing with executive payoffs?  Couldn't Lipton have asked Chinn for a referral?  "Confidentiality"?  Did the BOD not know that attorneys, even non-Wachtell attorneys, have a duty to maintain confidentiality?

        "Morgan Stanley Chief Executive Philip Purcell risked being ousted in a proxy fight the next spring, the Highfields (Capital Management LP, a hedge fund) managers said.  … The meeting with Highfields was the last significant event before directors and Mr. Purcell decided he should step down…. The tale serves as a caution for boards in an era when their role in corporate governance is drawing more scrutiny. The damage from delay when directors fail to spread their antennae widely is especially great at a Wall Street securities firm like Morgan Stanley, where the most valuable assets can walk out the door and never return. … One director even sought to squelch a doubter on the board.  At a mid-March board meeting, Laura D'Andrea Tyson, a former Clinton administration economic official who is dean of the London Business School, said directors should take the criticism of Mr. Purcell's record more seriously. Director Charles Knight, former CEO of Emerson Electric Co., rebuked Ms. Tyson, calling her comment inappropriate … The board took steps to interview more employees. … Mr. Knight, the director who had clashed with Ms. Tyson in March, and Klaus Zumwinkel, chairman of the management board of Germany's Deutsche Post AG, said they supported Mr. Purcell and didn't see any reason to discuss the matter since the board had already decided on it…. The attempt to cut off debate bothered some other directors, people familiar with the meeting say. Once Messrs. Knight and Zumwinkel left, the discussion turned more freewheeling. … … Some institutional shareholders are discussing an effort to vote out the directors at next spring's annual meeting."  (WSJ, 8/5/05, "Delayed Reaction At Morgan Stanley, Board Slowly Faced Its Purcell Problem"  Nothing gets a BOD's attention more than a credible threat of an old fashioned proxy fight.  Knight's conduct is reminiscent of that of a school yard bully who made it to the big time.  Institutional Shareholders do much "discussing an effort to out the directions," but, when push came to shove, they faded.  Knight and Zumwinkel, who should be their first targets, need not lose any sleep.  

        "Morgan Stanley said yesterday that one of its three newly elected directors, Roy J. Bostock, had a family connection to a hedge fund that does business with the firm. Mr. Bostock's son-in-law, Daniel Waters, is a partner and head of the client advisory group at FrontPoint Partners, a Greenwich, Conn., fund that has been a client of a Morgan Stanley subsidiary.  Last year, FrontPoint paid Morgan Stanley about $5 million in fees for brokerage and other services. So far this year, the fund has paid $4.8 million.… Family ties between outside directors and the companies on whose boards they sit tend to raise concerns among governance watchdogs.  They generally worry that the indirect connections can impair the directors' abilities to serve as independent advocates for shareholder interests.” (Dow Jones, 8/24/05, "Morgan Director Has Ties to Hedge Fund")  Bostock’s career has been with "advertising and marketing services" firms.  (  $5 million per year is a lot of business. "A Company subsidiary is prime broker for several FrontPoint Funds…" (Morgan Stanley SEC 8K 8/17/05)  What efforts, if any, were made by that $5 million per year customer to place a friendly face on Morgan's BOD?  How much direct and/or referral business, if any, does Morgan generate for FrontPoint?  Is this what is meant by "the ties that bind"?  If this is what Morgan Stanley does when it is under a corporate governance microscope, imagine what might occur when the spot light turns elsewhere --- business as usual.


        "The Home Depot board has awarded him (CEO Robert L. Nardelli) $245 million in his five years there. Yet during that time, the company's stock has slid 12 percent while shares of its archrival, Lowe's, have climbed 173 percent.  Why would a company award a chief executive that much money at a time when the company's shareholders are arguably faring far less well? … [T]he reason (is) … the clubbiness of the six-member committee of the company's board that recommends Mr. Nardelli's pay.  Two of those members have ties to Mr. Nardelli's former employer, General Electric. One used Mr. Nardelli's lawyer in negotiating his own salary. And three either sat on other boards with Home Depot's influential lead director, Kenneth G. Langone, or were former executives at companies with significant business relationships with Mr. Langone. In addition, five of the six members of the compensation committee are active or former chief executives, including one whose compensation dwarfs Mr. Nardelli's. Governance experts say people who are or have been in the top job have a harder time saying no to the salary demands of fellow chief executives. Moreover, chief executives indirectly benefit from one another's pay increases because compensation packages are often based on surveys detailing what their peers are earning. To its critics, the panel exemplifies the close personal and professional ties among board members and executives at many companies — ties that can make it harder for a board to restrain executive pay. They say this can occur even though all of a board's compensation committee members technically meet the legal definition of independent, as is the case at Home Depot.  … The many connections among Home Depot's directors cause some critics to ask whether the nominating committee is failing in finding truly 'independent' board members. … The net may not have been cast much farther than Mr. Langone's circle of friends and associates… [T]he Home Depot board decided … Mr. Nardelli, who had no retail experience, should (become CEO).  … And when it appeared that Mr. Nardelli might not hit one of the few performance goals the board had set to cause payment of a long-term incentive plan, the board lowered the goalposts…."  (NYT, 5.24/06, "Gilded Paychecks | Ties That Bind: With Links to Board, Chief Saw His Pay Soar")


        "In the latest version of management musical chairs, outside directors are moving inside as chief executive officers.  More than a dozen U.S. companies have installed independent board members as permanent CEOs since late 2004. ...  Several factors are spurring such appointments, recruiters and management consultants say. Boards are quicker to fire poorly performing CEOs, often before potential internal successors are ready for the job. Many of these companies have deep-seated problems, making it harder to recruit outsiders. And increasingly, there's a deep pool of outside executives in the boardroom.  ... Some investors disagree. They contend that a chief chosen from the board signals cronyism and weak succession planning. A director's comfort with a colleague obscures 'a clear view of the individual's suitability to be a successful CEO,' says Richard Breeden, an activist investor and former chairman of the Securities and Exchange Commission."  (WSJ, 2/4/08, "Should Companies Pick CEOs From Their Boards?")


        "Gen. Tommy R. Franks, the former chief of the Public Broadcasting System and the publisher of a Spanish newspaper would seem to have nothing in common — except for one thing. They all sit on the board of Bank of America. But as they and 13 of their colleagues meet Wednesday to discuss how to steer the bank through its troubled merger with Merrill Lynch, they are likely to be united by something else: a reluctance to undermine the bank's embattled chief executive, Kenneth D. Lewis. ... Their (shareholder) scrutiny has also turned an unusual spotlight on the oversight role played by the board members, many of whom were picked by Mr. Lewis from several companies that the bank, based in Charlotte, N.C., absorbed as he molded it into a sprawling financial giant. ... Bank of America's board is an eclectic group, and it will grow larger this week when it adds three members from the board of Merrill. The bank's two most powerful directors, O. Temple Sloan Jr. and Meredith R. Spangler, are close to Mr. Lewis's predecessor, Hugh L. McColl Jr., who began building the company into the banking giant that it is today. ... Aside from Mr. Lewis, only two people on the board — the former chief of FleetBoston and a former senior executive of MBNA — have roots in banking. While Wall Street is rife with tales of bank and brokerage directors who deferred to executives seeking faster growth through ever-riskier business, Bank of America's shareholder advocates have grown increasingly concerned about the board's ability to understand financial risks and rein in managers. ... While critics charge that Bank of America's board has been little more than a rubber stamp in the empire-building campaign of Mr. Lewis, others describe it as independent and willing to push back against the chief executive. Members of the board, many of whom are paid upward of $200,000 a year for their service, declined to comment or did not return calls. ... Its members are expected to vote Wednesday on the addition of three directors from Merrill Lynch.... Their approval would raise the number of board members to 20, and would tighten the web that already binds many of the board's current representatives. ... Yet some board members are connected in other ways that reveal strong cross-pollinations with other company boards. ...  'If institutional investors choose to re-elect the board, then they should stop blaming the bank,' said Orin Kramer, a hedge fund manager and chairman of the New Jersey pension fund. 'They should look in the mirror.'"  (NYT, 1/28/09, "Bank of America Board Under Gun From Critics")  This BOD is a prime candidate for group-think --- a few members might be familiar with finance and the well-compensated rest might be too afraid to admit their ignorance.


         C.      Directors Have Been Asleep At The Wheel


        Nothing could get the attention of Directors more than the prospect of being held personally accountable for their lack of diligence in performing their duties to Shareholders.


        "Shareholders worried about runaway executive pay are likely to be stunned by the findings of a new study that shows many board directors still have no idea how much their CEOs would collect if they retire, are fired or bought out.  Board members also acknowledge they are struggling to rein in bloated executive compensation, but are counting on investors to lead the cause to knock it down.  Those conclusions aren't a decade old, but are part of a recent survey from the consulting firm PricewaterhouseCoopers and the Corporate Board Member magazine, which culled responses of more than 1,300 directors at U.S. companies. Its bottom line: Directors still don't have as much control over corporate dealings that many believe is needed to curb supersized compensation. ... While more boards are independent of management, there are still plenty of cases of directors using flawed judgment or kowtowing to demanding executives who are pushing their own agendas. ... Part of the problem, it seems, is that boards are still controlled by CEOs, with 50 percent of directors surveyed saying that board leadership flows from the company's top executive who is also board chairman. Those individuals, therefore, set the agenda as well as the flow of information at board meetings and among members. ... In the area of compensation, two-thirds of responding directors believe that U.S. company boards are having trouble controlling pay. Separately, a third believe that stockholders are the group most likely to get pay pared down.  But it is hard to reduce pay when the directors themselves don't know how much they've even agreed to pay executives.  Less than half of those surveyed said their boards use tally sheets to add up total compensation, and about one in five directors said that they didn't know what the CEO would collect if he or she is terminated, retires or should there be a change in control." (AP, 2/4/07, "Corporate directors are out of the loop")


        "For the first time, directors are going to have to disclose -- and justify -- the size of these exit and pension packages when proxy season rolls around this spring. Among the bigger shockers in these filings are the tallies showing how much money executives will cart away if they are terminated or agree to a merger. ...  Buried in these figures is one of the most contentious items in all of payland: the 'tax gross-up.'  That is the amount shareholders must pay to cover excise taxes arising when a top manager pulls the ripcord on his or her golden parachute. ... Michael Kesner, principal at Deloitte Consulting in Chicago (said,) 'Boards are now just getting a sense of how big that number is. People are surprised.'  How can the same directors who supposedly O.K.'d the provisions be in the dark about their size? ...  If directors are surprised by gross-ups, you can imagine how stockholders will react. And given how ubiquitous gross-ups are -- surveys say 75 percent of chief executives have such arrangements with their companies -- the shocks could be far and wide. ...  Training the spotlight on gross-ups may help stamp them out. As long as they were kept under wraps, directors didn't have to justify them to angry shareholders." (NYT, 2/4/07, "The C.E.O.'s Parachute Cost What?")  


        "On Oct. 24, Merrill Lynch announced its biggest write-down ever, an $8.4 billion charge that also represents the biggest known loss in Wall Street history. Six days later, its chief executive, E. Stanley O’Neal, retired from the company he had run since 2002. ...  Underlying the situation at Merrill is the nagging question of what a Wall Street board is expected to know about complex financial markets where asset values can shift drastically and where many directors are not in the business of managing trillion-dollar balance sheets — or perhaps have little experience in doing so. ... [S]ome corporate governance experts say directors are responsible for the quality of the executive ranks and for risk-control oversight. Directors should know what independent risk controls are in place, who is overseeing that function ... and whether they have a firm grasp on the scope of the operations. ... After every market crisis ... there has been public hand-wringing over how much involvement directors should have in acting as a check against management. Case law, lawyers say, has affirmed that directors have to be informed and make sure that obvious red flags are not ignored.  ... There were certainly some red flags waving in front of directors. One issue should have been the revolving door of talent in the upper echelons of the firm.... And, like everyone else, directors knew about the bank's very public shift into riskier business areas, which until this summer were delivering handsome profits. Merrill had become the top issuer of collateralized debt obligations in the marketplace, and its profitability soared; fixed-income revenue in the second quarter was up 201 percent. According to some analysts, the billion-dollar size of those profits — and the soaring return on equity — should have caused directors to ask whether the risks being taken to generate higher profits warranted better controls. ... Analysts say that directors should have asked about the exposures and, more important, what might happen to those exposures under various financial scenarios, including a collapse of the mortgage market. ... In July, when credit markets worsened and Merrill faced escalating losses ... Merrill's potential losses did not reflect the heavy levels that they ultimately reached in October. Management realized that there was a structural problem, and Merrill announced on Sept. 10 that it was creating a new job — chief risk officer, a post Merrill hadn't had before, even though it is common practice on Wall Street to have someone in that role. ... Regardless of what ratings agencies had to say about the securities Merrill and others were juggling, many investors, especially hedge funds, had been pointing out the flaws in the structured finance market. William Ackmann at Pershing Square and David Einhorn at Greenlight Capital, for example, sounded the alarm for more than a year, noting that AAA ratings on less than AAA products did not make sense." (NYT, 11/4/07, "Where Did the Buck Stop at Merrill?")  Is it too much to ask that Directors keep themselves informed of issues covered in the news media?  Did ML Directors wonder who was dumb enough to grant mortgages to persons in California who purchased homes priced over $1 million with a low or no down payment, but were engaged in low paid employment and unable to speak English?  Did ML Directors feel that packaging such loans enhanced investment quality?

        "Boards sometimes have a shockingly poor grasp of the quality and performance of their companies' leaders. It is difficult to understand how a properly evaluated leader could have been honored, as (Stan) O'Neal was, with a $46 million performance-based payout as recently as 2006, then be out of a job for incompetence in 2007. The most plausible explanation is that the question of whether a company has a good or poor leader remains disturbingly nebulous for boards. A 'star CEO' seems to be, regrettably, more a social construction of the media and company PR efforts than a knowable reality – except, perhaps, with the benefit of hindsight." (WSJ, 11/7/07, "Wall Street must learn from the boss's downfall")  BODs might anticipate such contingencies by insisting that CEOs agree to compensation clawbacks.  


        "In recent months, owners of many financial stocks have lost billions because the directors who represent them were clueless about risky mortgage operations or toxic loans held by their companies. Then last week, shareholders lost the only shot they had at firing incompetent directors when the Securities and Exchange Commission voted to prevent investors from nominating their own board candidates.  After the S.E.C.'s vote, beleaguered shareholders of Merrill Lynch, Bear Stearns, E*Trade Financial and others will have the same directors at the wheel who drove them off the cliff this year.  ... Certainly the losses generated over the last few months by major financial firms indicate that something is very wrong with the boards of these companies. These directors either knew of the risks their managers were taking and blessed them, did not know of them at all, or were advised of them and were unable to rein in the executives in charge.  Mr. (Richard H.) Moore (the treasurer of North Carolina) noted that these boards happily paid enormous sums to executives when mortgage desks were coining money. 'This is post-Enron, when boards should have understood that you cannot base compensation on short-term profits alone, and yet they continued to sign executive employment agreements with no claw-back provisions,' he said. 'That to me is a per se breach of fiduciary duty.' A look at boards of companies with some of the biggest write-downs shows few members with expertise in mortgage trading or even in the securities business.  ...   Frederick E. Rowe Jr., money manager at Greenbrier Partners in Dallas and president of Investors for Director Accountability, said the Merrill board is diverse and politically correct but lacks the experience for the complex financial world. ... 'The board asked the right questions, exercised diligence and acted aggressively on the basis of the information that was presented to it,' a Merrill spokeswoman said. 'No board, however, can be expected to act on the basis of information not known to it, and even the most responsible and diligent board cannot prevent every serious problem that a company may face.'  With so few capable directors who hold themselves accountable to owners at public companies, is it any wonder that pension investors are turning to alternatives like private equity? Those managers act like owners." (NYT, 12/2/07, "S.E.C. Sends Investors to the Children's Table")  Merrill's vague statement leaves many questions unanswered --- What were the "right questions"? What acts constituted the exercise of "diligence"?  What did the BOD do to act "aggressively"?  What was "the information"?  Who presented it?  When it all of the foregoing occur?  What "information" did the BOD not know?   Why did the BOD not know the "information"? 


        "As a former chief executive officer of Gillette Co. and Nabisco Inc., James M. Kilts knows a thing or two about dealing with corporate boards. So when Mr. Kilts gave a keynote speech at a corporate-governance conference last April, he decided to share some of what he has learned over the years. The advice was surprisingly simple. 'Tell the truth,' Mr. Kilts told the crowd of executives, directors, corporate-governance gurus and others. CEOs, he said, must be open with their board about a range of issues, from the failure of strategic plans to unsavory business practices within the organization. Such a recommendation may seem obvious, but people who have spent time in corporate boardrooms say honest communication is often lacking between CEOs and their fellow directors. ... We're talking here about the CEOs who try to solve problems themselves without keeping the rest of the board informed of new developments. Or the CEOs who are reluctant to admit mistakes -- and may massage the truth to make things appear better than they are. 'Many times it's the thing not said, or overly optimistic positioning, that gets CEOs in trouble,' says Mr. Kilts....  Why is it so tough for CEOs to keep the board informed in a timely manner? Simply enough, CEOs want to appear to be in control, experts say. It can be hard for them to concede defeat or to admit they don't have all the answers. ... CEOs can also be reluctant to admit that things are not progressing as expected, or that a change in plans may be warranted. This is especially true when it comes to the executive's vision for the company. ... Of course, it can be hard to get up the courage to tell the board something it may not want to hear."  (WSJ, 1/14/08, "Why CEOs Need to Be Honest With Their Boards")  Is this an apology for BOD sleepiness?  A competent BOD member should be aware that CEOs have large egos and tend to obfuscate and, thus, the BOD should probe accordingly.


        "Another Sunday night, another ad hoc bank rescue rooted in no discernible principle. ... Not a single one of Citigroup's senior managers and directors will be let go as a condition of taxpayer assistance that now totals close to $350 billion. 'Citi never sleeps,' says the bank's advertising slogan. But its directors apparently do. While CEO Vikram Pandit can argue that many of Citi's problems were created before he arrived in 2007, most board members have no such excuse. Former Treasury Secretary Robert Rubin has served on the Citi board for a decade. For much of that time he was chairman of the executive committee, collecting tens of millions to massage the Beltway crowd, though apparently not for asking tough questions about risk management. The writers at the Deal Journal blog remind us of one particularly egregious massaging, when Mr. Rubin tried to use political muscle to prop up Enron, a valued Citi client. Mr. Rubin asked a Treasury official to lean on credit-rating agencies to maintain a more positive rating than Enron deserved. ... Chairman Sir Win Bischoff has held senior positions at Citi since 2000. Six other directors have served for more than 10 years -- including former CIA Director John Deutch, Time Warner Chairman Richard Parsons, foundation executive Franklin Thomas, former AT&T CEO C. Michael Armstrong, Alcoa Chairman Alain Belda, and former Chevron Chairman Kenneth Derr. When taxpayers are being asked to provide the equivalent of $1,000 each in guarantees on Citi's dubious investments, how can these men possibly say they deserve to remain on the board? All the more so given that Citi's board has lately been airing dirty laundry about Mr. Bischoff's role and leaking petty grievances. The directors all but started a run on the bank themselves, even as the bank assured the world it was sturdy enough to withstand any losses. ... While other banks can claim to be victims of the current panic, Citi is at least a three-time loser. The same directors were at the helm in 2005 when the Fed suspended Citi's ability to make acquisitions because of the bank's failure to adhere to regulatory and ethical standards. Citi also needed resuscitation after the sovereign debt disaster of the 1980s, and it required an orchestrated private rescue in the 1990s. Such a record of persistent failure suggests a larger -- you might even call it 'systemic' -- management problem...."  (WSJ - Opinion, 11/25/08, "Citi's Taxpayer Parachute --- Why are Robert Rubin and other directors still employed?")  There was not one mention of Shareholders and their supposed right, but lack of ability, to remove the dead-weight! 

         "Under fire for his role in the near-collapse of Citigroup Inc., Robert Rubin said its problems were due to the buckling financial system, not its own mistakes, and that his role was peripheral to the bank's main operations even though he was one of its highest-paid officials. ... Mr. Rubin, senior counselor and a director at Citigroup, acknowledged that he was involved in a board decision to ramp up risk-taking in 2004 and 2005, even though he was warning publicly that investors were taking too much risk. He said if executives had executed the plan properly, the bank's losses would have been less. Its troubles have put the former Treasury secretary in the awkward position of having to justify $115 million in pay since 1999, excluding stock options, while explaining Citigroup's $20 billion in losses over the past year and a government bailout of at least $45 billion. ... From the time Mr. Rubin joined Citigroup in October 1999 ... the bank has lurched from crisis to crisis, first with regulatory authorities, then with investors who grumbled that the bank lacked a strong strategy and was bloated. ... Mr. Rubin said it is a company's risk-management executives who are responsible for avoiding problems like the ones Citigroup faces. ...  Still, Mr. Rubin was deeply involved in a decision in late 2004 and early 2005 to take on more risk to boost flagging profit growth, according to people familiar with the discussions. They say he would comment that Citigroup's competitors were taking more risks, leading to higher profits. Colleagues deferred to him, as the only board member with experience as a trader or risk manager. 'I knew what a CDO was,' Mr. Rubin said, referring to collateralized debt obligations, instruments tied to mortgages and other debt that led to many of Citigroup's losses. Mr. Rubin said the decision to increase risk followed a presentation to the board by a consultant who said the bank had committed less of the capital on its balance sheet, on a risk-adjusted basis, than competitors. ... He said success would have been based on having 'the right people, the right oversight, the right technology.' ... He said the Citigroup board could bear some responsibility. 'Maybe there are things, in the context of the facts we knew then, we should have done differently,' he said." (WSJ, 11/29/08, "Rubin, Under Fire, Defends His Role at Citi")  The big bucks, but not the "buck," stopped at Rubin's desk. How much did the BOD pay the "consultant" who told them if Citi did things "right," it would result in gains?  Did the "consultant" describe the potential problems if things were not done "right"?  What was the "plan"?  How should the "plan" have been implemented differently?  Perhaps, the BOD Minutes would set forth some details.  How much less would "losses" have been?  What factors were considered in Rubin's alternative loss analysis? What are the "facts" that the BOD knew?  What "things" should the BOD have done differently?  Did the BOD request or receive interim progress reports?  For payment of a few hundred thousand dollars to the right PR firm, Rubin and other Directors similarly situated could have their public images burnished and their disastrous decisions expunged.  It would not be necessary to blame others and the fickle financial markets, but it has become the American way.

         "Analysts say that managerial problems plagued the Citi empire and that its board, which might have imposed some order, became little more than a rubber stamp during the Weill era. ' Sandy surrounded himself with yes men,' says Mr. (Chris) Whalen (editor of The Institutional Risk Analyst). 'He never wanted anyone second-guessing him.'" (NYT, 1/3/10, "Citi's Creator, Alone With His Regrets")


         "[W]hat's the rationale for not firing the boards? Bank directors presided over a disaster in a collective stupor, yet unaccountably continue to hold on to their seats.... At BofA, the board of directors includes several current or retired business executives, a college president and Gen. Tommy Franks, architect of the brilliantly executed Iraq war. My favorite director is Jackie M. Ward, a retired software executive who also serves on five other boards. These companies paid her total annual compensation of more than $1.5 million in cash and stock last year, according to their latest disclosure statements. The six corporations scheduled a total of 52 board meetings over that time, so she got $28,840 per meeting. ...I don't mean to pick on Ms. Ward, who for all I know is still a business dynamo at the age of 70. Yet given that she chairs the BofA board's committee on asset quality, which is ground zero of the company's implosion, might the institution not have been better served if she had focused on this one thing?"  (LAT, 2/19/09, "We already own the banks -- shouldn't we run them?")


         "You might think that board members overseeing businesses that cratered in the credit crisis would be disqualified from serving as directors at other public companies. You would, however, be wrong. Directors who were supposedly minding the store as disaster struck at companies like Countrywide Financial, Washington Mutual or Fannie Mae have not all been banished from other boardrooms. In many cases, directors just seem to skate away from company woes that occurred on their watch. ... [F]ew in this crowd have acknowledged culpability. Taxpayers and shareholders, meanwhile, who had nothing to do with the problems, are left holding the bag. ... [T]hey continue to get work as directors at other companies.  ... This is not to say that these directors are not performing their duties. Indeed, some would argue that directors who have witnessed at close range the collapse of a company may learn a great deal from that experience and bring to their boardroom activities an increased sense of responsibility. But it is hard to blame shareholders for wondering whose side directors are on, given the broad failures by many board members to recognize and rein in risk-taking at so many companies. As fiduciaries for the owners of the companies on whose boards they serve, directors have a duty to act in shareholders' interests. After all, they are the shareholders' representatives, and they are charged with ensuring that their companies are operated soundly and with long-term profitability in mind. Yet it doesn't always seem to work out that way. ... The main reason for director dysfunction is that board members have little fear of being fired for incompetence or sleepwalking through meetings. Because of the way director elections are structured, board members can win their seats if they receive just one vote of support. And even if a majority of shareholders withholds support from directors at annual elections, the directors who are singled out are often allowed to stay. Shareholders interested in ousting a director or two must mount an expensive proxy fight to do so." (NYT, 12/27/09, "What Iceberg? Just Glide to the Next Boardroom")


            "When chief executives take outside directorships, are they spreading themselves too thin? Some institutional investors think so. There are 118 top officers of Fortune 1000 companies who sit on at least three boards, including their employer's.... Critics say many senior executives are too 'overboarded' to do their jobs and monitor management elsewhere. ... Some investors are actively objecting to executives' multiple directorships. Calpers and the UAW Retiree Medical Benefits Trust ... say they likely will oppose board re-elections at 2012 annual shareholder meetings of several dozen CEOs with more than one outside board seat. ... Senior executives used to eagerly accept directorships to broaden their business perspective. But the time demands of board service have risen sharply. A single directorship required an average commitment of 228 hours in 2011, up sharply from 210 in 2006, according to surveys by the National Association of Corporate Directors. Boards, meanwhile, are rewarding members more handsomely. Among companies in the Standard & Poor's 500-stock index, average annual compensation for directors exceeded $232,000 in 2010, up 8% from $215,000 the year before, according to a 2011 study by recruiting firm Spencer Stuart." (2/29/12, WSJ, "Are Executives Overboarded?") WSJ Reader Comment: "Taking on overloaded directors is one of many lesser-known tactics that help consolidate power in managers. Overloaded directors come to meetings unprepared, mind wandering and without the full attention necessary to make complex, company-specific decisions. In those cases, they often end up deferring judgment to management and rubber-stamping decisions, which defeats the purpose of the board to begin with." One might just follow the money --- $232,000 for 228 hours of "being there" with minimal accountability. Few professionals garner $1,000 per hour.


                1.    Unprepared For BOD Meetings


        "[A]ccording to a survey conducted by Harvard Business School ... and Boston Consulting Group ... only 56 percent of the CEOs reported that directors were well-prepared for board meetings.  Even fewer --- just 40 percent --- said directors made efforts to learn about the company outside of board meetings...."  (On Board, 6/04, "Shareholder Activism Intensifies Spotlight on SEC Director Nomination Proposal")  Even so, the other 44% and 60%, respectively, walk to the bank with their lucrative pay packages, but, if and when it ever comes to issues of Director accountability, they'll claim lack of sufficient knowledge to be held culpable. 


        "Prosecutors rewrote their opening script for the retrial of L. Dennis Kozlowski and Mark H. Swartz 'This case is the story of how two men - the defendants in this case - stole $150 million from a company named Tyco and that corporation's owners, its shareholders,' said Owen Heimer, an assistant Manhattan district attorney, during his opening statement in New York State Supreme Court in Manhattan. 'These defendants ran Tyco, but they did not own Tyco.' … He also seemed to try to minimize the role of directors as watchdogs over the company, saying that they had no way to be privy to the company's records because 'they did not work at Tyco.  They had no access to the day-to-day.  They had occasional meetings.'  He also said that the defendants 'controlled the flow of information' to the directors, whom he described as 'part timers.'"  (NYT, 1/27/05, "Prosecutors Rewrite Script in New Trial of 2 at Tyco")  The BOD did not approve the alleged thefts as BOD members were asleep at the wheel by not doing their homework?


        "'I (General Motors CEO Rick Wagoner) get good support from the board,' he said, breaking into a long explanation of the role of corporate directors. 'We say, "Here's what we're going to do and here's the time frame," and they say, "Let us know how it comes out."  They're not making the calls about what to do next. If they do that, they don't need me.'"  (Detroit News, 11/25/05, "GM: Strike at Delphi is unlikely")  In order words, the BOD is compliant and does not even bother to challenge the CEO's assumptions.


        "Despite corporate reform legislation, 74 percent of boards say that the CEO is still primarily responsible for setting the agenda for board meetings, according to the 'What Directors Think' study conducted by PricewaterhouseCoopers LLP and Corporate Board Member magazine. Further, 10 percent say that the CEO is responsible for establishing meeting agendas for the audit, compensation, and governance/nominating committees… In this new world of board independence, the survey shows that boards aren't taking control over their own business. Almost half (47 percent) of respondents believe board leadership should emanate from the CEO versus a non-executive chairman or lead director.  … Other key findings of the survey include:  Recent news coverage of directors' personal liability for corporate downfalls has made directors more cautious but doesn't appear to be scaring them away from the boardroom. … In this era of catastrophes, both natural and manmade, boards need to be more involved in risk management. More than half (51 percent) of those surveyed said they do not have an action plan in place if their company faced a major crisis, and another 8 percent were not sure. … The fourth annual survey measures the opinions of 1,103 directors serving on the boards of the top 2,000 publicly traded companies listed on the New York Stock Exchange, NASDAQ Stock Market and the American Stock Exchange." (Press Release, 10/17/05, "CEOs Still Reluctant to Hand Over Reins to Boards, PricewaterhouseCoopers/Corporate Board Member Study Finds")


        "Mr. (Ronnie) Parker and three senior executives had signed juicy deals…. These golden parachutes represented more than twice the company's fiscal 2003 earnings -- and could potentially force Pizza Inn into bankruptcy again. … Ramon Phillips, a Pizza Inn director and former executive, says he received the accords the night before the board approved them and lacked time to fully weigh their financial impact. He adds that as far as he can recall, the full board never previously discussed 'putting in grandiose golden parachutes.'"  (WSJ, 10/17/05, "In for the Long Haul: More activist investors are winning board seats and helping companies revamp their governance practices")  Sometimes articles reveal more in what they fail to cover.  Did Phillips complain about the "night before" delivery?  Did he seek to postpone the BOD's decision until the matter could be adequately considered and discussed?  How did Phillips ultimately vote on the matter?  Does his admission provide ammunition for Shareholder legal action against the BOD?  How frequently do these "night before" deliveries occur in corporate America ?  Should they not represent a red flag to reasonably intelligent BOD members?


            "Citigroup agreed to pay $208 million to settle the case. The S.E.C.'s complaint involved Citigroup's asset management arm and its in-house mutual fund operation, Smith Barney Fund Management. … [T]he Smith Barney funds began exploring alternatives to their transfer agent, the First Data Corporation. ... First Data had been the transfer agent to the Smith Barney funds for a decade. … None of the funds' directors were affiliated with the fund company except the chairman, Heath B. McLendon, an officer of Citigroup Asset Management. …  Fearful that it might lose the Smith Barney business, First Data … offered a $25 million 'fee concession' to Citigroup if it renewed.  … First Data offered yet more concessions… Citigroup estimated that it would earn profits of $258 million over five years under the rebate deal. Take note: under the arrangement, the rebates would go not to the funds but to Citigroup. … Because the concessions were going to Citigroup and not its funds, Deloitte (& Touche Consulting) questioned the deal and said that it 'may not be legally viable,' according to the S.E.C.'s complaint.  But Citigroup went ahead. It made its own trust company the transfer agent and gave First Data a secondary role, as so-called subtransfer agent.  That way, the rebates did not go directly to Citigroup Asset Management, but to its affiliated transfer agent. ... The chairman did not inform the directors of … the full extent of the rebates to Citigroup, the S.E.C. said, and the memo to the directors stated that the arrangement was in the best interest of the funds. … Under the terms of the settlement, the firm also agreed that if one of its affiliates wants to act as transfer agent for any of its mutual funds, the adviser to the funds must also seek competitive bids from outside transfer agents. An independent monitor must oversee the bidding. … As the commission said in its complaint, Citigroup kept the deal going until Sept. 30, 2004, well after conflicts of interest at mutual funds had appeared on the national radar screen.  Just another reason investors should be wary of those who claim that the free markets - not regulators - are best at making conflicts go away."  (NYT, 6/5/05, "What's Good for Business, If No One Else")  Let's summarize: the clients' (Smith Barney funds) fiduciary (Citigroup) causes a service provider (First Data) to its clients to reduce fees for processing the clients' business, but the fiduciary pockets the amount of the reduction.  The fiduciary's (Citigroup) auditors inform the fiduciary that it is acting improperly.  The probably highly-paid and little worked so-called independent Directors (also fiduciaries of the client) are informed that some of the cost reductions would not reach the clients' pockets, but use their rubber stamps to approve the deal.  Why did the settlement not require competitive bids regardless of the nature of the transfer agent arrangement?  If those Directors knew that the full benefits were not getting to the funds from the memo and/or public media comments, they were on inquiry notice, i.e., if one sees smoke, one has a duty to locate the fire, and should be, at least, stripped of their past compensation and relieved of their Directorships.  It is more likely that the Directors will remain in office and vote themselves additional compensation.  Unfortunately, in far too many instances, that has become the "American way" of doing business. 


        "The board, it (an internal report of Krispy Kreme Doughnuts Inc.) said, approved big acquisitions based on little more than what it called 'back-of-the-envelope' calculations by executives, failed to oversee management with 'an appropriately skeptical eye,' and was 'distracted' by the company's apparent success and Mr. (Scott) Livengood's charisma."  (WSJ, 8/11/05, "Report Shows How Krispy Kreme Sweetened Results")  The BOD did not inquire as to why KKD employed four CFOs within a short period and functioned without a General Counsel during its first two years as a public company.  Perhaps, they'll assert the "Twinkie defense."


        "Lawyer Edward Greenspan's occasionally heated cross-examination of former Hollinger International Inc. board member Marie-Josee Kravis centered on why she did not ask any questions of (Conrad) Black at the time of the accused fraud.  ... Federal prosecutors have described the noncompete payments, which ensured that executives would not resume business in the same markets where they were selling off newspapers, as outright thefts from Hollinger International and shareholders that totaled $60 million.  ... Kravis and another board member, former U.S. Ambassador to Germany Richard Burt, have testified for the prosecution about how they were duped into approving asset sales that included payments to Black and two other former executives on trial. A fourth executive is accused of helping arrange the payments.  The former board members said the payments to executives were sometimes left out of oral presentations to Hollinger's board or were glossed over. In every case, Kravis said, she was told by Black and other executives that the buyers had demanded the noncompete agreements from executives.  Greenspan cited 11 company documents through 2003 that he said Kravis would have read as a board member in which the noncompete agreements were at least partially spelled out. Yet she had gone along and approved the deals, he said.  ...  At a few points in the testimony, when asked to review documents in which the payments were revealed, Kravis responded: 'I missed it.' 'From the chairman of the board to the ordinary shareholder, they relied on you, correct?' Greenspan asked, referring to her fiduciary duty as an independent company director.  'Well, they relied on everyone on the board,' Kravis replied." (LAT, 5/1/07, "Temper flares at Black trial")  Is this another version of the "if we all screwed-up, none of us screwed-up" argument ---- the modern version of accountability and survivability? If so, does it provide incentive to Directors or prospective Directors not to want to serve with the best and brightest, but with the dumb and dimmest.  

        "(Former Illinois Gov. James R.) Thompson seemed relaxed as he took the witness stand in the very courthouse where he was once the chief prosecutor. His record as a corruption-busting U.S. attorney in Chicago was the springboard for his four terms as governor of Illinois. Assistant U.S. Atty. Eric H. Sussman asked Thompson whether he had been familiar with the newspaper industry before joining Hollinger's board.  'Just as the subject of it,' Thompson quipped. He said he gradually learned about the business side of the industry during his time on the board of directors. Thompson eventually became the chairman of the board's audit committee, which was supposed to scrutinize related-party transactions — deals in which Hollinger was doing business with a firm in which someone in Hollinger's management had a financial stake... Sussman asked Thompson whether anyone in Hollinger International management had told him that $2 million in noncompete money from the American Trucker deal was being funneled to the Canadian company. 'No,' Thompson said. ... Thompson was asked whether top management should have made the audit committee aware that the money was going to Hollinger Inc. 'Yes, because it was a related party transaction,' he said." (LAT, 5/2/07, "Ex-governor testifies in Hollinger trial")  Did Hollinger require all Directors annually to complete related-party transaction disclosure forms to place the information into its proxy statements?    

        "[D]efense lawyers tried time and again to portray Mr. (James R.) Thompson, who was chairman of the audit committee, as inept or not paying attention to detail. ...  Mr. (Edward) Greenspan questioned Mr. Thompson about why he had failed to take note of memos, e-mail messages and, chiefly, government filings that seemed to show that he, his two colleagues on the audit committee, and other directors knew that Mr. Black and other executives had received large amounts of money as Hollinger made deals to expand further into the United States.  ... Mr. Thompson said that the documents, especially government filings, were loaded with jargon and ran dozens of pages long, often with single-spaced type.  'I would skim them,' Mr. Thompson testified.  Asked whether he had read the documents in detail, word for word, Mr. Thompson responded that he had not, instead glancing over them for critical information that would stand out. 'I should have, but I did not,' he said.  Mr. Greenspan, just before wrapping up his questioning, then suggested that Mr. Thompson and other audit committee members 'conveniently forgot' details of the deals, and their own roles in approving them, 'when questions started being asked.' ... Mr. Greenspan said there had been at least 11 times when Mr. Thompson and his colleagues on the audit committee should have spotted the questioned payments.  'You didn't see it?' Mr. Greenspan asked.  'Right,' Mr. Thompson answered."  (NYT, 5/3/07, "Ex-Governor Assailed as Inept in Trial of Conrad Black")  Interesting defense!  However, would Directors not breach their own fiduciary duties to the company if they aid and abet the CEO to breach his/her fiduciary duty?  When does an ultra vires theory emerge?  Are thieves relieved of responsibility for their actions when incompetent supervisors render their approval?  Evidently, Thompson does not consider big side payments as "critical information."  Pity the poor people of Illinois for all those laws signed by Thompson that he only "skimmed" before signing.

          "The image etched by (James) Thompson's two days of testimony isn't pretty. He skimmed over key disclosures that might have alerted him to the scheme allegedly masterminded by (Conrad) Black. A change in the Hollinger's corporate constitution required at least one member of the audit committee to be a financial expert. Thompson, the committee's chairman, kept holding meetings even though no one on the committee met the new requirement. Lawyers for Black and other defendants pushed a line of questioning that implied Thompson was dazzled by the perquisites of being on Black's board: A dinner at which British Prime Minister Tony Blair spoke; flights on the corporate jet; and belonging to a board studded with statesmen, including Henry Kissinger. In one instance, it dawned on Thompson that $28 million in payments to Black, his partner David Radler and two others for their role in a big transaction might be out of line. He asked for a comparison with other newspaper deals. At the next meeting, no comparison was provided, but Thompson OKd the payments anyway and commended them to the full board. ...  Had Enron happened earlier, Thompson might have taken his Hollinger duties more seriously and sniffed out conflicts of interest. Tips were everywhere, even in Hollinger's public disclosures. 'Did you want it in bigger print? Did you want it in neon?' defense lawyer Patrick Tuite derisively asked last week, when Thompson said no one at Hollinger had alerted him." (Chicago Tribune, 5/6/07, "Curtain falls on dismal final act")


                2.    Allowing Improper Compensation and/or Pay Without Performance


            "[T]he bonus is a symptom of a larger problem that has so enraged Main Street: a sense that on Wall Street, even big mistakes have no consequences." (NYT, 4/5/10, "Now to Explain the Party Favors")


           "Having a director with the stamina to repeatedly ride a bicycle up some of the highest peaks in the French Alps would seem to be a bonus in times of such stress. Yet Lance Armstrong, the seven-time winner of the Tour de France, did not attend a single meeting of his fellow Morgans (Hotel Group) directors last year, the proxy states. Early this year, Mr. Armstrong gave up his seat on the board after collecting more than $70,000 in fees and company stock in 2007.  Through a spokesman, the company said: 'Lance Armstrong was a valued member of our board of directors. During Mr. Armstrong's service, he was engaged and readily available to the C.E.O. and other directors for consultation on various issues and projects.'" (NYT, 4/20/08, "The Absentee Director")  Some people do not understand the difference between contractual terms in a consulting agreement, e.g., be available, and the fiduciary duties of a Director.  The existence of a phantom employee might result in a federal indictment.  The existence of a phantom Director is greeted with a yawn.  Are there two parallel ethical universes?  


        "[B]ig investors are treating excess compensation as a reliable index that something serious may be wrong.  In particular, it’s often a sign that a company’s board of directors is catering to the C.E.O.’s whims rather than supervising him." (The New Yorker, 2/13/06, "Overcompensating")


        For years, BODs have been compliant in bestowing undeserved riches on CEOs.  Directors claim that they rely upon the advice of "consultants" to determine levels of what is supposedly competitive compensation.  However, the BODs fail to inform Shareholders that the "consultants" are hired by the CEO to render the opinions and that the CEOs also engaged the services of the same "consultants" on other Company projects.  Do the Directors not know that they should/could directly engage the services of truly independent compensation specialists in making their determinations?  Are they unable to recognize the obvious conflict of interests that, most likely, produce biased information?  In some instances when Directors engage the services of "independent" consultants, CEOs are permitted to engage other compensation consultants on behalf of the Company to support the CEO's outlandish demands.  The reality is that the Company, i.e., Shareholders' assets, pays for advocates on behalf of the CEO's personal financial interests.  Will Directors ever personally pay a price for their own malfeasance?

        "Members of Congress are looking into the potential conflicts among executive compensation consulting firms that do other lucrative work for the companies whose pay they help devise. ... Mr. (Henry A.) Waxman (chairman of the House Committee on Oversight and Government Reform ) asked the consulting firms to identify which companies among the nation's 250 largest they had provided both executive pay consulting and other services for and to disclose total revenues received for each type of service. Mr. Waxman asked that the companies supply the information by May 29. ... But the consultants charged with advising on pay were often employed by large companies providing other services — like actuarial work on company pensions and the outsourcing of employee benefit programs — to those same corporations. Contracts for these services often generated significantly more revenue than those involving advice on executive pay. ... The potential for conflicts among pay consultants is reminiscent of those in the late 1990s among accounting firms that performed lucrative consulting services related to information technology and tax issues for the same companies whose financial results they were charged with certifying. ... [I]n overhauling its disclosure rules on executive pay last year, the S.E.C. did not require companies to disclose details that would signal potential conflicts among consultants, like the type of other work done by these consultants or the revenues earned under those arrangements. The commission did require public companies to identify the consulting firm or firms hired to help devise executive pay standards, however.  ... When discussing its pay practices in its proxy filings in recent years, Verizon (Communications) routinely said that they were devised by an 'independent outside consultant' that reported to the board. Although the consultant was not identified, it was Hewitt Associates, a company that did extensive work for the company in other areas, generating significant revenues." (NYT, 5/11/07, "Panel to Look at Conflicts in Consulting")  One need not wonder why Congress has scheduled hearings to determine whether the SEC is adequately protecting investors' best interests.


        "A deal is a deal, unless it's a severance agreement for a departing executive.  Then the terms are subject to last-minute reinterpretation.... Mel Karmazin from Viacom Inc. and Steven Heyer from Coca-Cola ... decided to leave after it became very evident they would never ascend to the post of chief executive. ... [B]oth executives were allowed to resign with full severance benefits -- worth about $30 million to Karmazin and up to $25 million to Heyer -- even though it's dubious that the nature of their departures qualified for such generosity under the terms of their contracts. ... [A]ny attempt at controlling severance amounts will accomplish little if corporate directors cannot be relied upon to stand firm at the crucial moment."  (Associated Press, 7/12/04, "Boards don't have good reason to cash out resigning executives") 


        "Nortel's board has come under scrutiny for allowing Nortel's improper accounting to go on, and for approving substantial bonuses for top executives even as the audit committee was investigating the company's accounting."  (WSJ, 5/27/04, "Former Minister In Canada Joins Nortel's Board")  The minister better pray that he is not entering into a den of sinners.  "Mr. Owens, a member of Nortel's board for the past two years, defended the board's approval of various bonus programs that paid out hundreds of millions of dollars to senior executives and staffers since the start of last year. ... Bonuses under one of the programs were paid out because of Nortel's apparent return to profitability in the first half of 2003, but that profit will be changed to a loss in the coming restatement.  Mr. Owens said he will examine all of the bonus payouts, and Nortel's board and management will 'do the right thing,' but he later declined to say whether Nortel may seek to recoup any funds."  (WSJ, 6/3/04, "Nortel May Face More Restatements")  What's $200 million of other people's money?  It appears that the BOD has decided that "doing the right thing" does not include seeking to recoup funds mistakenly paid for non-performance.  Since Directors are effectively not accountable for their actions, why should Shareholders expect that Directors would act to recoup their assets?  "Nortel say if 'the board determines that bonuses have been paid to individuals who have acted improperly, if fully intends to seek recovery.' ... Because of that profitable first quarter, most employees received payments equivalent of 10% to 25% of their annual salaries from Nortel's bonus plan.  Top managers earned between two and four times their salaries...."  (WSJ, 7/2/04, "Reversing the Charges: Nortel Board Finds Accounting Tricks Behind '03 Profits")  Does that mean employees and "top managers," who unjustly received bonuses based upon the erroneous earnings numbers and did not "act improperly," will still be allowed to keep the bonus money?  The BOD should attempt to recover all the funds based upon, at a minimum, the theory of unjust enrichment.  "Nortel said 12 of the company's most senior executives will take the unusual step of returning $8.6 million in bonuses they were paid based on the erroneous accounting. ... It is rare for senior executives to voluntarily refund bonuses following an earnings restatements, several pay specialists said. ... [T]he board also will seek repayment of bonuses paid to executives who have already been ousted."  (WSJ, 1/12/05, "Nortel Unveils New Accounting Flubs")  What about the thousands of others who received hundreds of millions of bonus money?  Did the 12, with a wink and a nod or more, receive assurances that Nortel will award them $8.6 million in stock options or future bonuses?  How vigorously will the BOD pursue the bonus money paid to "ousted executives"?

        "Nortel also announced Tuesday that five longtime directors, including its chairman, Lynton Wilson, would not seek re-election. Mr. (William) Owens (current CEO) said that the decisions were not related to criticism by some investors.  'With the restatement behind us, it was time to turn a page and have some new members,' Mr. Owens said. "  (NYT, 1/12/05, "Executives of Nortel Will Repay Bonuses")  Is this not reminiscent of Tyco International?  Tyco’s BOD appointed a new CEO, who, in effect, fired the BOD members and, then, selected their successors.  The successor-Directors became beholden to the new CEO.  This is known as merry-go-round corporate governance, where Shareholders are just a minor inconvenience.


        Members of the Board of Directors on the New York Stock Exchange, like so many other others, have been asleep at the competence wheel and/or declined to recognize obvious conflicts of interest.  "How did successive boards of the New York Stock Exchange, filled with senior executive from every major Wall Street firm and such companies as Viacom, Phillip Morris and AOL Time Warner, allow the exchange to pay its chief executive, Richard A. Grasso, a king's ransom?  The answer seems to be that most board members saw the post as an honor, but not one that required much attention. ... But not even H. Carl McCall, the former New York comptroller, who is chairman of the board's compensation committee, had understood how much money was involved.  And he had signed the contract of behalf of the board."  (NYT, 9/14/03, "Even on Wall Street, It Seems, the Fine Print Goes Unread")  One can only wonder about the quality of Mr. McCall's efforts when he served as Comptroller of the State of New York.  "Did the board understand the tremendous complexities that were sending Grasso's pay to the sky? ... One former director, in fact, refers to this body as being a 'jerk-off board' that didn't pay a whole lot of attention to anything. ... One former director remembers that in 2002, when he first learned how much Grasso was paid, he said, 'Holly s--t,' except, he adds, 'my language was a lot stronger than that.'" (Fortune, 2/9/04, "NYSE Dick Grasso's Pay: The Sequel")  However, Grasso's generous compensation may have had less to do with Director negligence than one might at first assume.  "He (Grasso) controlled the composition of the board and its agenda." (NYT, 12/30/03, "How Grasso's Rule Kept NYSE On Top but Hid Deep Troubles")  "The New York Stock Exchange's charitable contributions to organizations affiliated with members of the board's compensation committee have climbed 63-fold since 1995 as Chairman Richard Grasso's pay soared." (LAT, 9/15/03, "NYSE Donations Rocketed for Charities Linked to Pay Panelists")  "Grasso's pay was set by board members and compensation committee members whom he personally picked for their jobs. No one is suggesting any quid pro quo...." (Washington Post, 9/15/03, "Trust Is Trading in Short Supply")  "Experts in corporate governance have criticized the close ties that Mr. Grasso had with some directors, including Kenneth G. Langone.  A longtime personal friend of Mr. Grasso's and a fellow director of Home Depot, Mr. Langone was chairman of the N.Y.S.E. board's compensation committee from 1999 to June of this year.  It was during that period that Mr. Grasso signed the two contracts that would award him close to $200 million."  (NYT, 12/21/03, "Next for the Big Board: To Sue or Not to Sue?")  On September 17, Grasso tendered his resignation.  Questions remain --- Will Grasso keep the entire $140 million and/or obtain more?  Will the Directors, who authorized the payment(s), be held personally accountable or will their resignations be the total remedy for the damages that they have caused?  "Mr. Reed (NYSE interim Chairman) sent a letter yesterday to state and federal regulators recommending that THEY pursue legal action MR. GRASSO. ... 'Serious harm has been inflicted on the exchange by unreasonable compensation of the previous chairman and C.E.O., and by the failure of governance and fiduciary responsibility that led to the compensation excesses as well as other injuries,' he wrote." (NYT, 1/9/04, "Big Board Speaks Out Against Former Chairman....")  Did Mr. Reed recommend action against current or former NYSE Directors?  Why is it that the NYSE cannot or will not clean up its own mess rather than ask the government to do it at taxpayer expense?  "'The current board, by merely sending the report to me in the mail, has not fulfilled the entirety of its fiduciary obligation,' (New York Attorney General Eliot) Spitzer said." (Bloomberg News, 1/14/04, "Spitzer May Target Old NYSE Board")  "[I]f charges are filed, Grasso would have the ability to drag in prominent chief executives who approved the compensation, either as liable parties or as witnesses.  Involving such well-known executives ... would possibly embarrass some of the exchange's most prominent listed companies...."  (Reuters, 1/27/04, "Ex-NYSE head Grasso has legal leverage -- experts")  Are "prominent" and "well-known" establishment code words used to designate those persons who are entitled to be shielded from accountability for their actions?  The NYSE "said Thursday that it will not sue its former CEO and chairman over his lavish pay package...." (Associated Press, 2/6/04, "NYSE won't sue former CEO Grasso")  No mention was made as to whether legal action would be undertaken against former members of the BOD who authorized the payments.  Current members of the NYSE BOD should be concerned as to whether they are exposing themselves to legal liability for failing to pursue viable causes of actions against Grasso and/or their predecessors on the BOD.  So, hey, what's $187 million of other people's money among friends and/or colleagues?

        It's just a matter of fun and games.  "Richard A. Grasso is no longer a member of Wall Street's most exclusive public club, the New York Stock Exchange, but he still belongs to its most secretive society, Kappa Beta Phi… At its annual black-tie dinner on Jan. 15 at the St. Regis Hotel, Mr. Grasso was not only in attendance, but the butt of a series of jokes about his $139.5 million pay package as chairman and chief executive of the exchange. … Laughing with Mr. Grasso were several former directors of the stock exchange who granted him that pay … Drawing some of the biggest guffaws were a series of songs poking fun at Mr. Grasso's pay. In many ways, it was a night for bygones to be bygones. Several executives closely associated with last year's scandal over Mr. Grasso's pay observed the evening's festivities. Among the leading players were Kenneth G. Langone, a friend of Mr. Grasso's who was chairman of the exchange's compensation committee from 1999 to 2003, and Martin Lipton, a founding partner of Wachtell Lipton Rosen & Katz, the powerful Wall Street law firm, who drew public criticism for offering personal legal advice to Mr. Grasso while also serving as the stock exchange's top legal counselor. …Despite the zingers, there were no bruised feelings, according to bankers who attended. … Still, bankers remain reluctant to discuss the organization in detail. '"It's a secret society,"' said one Wall Street chief executive and member. ‘"I can't tell you any more, or it wouldn't be secret."'"   (NYT, 2/6/04, "If Only for a Night, Wall St. Fallen Idol Is One of the Boys")  Boys will be boys!

        "And in September 2003, just days before Mr. Grasso was ousted, Martin Lipton, the powerful Wall Street lawyer, advised Mr. Grasso not to forgo the additional $48 million he was owed, advice that would seem to clash with Mr. Lipton's position as chief counsel to the exchange's corporate governance committee." (NYT, 2/3/05, "Report Details Huge Pay Deal Grasso Set Up")  Where's the Ethics Committee of the New York State Bar when it is needed?  Does that Committee only go against the small-fry?


        "The New York Stock Exchange's directors said Thursday that they would seek to stay another year, disappointing exchange critics who hoped at least some new faces would be elected to the board in June. … [T]he NYSE last month for the first time invited investors to nominate director candidates and received 110 nominations.  But on Thursday, former Secretary of State Madeleine Albright, who chairs the board's nominating and governance committee, said the 'unexpected large response has made it difficult for the board to give proper consideration to all the individuals' in time for the June annual meeting of NYSE seat owners."  (LAT, 4/2/04, "NYSE Board Seeks to Extend Term")  Was this an example of poor planning or what?  The NYSE sought nominations from March 11 to 23, 2004 and planned to narrow the field by April 1, 2004.  What contingency plans were in place when the invitation for nominations was issued?  Is this an indication of competence or, more properly, lack thereof at the highest levels?   Unfortunately, at the BOD level, name recognition still trumps competence.  Since Ms. Albright was not up to the task, the NYSE could have listed the names of all 110 nominees and let its members make their own determination.

       "The Big Board doesn't want a trial airing more dirty laundry. … Some former NYSE directors are maneuvering to broker a settlement, which would avoid a lawsuit spotlighting their approval of his pay. [F]ormer compensation-committee members have urged Mr. Spitzer to ask former Merrill Lynch & Co. chairman David Komansky and Viacom Inc. president Mel Karmazin -- themselves former compensation-committee members -- to lobby Mr. Grasso to settle. …. The consulting firm, Hewitt Associates, gave NYSE directors a plan in 1996 that used pay at 'peer' companies as benchmarks for paying NYSE officials. These peers included Merrill Lynch, Citicorp Inc., Aetna Life and others with much bigger revenues and payrolls. 'Company size is unimportant,' the report argued, because the NYSE wanted to 'retain world class executive talent.'  Regulators want to know whether employees who directly reported to Mr. Grasso set the mandate for Hewitt that led to the selection of the peer companies…." (WSJ, 4/20/04, "Grasso Takes More Heat on Pay")  Why were the services of the consultant required?  Was a NYSE executive employee threatening to leave due to inadequate compensation?  "When he asked Mr. Grasso if he light be leaving for a job in Washington, Mr. Grasso replied, 'Not a chance in a million....I've got the best job in the world,' according to Mr. Langone." (WSJ, 6/15/04, "Langone Says NYSE Wasn't Misled on Pay Of Ex-Chief Grasso")  Was the NYSE unable to hire someone due to an inadequate compensation offer?  Did the Directors, who served on the Compensation Committee, directly hire and task the consultant to prepare the report?   Did NYSE executives cause the consulting firm to be compensated for other services on behalf of the NYSE?  Pursuant to NYSE-think, would not any executive who the NYSE might hire or retain be "world class executive talent" simply by virtue of being employed by the NYSE?  Does it make sense to allow Grasso to take possession of $140 million of retirement funds if the alleged objective was to give him incentive to stay on the job?

        "Big Board officials have indicated privately that they would be content if Mr. Grasso returned as little as $50 million....  [R]egulators ... began investigating the matter Jan. 8, when Big Board directors sent them the results of an internal inquiry.  That report, prepared by a former federal prosecutor, concluded that $120 million of the money Mr. Grasso had drawn from his retirement package was inappropriate." (WSJ, 4/27/04, "Grasso, Spitzer Keep Door Open for a Deal Despite Tough Talk")  Hey, what's a mere $70 million giveaway of other people's money among rich friends and business associates?  Is it just chump change?  Was the internal inquiry badly flawed?  If the NYSE did not believe that the report was accurate, why was it provided to the Attorney General?

        Look at who is now calling the kettle black!  "Some of Wall Street's top executives … have complained that Mr. Reed may have misrepresented his ultimate purpose in commissioning an exhaustive document on the origins of Mr. Grasso's hefty pay package.  Instead of using it to prepare himself for negotiations with Mr. Grasso, Mr. Reed gave the document, called the Webb report, after Dan K. Webb, the powerful Chicago lawyer that headed its preparation, to Mr. Spitzer, the New York attorney general, who along with federal regulators has been investigating the matter for months.    Fond of the backroom deal worked out among like-minded men, many of them found Mr. Reed's decision to go straight to Mr. Spitzer an abrupt departure from their preferred way of conducting business."  (NYT, 5/1/04, "A Meddlesome Priest of Sorts on Wall Street")  Is this an example of what goes around comes around? 

        When will NYSE members seriously consider whether those former NYSE Directors should compensate the members for breaches of fiduciary duty?  True aficionados of corporate governance might wish to view an annotated and excerpted version of the "Report to the New York Stock Exchange on Investigation Relating to the Compensation of Richard A. Grasso," but are able to view the entire searchable 142 page Webb Report "Lawyers who have seen the (Webb) report say that one of its primary conclusions is that Mr. Grasso, fearful that a new stock exchange board would not allow him to withdraw the $139.5 million, planned to renegotiate his contract so that he could take out his accumulated pension and deferred savings. … Still, while it may be easy to convince a jury that Mr. Grasso was overcompensated, it may be considerably harder to show that Mr. Grasso, and not the corporate executives who approved his pay, was responsible for it."  (NYT, 6/13/04, "Need a Superlawyer? Take a Number")  "The report withholds names, but the general impression is that these hard-charging executives turned to mush when considering Mr. Grasso's pay.  According to the report, one told Mr. Webb's investigators that the package for the year 2000 'blew him away,' and that, in hindsight, he 'maybe should not have agreed to a compensation award that high.'  But 'he went with the flow and did not object, as he didn't want to be the first to speak out.'  No profile in courage. ... In general, most outside directors don't have the time, the staffing or the access to information to do a thorough job overseeing the company.  And often, they don't have the inclination either."  (WSJ, 2/23/05, "Calling Ebbers and Other CEOs to Account")  This is a lessen about the Peter Principle and one of the greatest pleasures in life --- spending other people's money!  

        "New York Attorney General Eliot Spitzer intends to limit the defendants in a planned lawsuit to recover pay from former New York Stock Exchange chief Dick Grasso to just Mr. Grasso and a few others, sparing most of the Wall Street and corporate titans who have served as Big Board directors….  In addition to Mr. Grasso himself, a target of the civil action likely would be Kenneth Langone, the chief executive of Invemed Associates LLC, who headed the NYSE's compensation committee from 1999 to 2003.  Another likely target: former Big Board corporate-services chief Frank Ashen. …  Mr. Spitzer's strategy for now spares not only the financial and corporate executives, but also Mr. Spitzer's fellow New York Democrat Carl McCall, who served on the Big Board's compensation committee....  [T]he case could become uncomfortable for the other directors.  Mr. Grasso could sue the exchange and the directors himself, and at least some likely would be called as witnesses to testify about their role in approving Mr. Grasso's pay if a suit by Mr. Spitzer went to trial. … Mr. Ashen was the NYSE's executive vice president of corporate services, which included human resources, until last September, and the staff liaison to the compensation committee.  After he left that post, he received a consulting contract with the Big Board."  (WSJ, 5/21/04, "Spitzer to Take Narrow Aim In Grasso Suit")  Sunshine is the best disinfectant.  Hopefully, Spitzer will sue and Grasso will counter-sue.  Then, the public will learn whether the NYSE functioned like a banana republic with a tinhorn dictator.  "'This case demonstrates everything that can go wrong in setting executive compensation,' Mr. Spitzer said in a statement. 'The lack of proper information, the stifling of internal debate, the failure of board members to conduct proper inquiry and the unabashed pursuit of personal gain resulted in a wholly inappropriate and illegal compensation package.' …. Frank Z. Ashen, one of the key figures in the ongoing dispute over the pay package of Mr. Grasso, has reached a deal with state regulators to settle charges that he played an inappropriate role in setting Mr. Grasso's compensation….  Mr. Spitzer also settled with Mercer Human Resource Consulting, which had provided analysis to the NYSE compensation committee when it was determining Mr. Grasso's pay.  Mr. Spitzer said both Mr. Ashen and Mercer 'admitted providing information to the board that was inaccurate and incomplete.' … In light of the last-minute deal, Mr. Ashen, who was the Big Board's head of human resources during Mr. Grasso's tenure there, is likely to cooperate with regulators in pursuing their case, said a person familiar with the matter.  Mr. Ashen will also return $1.3 million to the NYSE, the suit revealed." (WSJ, 5/24/04, "Spitzer Sues Grasso, Langone In Effort to Recover Some Pay")  Is it such a surprise that, when the BOD's sources of information were not hired and paid for by the BOD, the information provided to the BOD favored those who paid the bills and provided other economic opportunities?  Will Ashen's current consulting contract with the NYSE present a credibility problem?  Perhaps, his compensation will be increased pending his testimony on behalf of the NYSE?   "Mercer admitted that its report on Grasso's final pay package …did not adhere to the exchange's typical methods for determining executive pay.  Under the settlement … Mercer will return the fees it charged the NYSE in 2003, totaling $440,275…." (Associated Press, 5/24/04, "N.Y. Attorney General Sues Ex-NYSE Head")  Did Mercer Human Resource Consulting perform other work, on behalf the NYSE that should be scrutinized?  Did Mercer Human Resource Consulting perform work, on behalf of others than the NYSE, that should be scrutinized?  "The lawsuit … contends, for example, that Mr. Grasso gave favorable treatment to Wall Street firms by not pursuing allegations of conflicts of interest involving research analysts during the period when the executives of those firms were approving his pay. … In agreeing to pay back $1.3 million, Mr. Ashen effectively is giving up much of the $1.9 million in bonuses he earned from 2000 to 2003, the bulk of which was approved by Mr. Grasso."  (NYT, 5/25/04, "Suit Seeks Return of $100 Million Given to Grasso")  Ashen does his dastardly deeds, keeps his salary and $600,000 in bonus.  Were there executives of NYSE members who wanted to serve on the BOD in order to obtain favorable regulatory consideration for their firms from the NYSE?  Don't they share any culpability?

        "By leaving the board out of his suit, though, he’s given directors everywhere an all-purpose defense.  To wit, I was too dumb, lazy, clueless, indifferent, gullible etc. to know what I was doing. … Mr. Grasso … will drag them into court, forcing them to choose between pleading gullibility, inattention and incompetence or undermining Mr. Spitzer’s case."  (WSJ, 526/04, Opinion – Business World, "Bored of Directors")  "As to the Aug. 7 vote on the contract extension, directors months earlier had received copies of two reports by the law firm of Vedder Price Kaufman & Kammholz, an outside consultant hired to analyze the still-developing proposal for Grasso's contract extension. … [I]ts reports contained most of the final numbers and raised serious questions in plain English about the propriety of such a massive and early cash-out.  The huge payout to Grasso would be 'rare and inconsistent' with the NYSE's supposed goal of giving Grasso an incentive to stay on the job, Vedder Price said. It added that the proposal raised ‘due diligence issues’ and would make it hard to recover the funds if Grasso ever resigned without good reason or was fired for cause." (LAT, 5/31/04, "Grasso Suit Not Cut and Dried Case")

        "Mr. McCall … joined the compensation panel and became its chairman in June 2003.  A year earlier, Mr. Grasso proposed a new employment contract that would allow him to pocket $139.5 million in deferred pay and benefits immediately, and called for another $48 million in benefit payments and $9.6 million in salary and bonuses in the next four years. … Mr. McCall met with … an adviser from Mercer Human Resource Consulting Inc. to discuss Mercer's report on the proposal. … [T]he 15-page report unambiguously stated that Mr. Grasso would receive $139.5 million immediately and repeatedly noted he would be paid another $7.1 million a year for four years from a NYSE benefit program. It also repeatedly mentions additional unspecified payments from another program and twice listed the actual proposed sums -- a total of more than $12 million in four years. All told, the report lists payments totaling nearly $41 million-plus between 2004 and 2007 -- nearly all of the $48 million.  On July 14, 2003, Mr. McCall’s compensation committee voted to recommend that the full board approve the Grasso proposal at its Aug. 7 meeting. … On Aug. 27, Mr. McCall signed a contract with Mr. Grasso on behalf of the NYSE. … In a letter to Mr. McCall on Sept. 2, the Securities and Exchange Commission demanded information about the contract. … In the days that followed, Mr. McCall repeatedly said he didn't know about the $48 million figure until Mr. Grasso told him about it as the NYSE prepared a response to the SEC.  He indicated that he felt blindsided. .... On Sept. 25, Mr. McCall resigned from the NYSE's board so the Exchange could 'move forward without being encumbered by the past.'" (WSJ, 6/2/04, "Did Spitzer Go Easy On Fellow Democrat In Grasso Pay Suit?")  Did McCall make efforts to cause other Directors to be provided with a copy of the Mercer Report?  If not, why?  Did the NYSE and Grasso engage separate and independent legal counsel in drafting Grasso’s employment contract?  Did any Director look at a draft of Grasso’s employment contract before August 27, 2003?  Before August 27, did any Director make an effort to rescind the vote on August 7?  Was McCall misled or a misleader?  Assuming the latter, what could have been his motive for lending such assistance to Grasso?  In November 2002, McCall was out of work after serving nine (9) years as Comptroller of the State of New York.  He was the unsuccessful Democratic nominee for Governor of the State of New York.  In early 2003, McCall became "Vice Chairman and Managing Director" of a small private-equity fund.  In March 2003, he became a director of Tyco International Ltd. and, according to, is "a director of New Plan, a real estate investment corporation and Standard Commercial Corporation, one of the world's largest leaf tobacco dealers."  Could it be beneficial to one's nascent career path to be nice to the powers-that-be?

        "The Webb report, which the exchange turned over to Mr. Spitzer, but hasn’t been made public, hadn’t been provided to Messrs. Grasso and Langone despite their requests to see it.  The judge said he wanted to review the report before deciding whether to release all or parts of it to the public. … NYSE chairman John Reed said last year that the release of the Webb report could be 'highly embarrassing' to the exchange.  At yesterday’s hearing, an NYSE lawyer said the report shouldn’t be released because it was an attorney work product for a client."  (WSJ, 1/26/05, "NYSE Is Ordered To Provide Grasso Report on Pay Deal")  Now, there is no valid reason to keep the content from the public.  Grasso’s litigation team will use every "highly embarrassing" detail.  As an aside, it appears that attorneys must be very careful when involved with internal investigations.  What were the expectations of the attorneys who prepared the Webb report with respect to its eventual distribution when they delivered a copy to the NYSE?  Did Spitzer subpoena a copy of the Webb report from the NYSE or did the NYSE voluntarily provide a copy?  Did the attorneys who prepared the Webb report object when they learned that the NYSE provided a copy to Spitzer?  Did the NYSE and Spitzer enter into a confidentiality agreement with respect to the content of the Webb report?  See, Internal Investigations Are Riddled With Conflicts of Interest.

        "Carl McCall, the former New York state comptroller who headed the NYSE board's compensation committee in 2003 when it approved Mr. Grasso's most-lucrative contract, signed without fully understanding or reading all of it. ...  In addition to not fully reading the 2003 contract, the (Webb) report said, Mr. McCall asked an NYSE staffer to give him a written description of the document to use in briefing the full NYSE board, but then didn't review it.  When he made his presentation to the board, 'by most accounts [he] struggled in explaining' the contract...." (WSJ, 2/3/05, "NYSE Report Shows Excesses Under Grasso")  When does one start using the phrase "reckless disregard" to describe his conduct as a Director?

        "Mr. McCall's notes said he realized that the board was in the dark when he started chairing the NYSE's compensation committee in June 2003. ... The indicate that many board members were 'shocked' when Mr. McCall gave them a 'heads up' on the size of Mr. Grasso's pay package." (WSJ, 4/28/06, "Grasso Pay Package 'Shocked' Board")  Did the BOD, after this "shock" and with some "awe," remain "in the dark" when they approved Grasso's pay package?

        "Henry M. Paulson Jr., the chairman of Goldman Sachs and a member of the exchange's compensation committee, was grilling Mr. Grasso about the propriety of drawing down such an enormous amount and suggested that he seek legal advice. So Mr. Grasso said he would call Martin Lipton, a veteran Manhattan lawyer and the Big Board's chief counsel on governance matters.  Would it be legal, Mr. Grasso subsequently asked Mr. Lipton, to just withdraw the $140 million if the exchange's board approved it?  Mr. Grasso told Mr. Lipton that he worried that a less accommodating board might not support such a move, according to an account of the conversation that Mr. Lipton recently provided to New York State prosecutors. … Then Mr. Lipton, a founding partner of Wachtell Lipton Rosen & Katz and a longtime adviser to chief executives on the hot seat, dangled another, hardball option in front of Mr. Grasso. If a new board resisted a payout, Mr. Lipton advised, Mr. Grasso could just sue the board to get his $140 million. … Mr. Lipton, who has said in correspondence with an acquaintance that he was only acting as Mr. Grasso's friend in the matter and not as his lawyer…  On Aug. 27, Mr. Grasso signed a contract authorizing the $140 million.  That afternoon, the Big Board issued a press release disclosing the payout. Mr. Lipton drafted portions of the release and corrected typographical errors. He also kept close tabs on the ensuing media uproar.  'What is your assessment,' Mr. Lipton wrote in an e-mail message to a public relations executive at the Big Board. 'I think W.S.J. and N.Y.T. as expected. FT and Lex not so good,' he said, referring to the Lex column of The Financial Times. By Sept. 2 … Mr. McCall told the board that Mr. Grasso was owed an additional $48 million…. Mr. Grasso offered to forgo the additional money, even though Mr. Lipton and Mr. Langone advised him against doing so.  The next day, when questions arose within the exchange over any residual tax liabilities Mr. Grasso might accrue, and that the stock exchange might have to pay, on the $48 million he declined, Mr. Lipton weighed in. 'I had my tax lawyer look at the question,' he wrote in an e-mail message to a stock exchange lawyer. 'It appears RAG does not have a problem.' As critics began questioning whether Mr. Lipton's advice to Mr. Grasso conflicted with his duties to the Big Board itself, Mr. Lipton wrote an e-mail message to Richard Painter, a law professor at the University of Illinois Law School, explaining his role in the stock exchange scandal.  In the message, which prosecutors introduced during his deposition, Mr. Lipton denied that advising Mr. Grasso represented a conflict. 'The real story is that I did not represent Dick Grasso in connection with his compensation nor did I represent the exchange or its board,' he wrote. 'As a friend I did advise Dick with respect to his taking his accumulated benefits and the related public disclosure.'" (NYT, 6/25/06, "The Winding Road to Grasso's Huge Payday")  Some attorneys don’t realize when it's time for them to head for the pasture.  It would be interesting to observe Lipton's and the "tax lawyer's" billing slips, if any, with regard to the matters mentioned, above.  An interesting scenario might be that Grasso successfully defends against the case brought the State of New York, but the NYSE brings a malpractice action against Lipton, which seeks, at least, $140 million.  

        Finally, after a forest has been cut to supply paper to feed the litigation monster, the Court has its say. "This Court must agree with Mr. Grasso that it is impossible for the Court to determine on this motion what Mr. Grasso actually knew about what the Board members knew. …  Mr. Grasso's duty is to be fully informed and to see to it that the Board was fully informed. He failed in this duty. …  This Court also finds this affirmative defense of neglect to be shocking. That a fiduciary of any institution, profit or not for-profit, could honestly admit that he was unaware of a liability of over $100 million, or even over $36 million, is a clear violation of the duty of care. The fact that it was a liability to an insider (Chairman and CEO) is even more shocking and a clear violation of the duty of loyalty. … [T]he Court is acknowledging the fundamental duty of each member of a board to understand the business of the company upon whose board they sit."  (10/18/06, Supreme Court Memorandum and Decision in People of the State of New York v. Grasso)  Directors should take note.


       "Two independent Morgan Stanley directors interviewed a number of senior executives throughout the firm yesterday, in an effort to gauge sentiment at the divided Wall Street house.  The talks, unorthodox by any measure, signal a growing concern on the part of the board that it needs to become more involved as the discontent over Philip J. Purcell's leadership shows little sign of waning. … The company declined to disclose the identity of the directors or the executives they met.  Mr. Purcell … and his executive team chose the list of executives who were to meet with board members. Who the board met with is important, given that a number of senior executives in the bank's institutional securities division are critical of Mr. Purcell's leadership."  (NYT, 4/27/05, "2 Morgan Stanley Directors Gauge the Firm's Discontent")  Which Directors did the interviewing is very important as some "independent" Directors may be more independent than others.  It should be unorthodox if members of a BOD have not gathered information directly from Management.  Does anyone expect that a CEO would not filter information that he/she provides to the BOD?  Perhaps, if the BOD had long ago gathered information, with unfettered access to Management, there would not be such current discontent.

        "A pension fund that holds shares of Morgan Stanley has sued the giant investment bank's directors, claiming they wasted corporate assets through 'grotesque mismanagement,' including paying more than $100 million to two departing executives. The suit, filed … by the Central Laborers' Pension Fund, calls the estimated total payouts in cash and benefits to former chief executive Philip Purcell and co-president Stephen Crawford excessive and designed to 'buy their silence and cooperation' to protect the directors."  (Newsday, 7/20/05, "Pension fund sues Morgan Stanley")  Is it not enough to prove corporate waste through "excessive" payments?  It will be interesting to learn what evidence will be used to prove the allegation of "buying their silence and cooperation." 

        "A big Pennsylvania pension fund lambasted Morgan Stanley's board for awarding lavish pay guarantees to departed and current executives and called for immediate governance changes. … The Pennsylvania group is the third pension-fund investor in recent days to signal publicly that it wants changes in how the Wall Street firm's board is elected and makes decisions.  Last week pension officials of the American Federation of State, County, and Municipal Employees, whose members own about 4% of Morgan's shares valued at more than $2 billion, asked for a meeting with board members to discuss reforms. They have tentatively set a meeting for mid-August.  Richard Ferlauto, director of pension and benefit policy for AFSCME, is seeking to organize other investors, too; he is circulating a letter encouraging other pension funds to 'engage the board' around the governance measures, saying, 'active shareholder involvement can only enhance these discussions.' … A Morgan spokesman said the board 'appreciates the opportunity to have a constructive dialogue with the company's shareholders.' … As is the case with most other U.S. corporations, Morgan Stanley allows directors to be elected with a plurality of votes cast.  That means any board member who is unopposed will get elected as long as a single vote is cast.  Shareholders may cast a 'withhold' vote on a candidate as a gesture of no-confidence, but that doesn't block the director's election." (WSJ, 7/22/05, "Third Fund Demands Changes In Morgan Stanley's Pay Policies")  A creativity maven once said, "If you (these pension funds) always think the way you have always thought, you will always get what you always got --- the same old, same old.  When will pension funds learn that filing a bare-bones proxy statement and making 30 solicitation telephone calls would be more effective in causing positive change than seeking the same old, same old?


            "Don Tyson took in millions in poorly disclosed perks; $84,000 in lawn care.  ... [T]he perks Don Tyson (Senior Chairman of Tyson Foods, Inc.) received were striking even in an era of lavish executive compensation.  ... The company agreed to pay $1.5 million to settle the charges. ... [B]oard members were unaware of the 'nature and scope' of the benefits and didn't know about certain amounts because Mr. Tyson failed to include the full amount when he filled out a corporate questionnaire."  (WSJ, 4/29/05, "In SEC Complaint, Tale of Chicken Mogul Feathering His Nest")  Didn't one of those chicken-farming BOD members think of asking the Accounting Department or the Internal Audit Department to fill out a questionnaire to cross-check the veracity of Tyson's statements?  Someone authorized the various payments.  Then, again, there are "questionnaires" and there are "questionnaires."  From  the Shareholders' viewpoint, Don Tyson takes benefits of which of the BOD was not aware (and, thus, unauthorized) and the Shareholders' assets are taxed an additional $1.5 million.  Were members of the BOD's Compensation Committee held accountable?


        "For Ivan G. Seidenberg, chief executive of Verizon Communications, 2005 was a very good year. As head of the telecommunications giant, Mr. Seidenberg received $19.4 million in salary, bonus, restricted stock and other compensation, 48 percent more than in the previous year.  Others with a stake in Verizon did not fare so well. Shareholders watched their stock fall 26 percent, bondholders lost value as credit agencies downgraded the company's debt and pensions for 50,000 managers were frozen at year-end. When Verizon closed the books last year, it reported an earnings decline of 5.5 percent. And yet, according to the committee of Verizon's board that determines his compensation … Mr. Seidenberg's package … was devised with the help of an 'outside consultant' who reports to the committee. The independence of this 'outside consultant' is open to question. Although neither Verizon officials nor its directors identify its compensation consultant, people briefed on the relationship say it is Hewitt Associates…. Hewitt does much more for Verizon than advise it on compensation matters. Verizon is one of Hewitt's biggest customers in the far more profitable businesses of running the company's employee benefit plans, providing actuarial services to its pension plans and advising it on human resources management. … Hewitt has received more than half a billion dollars in revenue from Verizon and its predecessor companies since 1997.  In other words, the very firm that helps Verizon's directors decide what to pay its executives has a long and lucrative relationship with the company, maintained at the behest of the executives whose pay it recommends. This is the secretive, prosperous and often conflicted world of compensation consultants, who are charged with helping corporate boards determine executive pay that is appropriate and fair, and who are often cited as the unbiased advisers whenever shareholders criticize a company's pay as excessive.  … [C]orporate governance experts say, the conflicts bedeviling some of the large consulting firms help explain why in good times or bad, executive pay in America reaches dizzying heights each year. … Consultants help select the companies to be used in peer groups for comparison purposes in judging an executive's performance. Picking a group of companies that will be easy to outperform is one way to ensure that executives can clear performance hurdles. Another is to structure an executive's pay so that it is always at or near the top of those in his industry regardless of his company's performance. This pushes up pay simply when others in the industry do well. … Last year, Verizon's directors described the compensation adviser as an 'independent, outside consultant.' In this year's proxy, the word 'independent' is missing. The Securities and Exchange Commission has proposed rules on compensation disclosure that would require compensation consultants to be identified. But the rules would not force companies to disclose details of other services provided by the consulting firm or its affiliates. … The Conference Board, a nonprofit organization that conducts research and conferences for business leaders, issued a report in January suggesting, among other practices, that boards hire their own compensation consultants, who have not done work for the company or its current management. … But according to consultants and directors, compensation committees typically employ a consultant who also works with a human resources executive, the company's chief executive and the chief financial officer. In many cases, a company's chief executive is present at meetings where the compensation consultant and the human resources executive hash out the terms of a package." (NYT, 4/11/06, "Outside Advice on Boss's Pay May Not Be So Independent")  Does anyone serious contend that BODs have not been fully aware of and tolerated this blatant conflict of interest since Day 1?  BOD members know where their bread is buttered and how easily a disgruntled CEO can remove their benefits.  In the interim, Shareholders pay the price.

        "When asked about this conflict of interest, the consulting firm (to Verizon) explained that it had 'strict policies in place to ensure the independence and objectivity of all our consultants.'  Please stop laughing.  … Consultants believe they can make objective decisions about the companies that indirectly employ them, just as legislators believe that campaign contributions don't influence their votes. … Research suggests that decision-makers don't realize just how easily and often their objectivity is compromised.  The human brain knows many tricks that allow it to consider evidence, weigh facts and still reach precisely the conclusion it favors. …  Much of what happens in the brain is not evident to the brain itself, and thus people are better at playing these sorts of tricks on themselves than at catching themselves in the act. … Research shows that while people underestimate the influence of self-interest on their own judgments and decisions, they overestimate its influence on others. … Because the brain cannot see itself fooling itself, the only reliable method for avoiding bias is to avoid the situations that produce it."  (NYT, 4/16/06, "I'm O.K., You're Biased")


        ''Everybody knows that executive compensation at many companies has been obscene. What everybody does not know is how obscene is now. … Consider the owners of Analog Devices, a semiconductor maker in Norwood, Mass.Jerald G. Fishman, the chief executive, had backed up his truck to corporate headquarters late last year and loaded up the $144.7 million that he was owed in deferred compensation. …. Analog Devices' compensation committee said it took into account his 'strong leadership in guiding A.D.I. through the downturn in the semiconductor industry, his position as a leading executive in the semiconductor industry and A.D.I.'s performance over the past fiscal year relative to its peer companies.' As for linking pay to performance, the committee said Mr. Fishman's bonus was calculated based on the company's operating profit before tax as a percentage of its revenue. But the company also excluded restructuring charges from the figure used to calculate the bonus. Too bad shareholders' returns can't be similarly adjusted to exclude the restructuring charges their companies take. Mr. Fishman, bless his soul, did decide to turn back the options that his board had planned to give him in 2006. Perhaps he concluded that his $144.7 million in deferred compensation, his $931,000 salary, his bonus of $414,000, his 400,000 options at a strike price of $37.70 each, and the $2.85 million he received from the exercise of 95,000 options in fiscal 2005 were enough to feed and clothe his family. As shareholders are learning, executive pay today is like the iceberg that sank the Titanic: scary on the surface, but scarier below it.'' (NYT, 2/19/06, ''A 'Holy Cow' Moment in Payland'')  The BOD's compensation criteria seem much less than objective.  Does "strong leadership" mean that he is a CEO who can bench press 500 pounds and bullies the BOD and employees?  Does ''leading executive'' mean that he leads in compensation chutzpah?  How relative is ''relative''?


        "Because of what the company called an 'improper interpretation' of his employment contract, Sheldon G. Adelson, chairman, chief executive and treasurer of the Las Vegas Sands Corporation, received $3.6 million in salary and bonus last year, almost $1 million more than prescribed under the company's performance plan. … The compensation committee of the board conceded that it had made an error. But it said that 'the outstanding performance of the company in 2005' justified the extra money, and it allowed the executives to keep it. … As executive pay packages have rocketed in recent years, their defenders have contended that because most are tied to company performance, they are both earned and deserved. But as the Las Vegas Sands example shows, investors who plow through company filings often find that executive compensation exceeds the amounts allowed under the performance targets set by the directors.  … It is the equivalent of moving the goalposts to shorten the field…. Some employment agreements actually stipulate that they will provide bonuses even if company performance declines. … While bonus and other incentive pay figures are included in company filings, shareholders hoping to calculate precisely what performance objectives executives must meet to receive such pay can be confounded. … Company officials often explain the practice by saying that too-specific information on performance hurdles can give away corporate secrets or invite rival organizations to lure executives away by offering them contract terms that are easier to achieve. Compensation experts counter that lists of vague hurdles may allow carefully chosen measurements to be met in both fair weather and foul. … Back at the Las Vegas Sands … unearned bonuses are … striking because they cannot be justified as performance-based under the tax code. The extra bonuses therefore were not deductible as a business expense, making them more costly for shareholders.  … [O]f the four-man compensation committee of Las Vegas Sands' board … Mr. (Irwin) Chafetz and Mr. (Charles) Forman have extensive affiliations, either present or past, with Mr. Adelson's Interface Group, they are considered independent directors according to New York Stock Exchange standards." (NYT, 6/1/06, "Big Bonuses Still Flow, Even if Bosses Miss Goals")


        "Over the last three years, former (KB Home) CEO Bruce Karatz made $232.6 million in compensation. ... Karatz, 61, retired under pressure last month after an internal investigation found that he picked stock option grant dates that inflated the value to himself and other executives. ... Compensation experts point to two features in his contract that helped guarantee outsized earnings.  The ... significant, was a clause that promised Karatz a bonus between 1% and 2% of KB's earnings before taxes.... Tying compensation to pretax profit without other restrictions all but guarantees massive payouts at a company of KB's size.... Karatz may also have benefited from a friendly board of directors, in particular the five-man compensation committee, which is led by Occidental Petroleum Chairman and Chief Executive Ray Irani.  Irani is no stranger to high pay. ... Also on the committee are two other chief executives: Leslie Moonves of CBS Corp., who earned $22.8 million in 2005, and J. Terrence Lanni, chairman and CEO of casino company MGM Mirage, who earned $9.6 million and was granted options with a potential value of $35.5 million. ... Amy Borrus, deputy director at the Council of Institutional Investors, faulted KB Home's board for not ensuring that Karatz's pay was more in line with what other home builder CEOs received. 'This suggests a board that was asleep at the switch,' she said. 'If your CEO is earning that much more than all of his peers, you might want to take a look at why that is, and whether it's justified.' ... In the aftermath of Karatz's resignation, some of KB's biggest stakeholders say they intend to look closely at the company's compensation plan as soon as it's available." (LAT, 12/17/06, "How KB Home CEO's pay went through the roof")


        "Robert Nardelli's demise as chief executive of Home Depot resulted, in part, from his failure to understand how profoundly the job of CEO has changed in recent years. ... As failures go, Mr. Nardelli's isn't half bad. He walked away with an exit package of $210 million....  Much of the package is due to the rich employment contract he negotiated with the Home Depot board before leaving General Electric Co., where he was one of three finalists to succeed Jack Welch. Mr. Welch convinced his board to give all three finalists large batches of stock options, telling board members they would have to make good on only one man's options, one director says. Upon leaving GE, the board was told, the two runners-up likely would use those awards to negotiate pay at their next jobs -- which is exactly what Mr. Nardelli and James McNerney, who is now CEO of Boeing, did. (WSJ, 1/4/07, "Executive's Fatal Flaw: Failing to Understand New Demands on CEOs")  What if out-the-back Jack was wrong as to the size of the two losers' egos and each remained at GE?  Granting stock options for desired performance differs greatly from granting stock options with the hope that the two losers would never exercise them.  Was Jack a business maven or an evil genius?


        "Mr. (Jesse) Brill, who has been publishing newsletters about corporate law since the 1970s ... suggested directors include current and future compensation, and dubbed the result a 'tally sheet.' Then he aggressively promoted the notion to the 30,000 readers of his newsletters and Web sites, who include corporate lawyers, pay consultants and directors. ... 'People thought it was Jesse's little fixation,' says John Olson, a senior partner at law firm Gibson, Dunn & Crutcher LLP, who advises corporate boards. ... [H]e (Olsen) urged a board he was advising to develop a tally sheet. ... Directors were shocked at the numbers." (WSJ, 3/13/07, "How Five New Players Aid Movement to Limit CEO Pay")  It is shocking that Directors do not know what they are permitting the hired help to take from assets of Shareholders.  Shocking, but probably par for the course.  


        "All U.S. companies, not just those in finance, should consider limiting compensation packages that reward excessive risk-taking by executives, a senior regulatory official said Tuesday. The comment by John White, director of the Securities and Exchange Commission's division of corporation finance, comes as large executive-pay packages fall under greater scrutiny in the wake of the taxpayer bailout of Wall Street firms. ... Several regulators around the globe have said lucrative pay packages helped fuel aggressive risk-taking by financial executives. ... Mr. White said in a speech to a New Orleans conference Tuesday that all compensation committees, when setting performance targets, should consider 'the particular risks an executive might be incentivized to take to meet the target.' He said they should weigh 'what Congress might want' prudent corporate boards to do." (WSJ, 10/22/08, "SEC Calls On Every Firm to Review Pay")  What about what Shareholders vis-à-vis Congress might want?  Why, at this late stage of the game, should it be necessary for the SEC to remind BODs of what should be part of BODs' basic fiduciary duties?


        "Capping a week of scrutiny for Bank of America, New York Attorney General Andrew M. Cuomo took another swing on Wednesday at uncovering which of the bank’s executives knew about large losses and bonus payouts at Merrill Lynch just before the two banks merged last year.  In an unusual move that could herald closer examination of corporate boards, Mr. Cuomo issued subpoenas to five current and former directors of the bank as part of his continuing inquiry into its hastily arranged takeover of Merrill, a person briefed on the investigation said. ... [T]he directors who had received subpoenas included members of the firm's audit committee, which was responsible for reviewing significant legal matters, including the takeover of Merrill. ... The subpoenaed board members include William Barnet III, a real estate executive and the mayor of Spartanburg, S.C.; John T. Collins, a venture capital investor based in Boston; Tommy R. Franks, the retired four-star Army general; Walter E. Massey, the former president of Morehouse College in Atlanta; and Thomas J. May, head of the Boston utility company NSTAR.... Mr. Cuomo's office wants to know whether Bank of America's board knew of additional losses discovered at Merrill after the merger was signed, as well as billions of dollars in bonus payments made to Merrill executives before the deal closed.  Based on earlier interviews with the bank's executives, investigators believe the bank's audit committee and other directors might have known about losses and bonus payments before shareholders voted to approve the deal in early December... 'A big unanswered question as we look back on the financial crisis is — where were the boards?' Mr. Cuomo said in an e-mail message. 'Did the boards of directors of our largest financial institutions protect the rights of shareholders, were they misled, or were they little more than rubber stamps for management’s decision-making?' ... This week, Judge Jed S. Rakoff rejected a settlement that would have put an end to a Securities and Exchange Commission investigation into possible securities violations by the bank in the Merrill deal. In his ruling, the judge criticized the S.E.C. for not holding individuals at Bank of America accountable. The ruling could pave the way for a public court battle between the bank and the S.E.C. early next year. It is rare for prosecutors to subpoena members of a company's board in a criminal case. ... Mr. Cuomo’s office plans to issue subpoenas to all 15 board members in the coming weeks.... Investigators plan to ask the directors how much they knew about Merrill's losses, and what role they played in decisions about disclosing information to shareholders...."  (NYT, 9/17/09, "Cuomo Is Said to Issue Subpoenas in Merrill Case")  Will the BOD lawyer-up and claim their 5th Amendment rights?  Time will tell.  Cuomo might share his findings with the SEC and enable the SEC to better do its job.


        "[O]n Friday, before they left for the holiday weekend, the SEC released a bevy of comment letters, many of which focus on compensation disclosures in the 2009 crop of proxies. One ... between the SEC and the Washington Post Co. which is dated July 16, but only became available on Friday. ... In the letter, the company's associate general counsel, Nicole Maddrey, says ... 'the more detailed approach proposed by the Staff could have made it easier for an investor to understand the relationship between the bonus amounts paid to our named executive officers and our reported financial results for 2008.' ...  The letter is in response to this letter sent back in May to CEO Don Graham which questions how the earnings target used to set bonuses was $31.90, but the actual reported earnings were $6.89 per share. The difference between the two numbers is a bevy of 'unusual items' that were excluded to get to the much higher number. What's particularly interesting here is that Warren Buffett — long a critic of overly complicated pay structures that use unusual targets – is not just a board member and major investor — he's the lead director." (, 10/12/09, " SEC tells WaPo to do better job explaining its comp…") 


                      a.    Improper Backdating of Stock Options


        "[T]he repeated grants before sharp stock gains raise the question of whether the grants were actually awarded later, then backdated to the more favorable time, or otherwise gamed. … It isn't yet clear how backdating may have been carried out. Grants typically are approved in writing by directors, and it's possible that in some cases documents were altered. It's also possible that executives took advantage of directors' inattentiveness to secure retroactively priced grants, or directors may have knowingly approved a grant carrying an earlier date. … Under accounting rules that were long in effect until recently, issuing a below-market option should trigger extra compensation expense, reducing a company's net income. Companies that failed to record that expense may have to restate their financial results, in some cases going back many years. Backdating also could run afoul of complex tax laws, requiring companies and individual to pay back taxes and penalties."  (WSJ, 5/22/06, "Matter of Timing: Five More Companies Show Questionable Options Pattern")  "[S]omewhere along the way, there was a leap of rationalization among … the corporate directors who oversee pay…. This puzzling state of affairs has led Jack Ciesielski of The Analyst’s Accounting Observer and others to ponder a key question: How is it some executives were given control over grant dates in the first place?  … A central tenet under the old accounting rules for stock compensation, and the reason companies fought so hard against change, was that options had no value or cost if their exercise price was exactly equal to the current share price. … Avoiding that potential expense was a hard-wired policy at most companies. But what appears to have occurred at the companies … amounts to wanting it both ways: backdating options to boost their value to the recipient without recording a corresponding cost that would hurt earnings. … [T]he sequence of events here seems to veer from a simple world view to one of relativity:  — Executives wanted the freedom to choose their own grant dates for options…. Nothing wrong so far.  — In some cases, that privilege was interpreted to mean executives could choose a point in the past when the stock was lower and then use that as the exercise price for their options. That’s a nice power to have … but not illegal. — To avoid recording an expense for the intrinsic value of those options, someone had to decide it was O.K. to not only choose a stock price from the past, but to borrow the date as well and call that the 'grant date,' as if to suggest the grant actually occurred back then too. Now it starts to sounds disingenuous  The legitimacy of this last act depends on your definition of 'grant.' If you choose a literal definition, whereby the grant represents an actual action in the present, then the day on which you decide the exercise price of an option is always the grant date — not some moment in the past you used as a reference point." (AP, 5/16/06, "Companies embroiled in backdating scandal")


        "As the scandal widens involving stock options that may have been manipulated to enrich top executives, investors are wondering anew whether corporate directors have been complicit or negligent in allowing questionable practices yet again. With a single vote, the directors of Cyberonics Inc. are said to have approved options grants that netted the chief executive a paper profit of $2.3 million overnight. … A growing number of public companies --- there are at least 31 --- are being investigated by the Securities and Exchange Commission or federal prosecutors for possible improper backdating of options grants to executives.  But in a new twist, the Cyberonics case is said to have involved a different sort of timing: not backdating options to a low point in the company's stock price, but granting them shortly after the company received positive news certain to boost the share price. … Regulators and shareholder advocates have decried what they see as a trend in recent years toward autocratic chief executives, their decisions rubber-stamped by docile directors. … Now again, in the stock options debacle, some company boards _ specifically their compensation committees _ may have relinquished their duty to oversee how their top executives were paid. … [B]ackdating, even if the actual practice wasn't illegal, may have broken the law if there wasn't proper disclosure to investors or the options weren't accounted for properly." (AP, 6/9/06, "Boards Under Scrutiny Over Stock Options")


        "Why does United-Health Group CEO William W. McGuire remain in his job? It's a question that has baffled corporate governance experts since The Wall Street Journal reported in March that UnitedHealth and other companies might have backdated options grants for officers to boost compensation. In the post-Sarbanes-Oxley world, boards are acting on the first whiffs of legal or ethical lapses. … While boards at companies that have pushed out executives appear not to have known about the alleged backdating, UnitedHealth's board allowed McGuire to pick his options grant dates. To dump him would be to admit that some wrongdoing occurred -- a position that could increase the legal risks for directors themselves. Instead, they're hunkering down. Going back to 1994, McGuire has received grants that coincided with lows in the stock. If backdating occurred, it appears that UnitedHealth's board may have known about the practice and approved it. According to McGuire's 1999 employment contract, he could choose the grant dates and notify the compensation committee. Legal experts say board awareness would bolster his case that the grants were proper. But even if the board approved the timing of McGuire's options, that would not absolve him or UnitedHealth's directors entirely. While backdating itself isn't illegal, it must be disclosed to shareholders and accounted for properly. … [D]irectors aware of backdating could face charges related to the lack of disclosure and for overstating earnings. … UnitedHealth … said it might restate earnings for the years 2003-05 by up to $286 million after review of earlier options grants." BusinessWeek, 7/10/06, "A Board With Its Back To The Wall --- UnitedHealth directors aren't ready to oust embattled CEO McGuire. Here's why")

        "With options under scrutiny at more than 80 companies so far, regulators and prosecutors haven't the resources to conduct full-blown forensic probes of every company. They often rely on companies' own internal inquiries to do the initial digging that helps authorities decide whom to pursue most vigorously. In addition, the companies themselves rely on these internal probes, either to show the public they've been diligent or to defend against shareholder suits. … UnitedHealth (Group Inc.) shows a variety of ties among directors or between directors and executives. … And Mr. (Richard T.) Burke, who is on the special committee investigating option grants, was himself s member of the board committee that made options grants for a time in the early 1990s. … As with any probe of options grants, investigators are likely to be keenly interested in the history of interactions between major recipients such as Dr. (William) McGuire and the compensation-committee members who approved the grants. UnitedHealth has described those members as independent. A close look shows various ties … might raise questions about how arms-length they could be." (WSJ, 8/11/06, "In Internal Probes Of Stock Options, Conflicts Abound: Directors' Ties Can Complicate Job of Assuring the Public Investigation Is Thorough; Sorting It Out at UnitedHealth")


        "Prosecutors accused 43-year-old Gregory Reyes, the CEO of Brocade Communications Systems Inc. until January 2005, of backdating options he doled out as a "committee of one" to hundreds of employees, boosting the potential value of the options and concealing millions of dollars of compensation expenses from shareholders.  The SEC's complaint said Mr. Reyes's own options, which were granted by the company's board, not the one-man committee, also were backdated. But the agency's complaint doesn't explain who was responsible, or how the backdating occurred." (WSJ, 7/21/06, "Brocade Ex-CEO, 2 Others Charged In Options Probe")  ''Options are not inherently bad, of course.  Options do not cause crookedness. But the easy money that they represented for companies and executives, especially when the awards were not accounted for as a cost or monitored by investors, seems to have encouraged some corporate chiselers to take advantage of their shareholders, whom they never had to face.'' (NYT, 7/23/06, ''At the Options Buffet, Some Got a Bigger Helping'')  Or, monitored by Audit Committees of BODs!  


        "[A]n affidavit by a Federal Bureau of Investigation agent, unsealed in Brooklyn , N.Y. , … and a related civil complaint filed by the Securities and Exchange Commission offer an unusually detailed account of how a blatant backdating scheme allegedly went on for years in the top ranks of a large corporation. The SEC alleged that (former CEO) Mr. (Kobi) Alexander looked back at Comverse's (Technology Inc.) past stock trading and cherry-picked dates for the options grants when the price was low, making the options more valuable. (Former senior general counsel) Mr. (William F.) Sorin then allegedly misled members of the board compensation committee by getting them to sign paperwork with the prior grant dates already filled out, the government charged. … As is the practice at many companies, the compensation committee of the board approved stock-option grants at Comverse. Approvals weren't official, according to federal authorities, until the committee members voted on them or signed documents indicating their assent. … Mr. Sorin, who was responsible for interactions with the compensation committee, in effect tricked it. Mr. Sorin first would call committee members to say options-granting paperwork was on its way. He or an assistant would send members written 'consent' forms to approve the grants, which bore the selected dates and said the options were to be granted 'as of' those dates, the SEC said. The account said committee members would sign the forms, which didn't contain any place for them to indicate when they signed -- the only date on the forms being the earlier date that had been chosen. … [T]wo compensation-committee membersassumed the 'as of' date on the consent forms they later received was the day Mr. Sorin had called them. It was not…. [T]he two committee members … didn't realize the grant carried a lower trading price and that they 'did not intend to grant in-the-money options.' One member of the compensation committee for an extended period was Mr. Alexander's sister, Shaula Yemini." (WSJ, 8/10/06, "Stock-Options Criminal Charge: Slush Fund and Fake Employees; U.S. Accuses 3 Ex-Executives At Comverse Technology Of Long-Running Scheme Scrambling to Avoid Detection")  BOD members are paid to know, not assume.  Further, BOD members, who are sisters of the CEOs, should no longer trust their brothers.

        "Comverse Technology Inc.'s former senior general counsel was sentenced to one year and one day in prison, the first corporate executive to be sentenced for an options-related crime since the wave of options-backdating cases started early last year. At a hearing in federal court in Brooklyn , N.Y., U.S. District Judge Nicholas G. Garaufis also sentenced William F. Sorin, 58 years old, to three years of supervised release after completing his prison term.  He had faced up to five years in prison. ... The judge ordered Mr. Sorin to pay $51.8 million in restitution...."  (WSJ, 5/11/07, "Former Comverse Official Receives Prison Term in Options Case")  Was the potential 5 year sentence reduced to 1 year and made contingent upon repayment of $51.8 million?  Perhaps, he provided prosecutors with information concerning the actions of BOD members.  Or, perhaps, the prosecutors did not ask.


        "In theory, directors are supposed to help keep wayward practices like options backdating in check at most companies, but at Mercury (Interactive) it was the directors themselves — who received a final seal of approval from the company’s compensation committee — who kept the backdating ball rolling.  … Mercury’s pay practices — and the actions of the three outside directors on its compensation and audit committees — have come under scrutiny. … [I]t appears to be the first time that members of an entire compensation or audit committee could face civil charges in the wake of a financial scandal. … Mercury … gave the board or compensation committee the right to set the number and strike price for all grants, in keeping with normal practice in corporate America . … Mercury’s internal investigators found that from January 1996 to April 2002, a vast majority of option grants to all employees — from entry-level hires to the company’s top five officers — had been intentionally backdated. … Theoretically, a corporation relies on its board for advice and for help in appropriately governing its affairs. And, theoretically, board committees need to function independently of one another in order to carry out their oversight responsibilities most effectively. Corporate governance experts say that having audit and compensation committees made up of the same members raises the possibility of serious conflicts of interest. Mercury, of course, had audit and compensation committees that mirrored each other. The same three men — Dr. (Giora) Yaron, Mr. (Igal) Kohavi and Mr. (Yair) Shamir — were the only members of both committees from October 1996 to July 2002. They were Mercury’s only outside directors at that time.  … If Mercury’s overlapping committee structures raised the possibility of conflicts of interest on the company’s board, some governance experts also say that the structure gave audit and compensation committee members plenty of information to help them monitor potential wrongdoing at the company — if they chose to do so." (NYT, 8/27/06, "Who Signed Off on Those Options?")


        "Board members were not just blissfully ignorant or willfully blind bystanders when they backdated stock option grants for corporate executives, according to a new study. Some 1,400 outside directors themselves may have received manipulated grants over the past decade. ... The study, sponsored by the Harvard Law School Program on Corporate Governance, also raises serious questions about corporate governance if the outside directors, who are supposed to act as a final backstop against bad practices, received — and in many cases may have even approved — fraudulent option grants. ... They concluded that board members at about 460 companies, or seven percent of all publicly traded companies, probably received manipulated options. About 1,400 outside directors, or about 4.6 percent of board members, probably benefited from manipulated option grants. ... The new research also helps debunk the common belief that outside directors would be immune to receiving manipulated stock options because their grants were typically awarded around the time of a company’s annual meeting. In fact, about 29 percent of the time, a company’s directors were granted stock options on the same date as those given to executives... 'If the facts permit, and I want to emphasize that all of our enforcement cases are very fact-specific, it wouldn't surprise me to see charges brought against outside directors,' Roel C. Campos, an S.E.C. commissioner, said last August." (NYT, 12/18/06, "Study Finds Outside Directors Also Got Backdated Options")  Sure?!


        "For companies that played games with employee stock options, the possible penalties are growing. New rulings (Tyson Foods, Maxim Integrated Products) in Delaware indicate that directors would be personally liable if options were wrongly issued. And the Internal Revenue Service has decided that employees who innocently cashed in backdated options in 2006 face a soaring tax bill. The agency has given companies two weeks to decide whether to pick up the tax for the workers. That means directors must decide whether to spend corporate assets on bailing out workers, possibly angering shareholders, or leave the workers to shoulder huge tax bills. In two rulings issued this month, Chancellor William B. Chandler III of the Delaware Chancery Court made it clear that the backdating of options was illegal. That was no surprise, but he went on to say that the same applied to ''spring loading,'' the practice of issuing options just before the release of good news. 'It is difficult to conceive of an instance, consistent with the concept of loyalty and good faith, in which a fiduciary may declare that an option is granted at '"market rate"' and simultaneously withhold that both the fiduciary and the recipient knew at the time that those options would quickly be worth much more,' Chancellor Chandler wrote. That decision creates the possibility of significant liability for directors, particularly those on compensation committees. Issuing options is an area over which they had specific authority. ... He also ruled that companies could not use the statute of limitations to avoid such suits. Even if the options were issued years ago, the fact that the directors hid the practice means that they can be sued now, when the facts have come out. ... Directors of companies that issued backdated or spring-loaded options may now try to shift the blame. One can imagine directors contending they were deceived by executives or by corporate counsel, and that they, not the directors, should pay. Personal liability, in other words, can concentrate a director's mind."  (NYT, 2/16/07, "Option Lies May Be Costly for Directors")  And, if the Directors are held personally liable for their acts, will they seek and receive indemnity and defense costs from their companies and their companies' insurers?


                       b.     Retention Bonuses in Bankruptcy Proceedings


        "When corporations do well, the bosses do much, much better than the workers. But what happens if everything goes wrong? The Dana Corporation, an auto parts maker, is facing lawsuits claiming that it manipulated its books to hide rising costs before it filed for bankruptcy early this year. It is considering reducing or eliminating retiree health benefits. But at the same time, the bosses, including the chief executive, Michael J. Burns, want guaranteed multimillion-dollar payouts. … It is remarkable that when unexpected good news makes a chief executive's options worth hundreds of millions more than was anticipated, no board ever considers reducing future payments to compensate for the windfall. … Those complaining say that Dana ignored a provision of the bankruptcy law passed by Congress last year. That bill … contained a section that was supposed to prevent companies from rewarding top executives with rich retention payments while others were suffering. To pay a retention bonus, the company must show that the executive is 'essential to the survival of the business' and that he or she has a bona fide competing offer from another company offering at least the same pay. Even then, the law puts limits on the amount. There is no claim that Mr. Burns or his colleagues have other job offers, and some creditors heap scorn on the idea, questioning, in the words of a lawyer for one group of creditors, whether competitors are 'actively seeking members of a management team that led Dana to financial distress.' The company evidently deems the new section of the law irrelevant, and figures that so long as it does not call a retention payment by that name, it can hand out big bonuses based on no more success than getting through the bankruptcy process, even if shareholders and creditors are wiped out.  It wants the judge to bow to the business judgment of the company's board. … The issue is whether the new bankruptcy law will mean anything at all, or whether it will be another law that sounded good but was easily evaded.'' (NYT, 8/18/06, ''It's the Law, But Is the Law Meaningless? '')  Next, we'll be hearing about retention bonuses for Directors.


               3.    Unwilling to Challenge Management


        "Facing repeated questions about what would happen to Wells Fargo & Co.'s top executives in the wake of its sales-practice scandal, Chief Executive John Stumpf gave much the same answer: It is up to the bank's board. But that wasn't enough for obviously irritated members of the Senate Banking Committee who blasted Mr. Stumpf on Tuesday. They made clear they think the board, which has known about the bank's 'cross-selling' problems since 2013, should have acted more quickly to clean up the mess—especially on deciding whether to claw back compensation from top executives. … Wells Fargo's 15-member board includes a former Federal Reserve governor, a former CEO of accounting firm Deloitte Touche Tohmatsu and two former cabinet secretaries. Like other corporate boards, they are tasked with acting as a check on the company's management and with overseeing the company's risk management, disclosures, compensation practices and compliance with laws and regulations. … Some governance experts also said the board should examine the 'tone at the top' set by Mr. Stumpf. While he accepted 'full responsibility' Tuesday for the bank's misdeeds, earlier he had pinned the blame for the affair on bad employees, telling The Wall Street Journal that "there was no incentive to do bad things." He didn't directly answer questions from senators about whether any senior Wells Fargo executives had been fired over the matter. Carrie Tolstedt, who oversaw retail banking, has announced plans to retire at year's end after 27 years at the bank. Mr. Stumpf said it was up to the board's human-resources committee to decide whether to claw back part of Ms. Tolstedt's pay. But Sen. Elizabeth Warren (D., Mass.) said that it isn't as if Mr. Stumpf is separate from the board—he is the board's chairman, though he doesn't serve on the human resources committee." (9/21/16, WSJ, "Directors at Wells Come Under Fire")


        "[T]he central detail of this one remains astonishing.  Somehow, the Rigases persuaded a network of commercial banks to lend to them more than $3 billion that not only the family, but also Adelphia, a public company with public shareholders, would be liable for repaying. … Adelphia's independent directors approved the 'co-borrowing' loans. … The blurriest part of all was Adelphia's board, which supposedly represented the public: a majority of the directors were family members. … In 1996 … the enabling agreement stated openly that the family would use some of the money to purchase stock, and any director who bothered to read it would have known that. … Why would the directors let the Rigases borrow on the shareholders' credit? … And according to the minutes of a special board meeting on Aug. 23, 1999, at which additional co-borrowings were authorized, the Rigases not only made plain that they intended to keep buying stock, but, indeed, the directors also encouraged them. … [M]aterials distributed at a board meeting in October 2000 … said, 'Rigas family to purchase $250 mm’ of an Adelphia stock offering.  Another page disclosed that the Rigases were drawing an identical $250 million of the co-borrowing. … Such details almost put too fine a point on it.  Corporate directors weren't in the habit of challenging management, certainly not on a board where the founding family had a majority of seats. And the interests of the outside directors were, in many cases, somewhat tied to the company's.  Erland Kailbourne, a prominent civic booster in Buffalo, was a Rigas family friend and a promoter of Adelphia's plans to build a skyscraper downtown there.  Two other directors, Dennis Coyle and Les Gelber, were executives at Florida Power and Light, Adelphia's partner in some cable systems in Florida.  F.P.L. wanted out, and it was hoping that Adelphia would eventually buy its share, which it did.  (Alvin) Davis, the lawyer (for three of the outside Directors), said that those directors relied on the independence of the board's audit committee.  But by then the audit committee consisted of only Pete Metros, a John Rigas chum from upstate New York, and Tim Rigas, who was the chairman of it.  No minutes of the audit committee meetings have been produced, and it isn't clear that the committee formally met.  In other words, Metros seems to have been a rubber stamp allowing the company's chief financial officer to supervise himself." (NYT, 2/1/04, "The Company They Kept")  Of course, external auditors, the bankers, investment bankers, outside legal counsel publicly expressed shock when Adelphia imploded and filed for bankruptcy protection.  Where have all the stand-up people gone?  "Although the board had approved the co-borrowing arrangement, using it to buy company securities hadn't been cleared, Mr. (Dennis) Coyle (former Director) testified." (WSJ, 3/04/04, "Former Director Of Adelphia Testifies in Case")  What did the BOD do to verify that the use of loan proceeds would be restricted?  Did they review the loan documents?  Did the BOD ask the lenders what, if any, monitoring would be put in place with respect to the loan proceeds?  $3 billion is still a lot of money!  "A federal jury convicted Adelphia founder John Rigas and his son Timothy, who had been the cable-TV company's chief financial officer, of fraud.  The elder Mr. Rigas said he had relied on Adelphia's board and its outside accountants and lawyers to warn him of any potential abuses."  (WSJ, 7/9/04, "CEOs From Enron to Sotheby's Blame Scandals on Underling's; Too Busy for All the Details?")


        "Federal regulators released a scathing report Wednesday on the corporate culture that fostered improper accounting at Freddie Mac, the same day that the company had agreed to pay a $125 million penalty....  The report of the Office of Federal Housing Enterprise Oversight ... is much harsher than previous reports in its assessment of Freddie Mac's ... board members. ... The report ... traces the problems to the mid-1990's....  The report strongly suggests that the board knew about efforts to smooth earnings. ... '[M]anagement carefully reviewed the board's minutes to ensure that there were no references to earnings management,'.... The board also did not investigate potential weaknesses of the company's accounting functions ... although there were warning signs that the accounting staff was inadequate to its task....  'The special examination is led to the conclusion that the board of directors of Freddie Mac played no meaningful role in the oversight of the critically important area of accounting policies and practices, as required by law and regulation.'"  (NYT, 12/11/03, "Report Says Freddie Mac's Lax Oversight Led to Scandal")  Who among us believes that even 1-cent of the "$125 million penalty" will be paid from the personal assets of the Directors?  Who believes that any of the Directors will even be shunned at their respective country clubs for what they have done or, more accurately, what they have failed to do on behalf of Shareholders?

        "Accounting improprieties beginning in 2000 led Freddie Mac to restate by $5 billion its financial results for that year, 2001 and the first three quarters of 2002.  Two former chief executives at the company were defenestrated during three months last year and two investigations concluded that Freddie Mac flouted accounting rules and disclosure standards to smooth earnings growth. The company is still late in its financial reporting.  You would think that shareholders would be howling for the heads of the Freddie Mac directors who were snoring in the boardroom.    Gregory P. Taxin, chief executive of Glass Lewis & Company, an institutional advisory firm in San Francisco, says he is puzzled by the apparent lack of outrage from Freddie Mac shareholders. 'This is another situation where the deficiencies in the corporate democracy system are quite evident,' he said. 'This is a board that flubbed it horribly over the last 12 months, and yet they will all be re-elected, maybe with little protest.'  An investigation into Freddie Mac's practices by the Office of Federal Housing Enterprise Oversight, the federal agency that oversees it, was scathing about the board's performance. … Glass Lewis is advising Freddie Mac shareholders to withhold votes from 10 directors who served on the company's board when its oversight was lax.  Four of the directors standing for re-election have served recently on Freddie Mac's audit committee, which can certainly be said to have failed in its duties.  These directors are Michelle Engler, a lawyer and trustee of JNL Investor Series Trust, an investment company; Shaun F. O'Malley, a former chairman of Price Waterhouse, the accounting firm; Ronald F. Poe, president of a private real estate investment firm; and William J. Turner, founder of Signature Capital Inc., a venture capital firm.  If re-elected, all will continue to serve on the audit committee at Freddie Mac.    That directors of Freddie Mac, who failed rather spectacularly in their responsibility to shareholders, would not take themselves out of the running for re-election simply shows that shame is not a dominant gene in corporate America's DNA.    Major mutual fund companies are among the biggest shareholders of Freddie Mac.  The Capital Research and Management Company, investment adviser to the American Funds Group, owns 5.8 percent. Putnam Investment Management owns 3.6 percent, and Fidelity Management and Research holds 2.6 percent. Investors who own shares of funds run by these companies should watch how they vote on Wednesday."  (NYT, 3/28/04, "Freddie Mac: Sounds of Silence")

        "Leland Brendsel, ousted as Freddie Mac's chief executive because of widespread accounting problems, is suing the company's federal regulator over $53.7 million in withheld compensation, charging the Office of Federal Housing Enterprise Oversight with overstepping its enforcement powers. …  Ofheo told Freddie Mac in June 2003 to freeze pay and benefits for Mr. Brendsel and two other top executives who were forced out after an internal investigation uncovered widespread accounting problems.  The probe found company executives committed numerous errors and intentionally violated certain accounting rules in an attempt to make Freddie's earnings appear less volatile by pushing extraordinary earnings growth in the early part of this decade into later years.  A multiyear reaudit of the company's books resulted in a $5.1 billion after-tax increase to earnings from 2000 to 2002.  Freddie's board fired one executive and asked Mr. Brendsel and former Chief Financial Officer Vaughn Clarke to step down. Messrs. Brendsel and Clarke were allowed to keep lucrative severance packages that would have otherwise been forfeited if either was terminated 'for cause,' but under Ofheo's orders the money has been frozen pending the final outcome of the agency's investigation and cases against the two executives." (WSJ, 5/20/04, "Freddie's Ex-CEO Seeks Withheld Pay")  Either the former CEO knew of the book cooking or should have known.  He was being paid the big bucks to perform some service to the corporation.  But, the BOD may have negotiated one of those wimpy CEO employment agreements that only allows for termination of the CEO’s employment “for cause” when the CEO is caught with a smoking gun in his hand.  "Fan and Fred have one sweet arrangement.  Because they are assumed to enjoy the backing of the federal government, they can borrow at below-market rates.  This implicit subsidy is supposed to reduce mortgage rates and increase homeownership.  But, as study after study has demonstrated, their activities have only a tiny impact on mortgage rates; and they retain as much as 50% of the subsidy for their own purposes, such as compensating executives." (WSJ, 7/16/04, Opinion: Review & Outlook, "HUDwinked")  Of course, the Directors neither know of the existence nor have read any of those studies.  How many people could enjoy homeownership in lieu of those "lucrative severance packages"?  "[A] U.S. federal judge ruled that the government regulator of Freddie Mac can't stop the company from handing over $60 million in severance to its ousted chief executive. The judged ruled that the Office of Federal Housing Enterprise Oversight overstepped its authority when it sought to have the payment withheld from former ... CEO Leland Brendsel.  Brendsel, along with other executives, left the mortgage finance company last year in the wake of a $5 billion accounting scandal. The OFHEO is also seeking to strip its former chief financial officer Vaughn Clarke of his severance compensation." (, 8/31/04, "Judge Says Freddie Mac Can Pay Ex-CEO $60 Million")  Just because a Judge has said Freddie Mac can legally do so, does not mean that the Directors should do so.


        "Mr. (Robert J.) O'Connell (former CEO of MassMutual Financial Group) had forbidden senior executives from directly communicating with board members...." (WSJ, 8/19/05, "Inside MassMutual Scandal, An Angry Wife Sparks Probes")  Chain-of-command arguments aside, such a policy should set off red flags to a competent BOD that knew of it.  Intelligent BOD members might quickly learn of such a policy if they attempt to communicate with senior management, but receive a response from only the CEO.

        On the other hand, when BODs muster up the courage to challenge a CEO, BODs should act in a competent manner.  "Amid allegations of extramarital affairs with female employees, illegal activity in trading accounts, and the misuse of company aircraft, Robert J. O’Connell was unceremoniously fired as chief executive of the Massachusetts Mutual Life Insurance Company for cause by its directors in June of 2005. … In a rebuke of the board, some of its directors, as well as its outside counsel, a three-person arbitration panel has found that the board did not terminate Mr. O’Connell 'for cause.'  The panel said that Mr. O'Connell did not breach his fiduciary duties to MassMutual and that he was owed benefits he had been previously denied. His lawyers estimate he could be repaid as much as $50 million. … But the MassMutual episode could illustrate how boards, in an effort to appear tough on corporate malfeasance, might need to pay more attention to the process of dismissal. …[T]he arbitration panel acknowledged that while Mr. O’Connell did, in fact, have affairs with two female employees; made millions in profit in a deferred compensation account by trading using closing prices from the day before, and perhaps even stepped over the line in use of the company aircraft, none of these acts constituted 'willful gross misconduct' on his part or resulted in 'material harm' to the company. … In its appeal, MassMutual argues that the chairman of the panel, William S. Sessions, failed to disclose that he was terminated from the F.B.I. for misusing assets and personnel. … During an investigation that year, several issues arose, including Mr. O'Connell's amendment of the company’s nepotism policy to allow his children to be employed there; the alleged excessive use of the company aircraft by the O'Connell family and a 2003 health problem that O'Connell had failed to inform the board about. Nevertheless, the investigation concluded that there was not enough evidence to support the existence of an inappropriate relationship between Mr. O'Connell and Ms. Alfano. (A later investigation found that Mr. O'Connell had affairs with two other female employees.) The board took no action against Mr. O'Connell and, in April 2004, signed a letter agreeing not to reopen the investigation unless there was new evidence of an affair and then only with the full approval of the board. The board did make changes to the company's transportation policy. … James R. Birle, a director, contacted Dennis Block of the law firm Cadwalader Wickersham & Taft, in early February 2005. Mr. Block began conducting interviews of employees, although his firm was not formally retained by the governance committee until later that year. 'Block's investigation was unauthorized by the full board of directors and based on stale evidence,' the arbitration panel said in its findings. Furthermore, the investigation breached the terms of the April 2004 agreement and 'presented to the board of directors the selective, biased statements of O'Connell's chief detractors and unfairly prejudiced the process to remove O'Connell,' the panel concluded."  (NYT, 10/21/06, "Firing Chief Was Wrong, Panel Says")  "Willful gross negligence" is an oxymoron!  Who, in their right mind, would entered an agreement containing such a phase?  Did the lawyers drafting/reviewing it advise the BOD not to sign?  Where was the paper trail of warnings to the CEO?  Why enter into an agreement to end an investigation?  Why not give the CEO full notice and opportunity to defend against the allegations at a BOD meeting --- at least the BOD would receive a preview of the CEOs purported defenses and might have obtained more ammunition to support their "for cause" case?  Who agreed to submit the matter to "arbitration"?  How were the arbitrators selected?  Did the attorneys do their homework to learn the arbitrators' backgrounds?  What were the rules pertaining to the arbitration?  For a critique on resolving disputes between public investors and securities firms by means of arbitration see Securities Dispute Arbitration.


        "When a director raised questions about the propriety of Mr. Fastow personally profiting from his role running LJM, Mr. Skilling told the board's compensation committee, according to Mr. Fastow, that 'Andy Fastow has put $1 million into the game. He should get profits because he has skin in the game.' The board approved the deal."  (NYT, 3/8/06, "Enron Executive Points a Finger at Former Chiefs")  Was the BOD concerned that it waived its conflicts-of-interest policy to approve the arrangement?   Did the BOD understand that the purpose of LJM was to camouflage Enron’s losses?  Did the BOD inquire as to whether Fastow was provided with any assurances that he would "get profits" as opposed to be subject to economic risks?  Did the BOD establish an effective system whereby it would monitor the situation?  If so, did the BOD monitor the situation?  "Fastow described numerous meetings at which Enron directors signed off on deals involving the partnerships he created. … When the first partnership, dubbed LJM1 … was created in 1999, the board approved a special waiver of a company conflict-of-interest policy to enable Fastow to serve as head of LJM while retaining his position as Enron's chief financial officer. When Enron's board of directors discussed possible problems the arrangement could pose for the company, at the top of the list was what Fastow called 'the Wall Street Journal risk' — the danger that the news media would get wind of it and subject the company to harsh scrutiny. 'Whether it were right or wrong, it would look terrible,' Fastow testified." (LAT, 3/8/06, "Fastow Tells of Deception at Enron")


        "Sun Microsystems uses Ernst & Young LLP as its independent auditor, and Ernst's agreement to audit Sun's books, the proxy reads, is 'subject to alternative dispute resolution procedures and an exclusion of punitive damages.' Translation: If Sun runs into accounting problems and thinks a botched audit by Ernst is to blame, it is barred from taking the accounting firm to court. Instead, Sun has to go through mediation and arbitration. It also can't seek any damages beyond the actual, compensatory damages related to Ernst's conduct. Ernst placed these provisions in its audit agreement with Sun to try to limit its liability should something go wrong. … Audit 'engagement' agreements between a company and its auditor aren't public documents, so the liability caps aren't widely known about, though some observers fear they could jeopardize an auditor's performance and independence. … As a result, some investors are pushing companies to spell out these provisions and make their implications crystal clear. 'I think a lot of people agree that more disclosure on this would be warranted,' says Ted White, deputy director of the Council of Institutional Investors. …  Lynn Turner, the departing chairman of Sun's audit committee and a former Securities and Exchange Commission chief accountant, says investors need "greater transparency" in evaluating these provisions. 'Since all four accounting firms are demanding the companies include these liability cap clauses in their contracts,' he said, 'audit-committee chairs, including myself, are faced with a fait accompli when asked to sign them.' …  'How do we find out how widespread this is?' Mr. White of the Council of Institutional Investors asks. 'We're not even convinced that audit committees necessarily know about this.'" (WSJ, 11/28/05, "Auditing 'Liability Caps' Face Fire")  Is the implication of the article that BODs are too timid to inquire whether the Company has entered into such a limited liability agreement and/or BODs, acting through its Audit Committee, do not have the authority to restrict CEOs from causing the Company to enter into such agreements?  For detailed comments on the problems associated with and criticisms of the current arbitration process in customer-brokerage firm securities disputes, please see


        ''Hurricane Katrina was powerful enough to blow a loophole in rules laid down by the board of  Forest City Enterprises.  All but one of the company's independent directors approved a $1 million gift to the Tulane University Katrina Relief Fund…. Why did the other director, Scott S. Cowen, abstain? Well, he happens to be the president of Tulane. Forest City's corporate governance guidelines prohibit 'substantial charitable contributions to organizations to which a director is affiliated.'  But the board made an exception after determining that the gift would not compromise Mr. Cowen's independence, the proxy said.'' (NYT, 4/2/06, ''Openers: Suits; Hurricanes Don’t Count'')  Since $1 million would not compromise Mr. Cowen's independence, it appears that $1 million just does not buy what it used it.  Or, perhaps, the article should be entered under the category of "Rules Are For Fools"?  On the other hand, perhaps, BODs establish stringent conflict-of-interest and independence rules to claim bragging rights and for public consumption, but waive those rules when an item of back scratching personal interest arises.


        "Early in 2005, Ms. (Mary) Forté (former chief executive officer of Zale Corp.) moved to cultivate a higher-income clientele. … Pamela Romano, who headed Zales Jewelers for seven years, told Ms. Forté it was a mistake to move so radically…. Through a sympathetic board member, Ms. Romano asked to talk to the board of directors. The board, however, refused, saying it didn't want to meddle, according to people close to the situation. Ms. Romano left the company shortly afterward, in early 2005. Betsy Burton, a board member and Zale's interim chief executive, says the board didn't understand the magnitude of the changes proposed by Ms. Forté. "Everything that was told the board sounded like a solid plan...It was perceived as more of a subtle change as opposed to what was in actuality a very radical change," she said. Ms. Forté says the board was fully briefed on the new strategy. … In January, Ms. Forté was asked to resign, just four months after signing a one-year employment contract that included a severance agreement worth more than $8.5 million in cash and stock. Ms. Burton says Ms. Forté was on thin ice even before Christmas because the company missed earnings guidance and sales plans for numerous quarters. … Since taking charge, Ms. Burton has scrapped much of last year's strategy." (WSJ, 6/26/06, "Chasing Upscale Customers Tarnishes Mass-Market Jeweler Zale Corp.'s Botched Revamp Prompted CEO's Ouster And Merger Bid From Rival")  It appears that the BOD refused to understand the situation by making sure that it did not hear dissenting views.  Also, the BOD, after numerous misses, awarded big bucks to the CEO.  Folks, it's the new American way!


        "Corporate boards are in desperate need of some help snooping on the executives they are supposed to oversee. Chief executives have been carousing behind their backs, canoodling with private-equity firms ... about buyout deals.  These transactions stand to be lucrative for top managers, who typically keep their jobs and are awarded new equity along the way. ... That is because the chiefs are in a position to exploit their own office and ownership positions to pursue deals that serve them best.  A few executives are pursuing deals for weeks or months without alerting their boards. Others are subtly threatening to quit if a company isn't sold and delivered back to their buyout buddies. ... Now, after years of rubber-stamping buyout recommendations, both boards and shareholders are beginning to challenge the terms they're receiving in these deals. The end game for shareholders is simple -- getting the best price possible. ... Some of these players will eventually have to answer to the courts. ... Boards are supposed to neutralize those advantages by controlling the flow of information to their CEOs, while keeping them on a short leash. ... [C]onsider a 2005 transaction that caught the eye of the Delaware courts -- a nearly $1 billion buyout of technology firm SS&C Technologies Inc. by the Carlyle Group and the Windsor , Conn., tech company's largest shareholder and CEO, William Stone. As described in company filings, Mr. Stone began soliciting offers for the company, and even hired a set of advisers to set up meetings with six potential buyers. The company went on to sign nondisclosure agreements with the private-equity groups. It took more than a month before the company's board knew any of this, according to filings. ... In an interview, Mr. Stone said, 'Our process was transparent. We're not hiding anything from our board members. SS&C got the highest price in its history.' ... A high-profile firing might nonetheless be the only way to get through to the next crop of executive free-lancers and canoodlers. Nothing else seems to be working." (WSJ, 1/30/07, "Fine Line of Selling, Selling Out, the Firm")  Are we supposed to believe that CEOs do not understand the concept of conflict of interest and BODs do not have any means to educate them?  That does not speak well for BODs.  Ethical considerations are only a burden of the plebian masses that, unlike CEOs, have not learned the personal benefits of "thinking out-of-the-box."


        "How does this business (private equity) make so much money?  Are there really a huge number of mispriced securities out there?  Are there really a vast number of corporations whose stock is wildly underpriced so that private equity can buy them at above-market prices and then make money after a little spiffing up and wiping clean? Maybe so, but this defies the basis of the whole theory of efficient markets. ... Or maybe it's that the deals are often done with the help of the acquired entity, where managers know exactly how to change the company and make it worth more, but want to put that knowledge to work only if they can reap immense rewards from the repair job.  That often seems to be what's happening." (NYT, 7/1/07, "What Is This Thing Called Private Equity?")  Directors have a fiduciary duty to ask Management for details of contemplated "spiffing up and wiping clean" and why it is not already being done for the benefit of current shareholders.


        "The dark side of Henry T. Nicholas III's life is on display as never before -- inviting questions about how he ever won such free rein to run a prominent public company. Mr. Nicholas co-founded Broadcom Corp. in 1991 and led the Irvine , Calif. , semiconductor company for more than a decade in a frantic, zany style. ... Now, two criminal indictments provide a more troubling view of Mr. Nicholas's years at the top. One of them, filed by federal prosecutors in California, accuses him of orchestrating financial frauds from 1999 to 2002 related to the timing of stock-option awards. The other accuses him of buying and distributing cocaine, Ecstasy and other controlled substances, starting in early 1999. ... So why did so many people accept Mr. Nicholas in his heyday as the right man for the job? ... The company was growing so fast in the late 1990s that employees wanted to regard the 6-foot-6 Mr. Nicholas as a messianic leader. ... Some former employees talk about the 'cult of Nick' as something that seemed good for the company. ... What's more, Mr. Nicholas owned about a third of the company's voting stock, as did co-founder Henry Samueli. As long as the two founders liked their own leadership styles, analysts say, anyone challenging them had no hope of succeeding. One of Broadcom's independent directors, Werner Wolfen, talked candidly about those constraints in a 2004 interview with me. Early board meetings were 'kind of futile,' he recalled. ... Wider lessons abound for any company with a brilliant but unconventional CEO. Such leaders can help a company defy conventional wisdom and achieve great things in a hurry. But their bravado may mask personal turmoil that ultimately can hurt the business. In such situations, directors need back-channel sources to help them gauge a CEO's conduct and effectiveness in all aspects of the job. It isn't enough to look at quarterly financial results and accept board presentations by the CEO as the final word on everything. ... Effective boards should provide such adult supervision long before a crisis is obvious. And if everything gets too unstable, boards need to be ready to dislodge such a boss before the entire company faces the risk of ruin. Mr. Wolfen said this week that he didn't hear any complaints from Broadcom employees about Mr. Nicholas's style during boom times. But its leadership was clearly struggling in 2002 to deal with the tech slump. So in late 2002, outside directors decided that a new CEO was warranted. Mr. Samueli, the co-founder, in a 2004 interview, confirmed that he reluctantly agreed. At that point, Mr. Wolfen held an eye-opening series of conversations with several of Broadcom's top lieutenants." (WSJ, 6/11/08, "Downfall of Zany Broadcom Co-Founder  Offers a Lesson for Corporate Boards")  So-called independent Directors should have "back-channel sources" under all circumstances.  However, why should he/she bother if corrective action would be "kind of futile"?  A prospective Director's due diligence should reveal that potential futility.  On the other hand, why not just collect the big buck fees and other perks while going with the flow and knowing, in the real world, there is no such thing as Director accountability if things go wrong?


        "Nine of them are retired. Four are over 75 years old. One is a theater producer, another a former Navy admiral. Only two have direct experience in the financial-services industry. Meet the Lehman Brothers Holdings external board directors, a group of 10 people who, perhaps unknowingly, carried the health of the world's financial system on their shoulders the past 18 months. ... [O]ne can't help but wonder how and why this board let its longtime chairman and patron, Richard Fuld Jr., cling to both hope and power. Perhaps it was because Mr. Fuld wanted it that way. ... [I]t is telling that news accounts of Lehman's capital-raising efforts focused entirely on the efforts of Mr. Fuld, and make nary a mention of the 10 other members of Lehman's board. Who was on this board? Until the 2008 arrival of former US Bancorp chief Jerry Grundhofer, the group was lacking in current financial-knowledge firepower. A number of the members did have past financial-markets expertise, but most of their working lives were tied to a different era, one before massive securitization, credit-default swaps, derivatives trading, and all the risks those products created.  The board's members include John Macomber, 80 ... John Akers, 74 ... Thomas A. Cruikshank, 77 ... Henry Kaufman, 81 ... Sir Christopher Gent, 60 ... Roger S. Berlind, 75 ... Roland Hernandez, 50; Michael Ainslie, 64 ... and Marsha Johnson Evans, 61.... How much was Lehman's board monitoring the company's risk as it began accumulating its portfolio of real-estate assets and securities? In 2006 and 2007, the board's risk committee met twice each year, according to SEC filings. ...  'Lehman Brothers has a very qualified board,' said a person close to the board, who noted that risk was discussed at four risk-committee meetings, as well as 25 board meetings in 2008." (WSJ, 9/18/08, "Where Was Lehman Board? --- Firm's External Directors Had Relied on Experiences Of a Bygone Financial Era")  "Risk" may have been "discussed," but what exactly was said?  Perhaps, the BOD never discussed In re First Alliance Mortgage Co. or the BOD suffered a collective "senior moment" if it was discussed.

        "On Friday, December 8 (2006), the U.S. Court of Appeals for the Ninth Circuit decided In re First Alliance Mortgage Co. ... First Alliance Mortgage Company, a non-prime mortgage lender, had been driven into bankruptcy in the aftermath of lawsuits and investigations relating to allegations of unfair and deceptive business practices. Lehman Brothers, Inc. had extended credit to First Alliance and underwritten and managed its asset-backed securities. A class of borrowers sued Lehman in a California federal court for aiding and abetting First Alliance's 'fraud' and for violation of the state's unfair competition law. The plaintiffs claimed that Lehman was aware of and assisted First Alliance in its conduct. ... Lehman defended on the grounds that it was not an active participant in the allegedly fraudulent practices and that it assisted First Alliance's business generally, but not the specific practices. ¶ Following a jury verdict (6/16/03), the district court awarded the plaintiffs over $5 million in damages on the aiding and abetting claim. ... Lehman appealed the damages award, arguing, among other things, that the borrowers did not prove systematic fraud on a class-wide basis, that the jury was improperly instructed on the elements of aiding and abetting fraud and that there was insufficient evidence to establish aiding and abetting liability. The Ninth Circuit affirmed the judgment against Lehman on the basis that Lehman's internal reports indicated direct knowledge of First Alliance's questionable business practices. The Court also rejected Lehman's claim that it had assisted First Alliance's business but not its fraud, holding that such a distinction is irrelevant when a company's whole business is 'built like a house of cards on a fraudulent enterprise.' (Underline emphasis added.) The Court, however, did remand the case for a recalculation of the damages amount." (American Bar Association, Section of Litigation, "Ninth Circuit Decides First Alliance Mortgage Case")  "Plaintiffs' attorneys had focused on internal memos, especially a Lehman due-diligence report that said First Alliance required its employees 'to leave your ethics at the door.'" (Emphasis added.) (LAT, 9/18/08, "Lehman Bros. was big, early supporter of subprime lending")  "Internal reports contained unfavorable descriptions of First Alliance's business practices, including references to unethical practices and a disturbing record of loans generated to senior citizens. Nevertheless, in 1996 Lehman agreed to extend First Alliance a $25 million warehouse line of credit. During 1996 and 1997, Lehman co-managed four asset-backed securitization transactions for First Alliance." (Emphasis added.)  In re First Alliance Mortgage Co., 471 F.3d 977 (9th Cir. 2006)  What precautions, if any, did the "risk committee" take to make sure that Lehman would not enter into relationships with others who engaged in "questionable business practices"? 


        "These days it's impossible to avoid news stories about the financial crisis.... Yet one very important question has gotten little attention: Where were the boards of directors of the companies that helped create this mess? Boards of directors set the guidelines and compensation levels, and in the end are ultimately responsible for the performance of their CEOs and companies. They have a clear-cut fiduciary responsibility to provide oversight. We should not ignore their roles in contributing to this financial meltdown. Behind the CEO of every Freddie Mac, Bear Stearns or Lehman Brothers who led their company down a path toward financial ruin, there was a board of directors that sat by silently and let it happen. The boards at these failed companies should have more thoroughly challenged management about the types of investments the companies were making, how much they were borrowing, and the types of standards being used to assess the creditworthiness of those to whom they were making loans. While the CEOs run their companies' day-to-day activities, the boards have an obligation to make sure there are enough safeguards in place that the CEOs can't sink their ships, such as requiring more active oversight of the activities and investments being made by management and assuring that the board has a thorough understanding of the risks, both long term and short term, presented by those activities and investments. Apparently, these boards faltered in this respect. ... [P]oliticians in Washington would be wise to adjust their focus upward -- where the true power lies -- and set greater levels of accountability for boards, requiring more stringent oversight by those who are empowered to set the ground rules for American companies." (WSJ, 10/25/08, Opinion: "Where Were the Boards?")  Yeah! Yeah! Yeah!  CEO, BODs and politicians are now expressing politically correct views on corporate governance, but watch the small print if and when they propose purported solutions.  No one will destroy their own rice bowl.


        "President-elect Barack Obama's newly appointed chief of staff, Rahm Emanuel, served on the board of directors of the federal mortgage firm Freddie Mac at a time when scandal was brewing at the troubled agency.... [T]he entire board was later accused by the Office of Federal Housing Enterprise Oversight (OFHEO) of having 'failed in its duty to follow up on matters brought to its attention.' ... The spokesperson said that while on the board, Emanuel 'believed that Freddie Mac needed to address concerns raised by Congressional critics.' ... The actions by Freddie Mac are cited by some economists as the beginning of the country's economic meltdown. ... The oversight report said the board had been apprised of the suspect accounting tactics but 'failed to make reasonable inquiries of management.'"  (ABC News, 11/7/08, "Emanuel Was Director Of Freddie Mac During Scandal") The admission as to his belief makes a case for reckless disregard rather than plain-vanilla negligence.  After learning of the "concerns," what did he try do to remedy the situation?  Did he forcefully speak-out or just silently slither to the bank with his lucrative compensation package?

        "Before its portfolio of bad loans helped trigger the housing crisis, mortgage giant Freddie Mac was the focus of a major accounting scandal that led to a management shake-up, huge fines and scalding condemnation of passive directors. One of those board members was Rahm Emanuel, now chief of staff to President Obama. Emanuel earned at least $320,000 for his 14-month stint at Freddie Mac. Emanuel plays a critical role in addressing the nation's mortgage woes and fulfilling the administration's pledge to impose responsibility on the financial world -- the type of responsibility that appeared to be absent at Freddie Mac. ... Clinton appointed him to the Freddie Mac board in February 2000. The board met no more than six times a year. ... Emanuel and other new directors qualified for more than $300,000 in stock and options plus a $20,000 annual fee.... During Emanuel's stint on the board, Freddie Mac executives told the board of a plan to use accounting techniques to maximize profits that the government-chartered firm was reaping from risky investments.... The report by Armando Falcon Jr., director of the Office of Federal Housing Enterprise Oversight, found that the goal was to shift earnings into the future, ensuring that Freddie Mac would appear profitable for years. Falcon noted that this action boosted executives' subsequent annual bonuses. Falcon criticized the board for its acquiescence, saying it 'became complacent' and 'failed to make adequate inquiries of management and obtain sufficient information upon which to make decisions.' ... Many of those same risky investment practices eventually brought the firm to the brink of insolvency and led to its seizure last year. ... Because of Freddie's federal charter, the board in Emanuel's day was a hybrid of directors elected by shareholders and those appointed by the president. ... Falcon found that presidential appointees played no 'meaningful role' in overseeing the company and recommended that their positions be eliminated. ... The Obama administration rejected a Tribune request under the Freedom of Information Act to review Freddie Mac board minutes and correspondence during Emanuel's time as a director." (LAT, 3/26/09, "Obama aide had stint at Freddie")  Is this another example of the Peter Principle?


         "Why do smart people make bad decisions? With Congress grilling bank CEOs Wednesday, it's a timely question. ... Sydney Finkelstein, a professor at Dartmouth's Tuck School of Business, has studied decision-making, and tried to track down some answers in a new book he's co-authored called 'Think Again: Why Good Leaders Make Bad Decisions and How to Keep it From Happening to You.' Mr. Finkelstein and his co-authors looked at research in neuroscience and psychology as well as management. He talked with The Journal recently; here are edited excerpts of the conversation. ... Another idea is around governance. I've studied boards for --- it must be 15 or 20 years now. I'm completely convinced that the biggest differentiator between high quality boards and weaker boards is the extent to which they actually engage in real debate." (WSJ, 2/13/09, "Why Good Managers Make Bad Decisions")


            "The shockingly poor financial management of General Motors and Chrysler weakened their case for a government bailout, but officials feared letting the automakers collapse would severely harm the U.S. economy, the former head of the Obama administration's auto task force says. ... [S]teven Rattner said he was alarmed by the 'stunningly poor management' at the Detroit companies and that GM had 'perhaps the weakest finance operation any of us had ever seen in a major company.' GM's board of directors was 'utterly docile in the face of mounting evidence of a looming disaster' and former GM chairman and chief executive Rick Wagoner set a tone of 'friendly arrogance' that permeated the company, Rattner wrote." (AP, 11/212/09, "US task force shocked by state of GM, Chrysler")  So goes General Motors, so goes the our County?


            "[W]hat happens to the corporate directors who were supposed to be watching over management? Usually, nothing. They are likely to be named in shareholder suits, but those suits are usually settled out of court, and the insurance company, or the company itself, pays the bill. If it cannot be proved that the directors actually took part in the fraud, they almost certainly will escape with no penalty beyond a tarnished reputation. That reality made it all the more surprising this week when the S.E.C. filed civil charges against three former outside directors of a military contractor, DHB Industries, which sells body armor to the military and to law enforcement agencies. ... The paucity of director cases since the passage of the Sarbanes-Oxley law in 2002 has served as an indication that the S.E.C. is mindful of the complaints companies made back then. The law required that boards have audit committees formed of independent directors, and set forth a number of duties for those directors. Some company officials worried that the requirement would make it harder to attract and keep directors, who would fear liability if they somehow made a mistake or overlooked some minor detail. That has not happened. Instead the commission has chosen not to proceed in cases in which there was anything less than severe recklessness. If directors relied on experts like law firms or auditing firms, they have received the benefit of the doubt. No outside directors of financial firms were named as defendants in cases the S.E.C. filed that stemmed from the credit crisis. Instead, some critics claim that audit committees of boards have turned into check-the-box groups who mechanically follow procedures aimed at assuring compliance with the law, but may not be actually taking the time to oversee the company. ...That there was a fraud at DHB Industries is not news. The former chief executive, David H. Brooks, and the former chief operating officer, Sandra Hatfield, were convicted last September of fraud and are awaiting sentencing by a federal judge. The former chief financial officer, Dawn Schlegel, pleaded guilty. The company is in bankruptcy and has restated its financials, admitting among other things that it greatly overvalued inventory. It has agreed to settle S.E.C. charges as soon as it receives approval of the bankruptcy court. ... The S.E.C. alleges that he (Brooks) used another company he controlled to overbill DHB Industries and siphon $10 million out of the company when it was enjoying a surge of orders for body armor after the Sept. 11, 2001, attacks. He is also said by the commission to have "misappropriated millions from the company through the use of company credit cards and checks to pay for personal expenses, including luxury cars, jewelry, extravagant vacations, prostitutes and his horse racing empire." The directors, Jerome Krantz, Cary Chasin and Gary Nadelman, were counted as independent members of the board's audit committee, even though they were all old friends and Long Island neighbors of Mr. Brooks. Mr. Krantz was the company's insurance agent, and Mr. Chasin was a former company employee. One major objective of the Sarbanes-Oxley law was to allow boards to escape the domination of powerful chief executives. The S.E.C. says that did not happen here. When accusations of wrongdoing were made, the board allowed Mr. Brooks to control investigations of his own conduct. When the law firm that conducted one investigation concluded it had been misled and resigned, the directors "merely echoed Brooks's sentiment" that the lawyer was spineless and disloyal, the S.E.C. stated. The company went through two auditing firms that resigned, one of which quit after the company forged an audit letter so it could issue its annual report, according to the S.E.C. When one of the firms disavowed its earlier audits, the company hired two separate firms to redo the audits, without telling either firm about the other. It evidently hoped that one auditor or another would sign off on the numbers. When the company's controller concluded its inventory was overvalued, he first told his superiors and then told the auditor, which notified the audit committee and said it should arrange for an independent investigation. There was no investigation, but Mr. Krantz is said to have been outraged that the controller violated protocol by telling the audit firm instead of the committee. The controller was fired. None of the directors settled the S.E.C. cases, which seek injunctions and would bar them from serving as directors of public companies. The suits also seek to reclaim profits the directors made from selling shares when the company's stock briefly became popular with investors. ... Instead, passage of that law seems to have been a bonanza for outside directors. After the law took effect, a consensus developed that better pay was needed to attract quality directors, and director pay shot up. The increases stopped coming during the financial crisis, but pay began rising again last year, particularly at smaller companies. ... Even at small companies, the pay for outside directors is now in the six figures, which is not bad for part-time work. It would certainly be understandable if some directors hesitated to risk their positions by challenging a powerful chief executive. If it takes a case this egregious to provoke an S.E.C. action against outside directors, the bar may be set too high." (3/3/11, NYT, "For Boards, S.E.C. Keeps the Bar Low ")


                4.    Reliance Upon Suspect Information


        Some Directors seem to recklessly blind themselves.


        "As far as John Bogle (76-year-old founder of the Vanguard Group Inc.) is concerned, most corporate executives simply don't live up to their promises or earn their exorbitant pay.   So how did we get into this mess where it's normal for chief executives to pocket millions of dollars in salary, benefits and personal perks in return for lackluster leadership?  … [T]he compensation committee to turn(s) to an understanding outside consultant, who invariably says the CEO deserves a raise.  'No consulting firm, as far as I know, has ever stayed in business by recommending that CEOs get less money. There are only two types of clients these compensation consultants don't want to offend: actual clients and potential clients.'" (Dallas Morning News, 5/6/06, "Exorbitant CEO pay 'doesn't wash'") 


        "[T]he consultants feed data to compensation committees piecemeal, reporting what other companies are offering in supplementary pensions one day, the trend on bonuses a few days later, the value of stock options a week after that. The directors, in turn, set the different components of their own chief executive's pay package in equally disjointed fashion. … Governance experts say the full board increasingly wants a better handle on compensation committee deliberations. Many directors fear that they will all be held accountable for egregious pay packages.  'The Dick Grasso situation has made a lot of directors more cognizant of the need to get the total picture, see how all the pieces - the base salary, restricted stock, options, perks, retirement benefits - add up,' said Eleanor Bloxham, president of the Corporate Governance Alliance, a consulting firm in Westerville, Ohio." (NYT, 4/3/05, "My Big Fat C.E.O. Paycheck")  How asleep at the wheel could Directors be that they do not bother to add the separate elements of pay packages to CEOs?  One would assume that they did not get where they are by being totally incompetent.  How about beholden or planning ahead for some reciprocity?


        "Disney's directors were presented with the results of an in-depth review by investment banks and lawyers hired by Disney after Comcast announced that it was interested in acquiring the company.  It is expected that the board would reject the bid...." (NYT, 2/16/04, "Disney Board Rejects Bid From Comcast as Too Low")  Does "hired by Disney" mean, in substance, "selected by CEO Michael Eisner" and with the implicit understanding that there will be more employment and fees for those investment banks and lawyers from Disney if their findings keep Eisner in power?  If so, some Directors are not capable of recognizing a blatant conflict of interest.

        "[C]ourt documents were unsealed in a case in Delaware related to Mr. Eisner's firing of Michael Ovitz, the former Hollywood agent who received a $140 million severance package after he was ousted as President in December 1996.  Among the documents, which Disney's lawyers had hoped to keep sealed ... is a ... report that suggests that Disney's board did not properly oversee the hiring and firing of Mr. Ovitz." (NYT, 2/26/04, "Pension Fund and Proxy Firm Join Critics of Disney Chief")  So, what's the big deal?  Didn't it happen a long time ago?  Wasn't it only $140 million of Shareholder assets?  Aren't Directors allowed to miss a small item here and there?  Weren't the attorneys just doing their duty by shielding Directors from the release of embarrassing information?  To whom the attorneys felt they owed such a duty remains to be learned.  "The documents paint an unflattering portrait of Mr. Eisner's seemingly unilateral move to bring Mr. Ovitz in, and later to award him a rich severance package."  (WSJ, 2/26/04, "Disney Shareholders' Revolt Widens")  Does "unilateral" mean that the BOD had little or no participation in the decisions?  "In her report, (Deborah A.) DeMott said Eisner decided to hire Ovitz as Disney president before consulting the company's board of directors.  The two men decided during an August 1995 hike in Aspen, Colo., that Ovitz should join Disney.  Before board approval, DeMott said, remodeling began on Ovitz's future office and appraisals were sought for his corporate jet.  The board signed off in late September." (LAT, 2/28/04, "As Spender, Ovitz Was $6-Million Man")  "Documents unsealed recently in the Delaware case suggest that when Eisner decided to hire Ovitz as Disney's president, he did not consult the full board and that a committee of directors spent about 10 minutes reviewing the employment contract before recommending that it be approved." (LAT, 9/20/04, "Ovitz Case Haunts Disney Board")  "Former Walt Disney Co. board members Stanley P. Gold and Roy E. Disney have been ordered to give new depositions in a shareholder lawsuit against the company over the brief tenure of former company President Michael Ovitz.  … (There are) perceived inconsistencies between their testimony before they resigned and their subsequent criticism of the Disney board. … Roy Disney gave a deposition in the case last June, and Gold testified last October. Both said they had fully supported Eisner's courting of Ovitz.  They also said they had supported the move to terminate Ovitz on a no-fault basis.  After their resignations last fall, Gold and Roy Disney embarked on a campaign to oust Eisner and attacked the Disney board for being Eisner's 'rubber stamp' during a period that included Ovitz's brief stint as company president." (LAT, 6/2/04, "New Testimony on Ovitz Ordered")  Those in glass houses….  "Michael Ovitz asked a judge to dismiss investor claims ... because, he argues, investors can't prove that the former talent agent violated any legal obligations by accepting the compensation and severance packages offered by Disney Chief Executive Michael Eisner and approved by the company's board." (LAT, 7/1/04, "Ovitz Seeks to Dismiss Disney Investor's Suit")  Hmmm.  If Ovitz gets off the $140 million hook, whose money would be at risk to pay the potential judgment?  "The plaintiffs are seeking about $200 million in damages ... with any reward to be covered by insurance. ... Mr. Eisner said that shortly after Mr. Ovitz's hiring in August 1995, he began to school the new executive in Disney's mission for the near future. ...  Mr.  Eisner saw Disney as a company that needed to focus on ongoing operations, not hunt for new deals. ... Mr. Eisner said that Mr. Ovitz didn't seem to hear the message, focusing on attempted acquisitions."  (WSJ, 11/17/04, "Disney's Eisner Paints His Own Picture of Ovitz")  Before Ovitz was hired, did any member of the Disney BOD ask the basic question, "Mr. Ovitz, what do you see as the future for Disney and, if you are selected for the position, your role in that future?"  What's "due diligence"?  

        "George J. Mitchell, a hands-on negotiator in international peace talks, preferred to rely on trusted advisers when it came to hiring and firing Michael S. Ovitz as president nearly 10 years ago. … Mr. Mitchell maintained that Mr. Ovitz's hiring was not a 'fait accompli' when the board first met as a group to consider his employment on Sept. 26, 1995, even though a month earlier Mr. Eisner had offered Mr. Ovitz the job, approved the terms of his employment agreement, notified the media, held a lunch and engaged him in Disney projects.  … [H]e could not recall anyone's asking for an independent evaluation.  ‘There was a substantive discussion; there were questions asked,’ Mr. Mitchell said, adding he was one of those who asked why Mr. Ovitz was being given three million options. Two members of the compensation committee explained that the options were necessary to induce Mr. Ovitz to leave the company he founded, Creative Artists Agency, where he was said to earn up to $25 million a year.  At Disney, his annual compensation was to be $1 million a year plus a discretionary bonus of up to $10 million.  Mr. Mitchell said the board never asked for a separate investigation of Mr. Ovitz's earnings at the agency." (NYT, 11/24/04, "Chairman Tells of Shared Authority on Ovitz")  "The committee did not see … an analysis of the contract, the exercise price on the options, a spreadsheet indicating what it might cost Disney to make good on the non-fault termination, or anything to indicate what comparable executives in comparable jobs were being paid.  Instead, the committee members approved Ovitz’s contract 'subject to such reasonable further negotiations within the framework of the terms and conditions described' as Eisner might approve. …Unfortunately, among the trifling details left unresolved in Ovitz’s contract and to be negotiated subject to Eisner’s approval was the circumstance that might give rise to a non-fault termination. What Eisner and Ovitz negotiated between them turned out to be a substantial departure from what had been summarized for the compensation committee."  (Corporate Board Member, November/December 2004, "The Ghost of Michael Ovitz Still Haunts the Disney Board")  Are these the foot prints of "a hands-on" kind of guy?

        "(Richard A.) Nunis said that prior to Ovitz's ouster, he and other board members weren't briefed about the reasons Eisner decided to grant Ovitz a 'non-fault termination' that allowed him to receive the severance.  He also acknowledged that he and his colleagues didn't know specifically how much Ovitz might be entitled to under the contract."  (Bloomberg, 11/29/04, "Disney's Nunis Says He Backed Eisner on Ovitz Firing")  "Richard A. Nunis, the ex-chairman of Disney's parks and resorts and a former Disney director, said he told chief executive Michael Eisner that he fully supported the decision to fire Ovitz in a phone conversation a few days before it was announced publicly in mid-December 1996.  Nunis said that phone conversation was the first time Eisner told him that Ovitz was being terminated. ... Nunis said he was pleased to learn from Eisner in the summer of 1995 that Disney planned to hire Ovitz as it president.  Eisner telephoned him a few days before the hiring was announced publicly, Nunis said. ... Nunis said he believed it was the responsibility of Disney's compensation committee to approve Ovitz's pay package and then report those results to the full board."  (AP, 11/29/04, "Ex-Disney Director Testifies on Ovitz")  It seems that Eisner used the divide and conquer technique to control the BOD.   Evidently, Nunis did not understand Eisner's fait accompli style of corporate governance or his own fiduciary duty to Shareholders and got out his rubber stamp.

        A written legal opinion and some objective legal advice might have saved Shareholders of Disney at least $140 million.  "Sanford M. Litvack, Disney's former chief of corporate operations and chief legal officer, said … Mr. Ovitz's contract only allowed him to be fired for cause if he committed gross negligence or malfeasance.  … 'He was guilty of not being able to do the job.' … Mr. Litvack said he didn’t do any legal research on the issue….  Mr. Litvack said that he discussed the matter with in-house Disney lawyers and outside counsel, but never asked for a formal written opinion on the matter."  (WSJ, 12/1/04, "Disney Ex-Officer Says Ovitz Couldn’t Be Fired 'For Cause'")  According to Black Law Dictionary, "gross negligence," unless contractually defined, is, in part, “The intentional failure to perform a manifest duty in reckless disregard of the consequences as affecting the life or property of another.”  Disney could have hired a legal maven to write a letter to Ovitz: (1) informing him as to his contractual obligations to Disney and industry standards of performance, that he was “not being able to do the job” and his severe negative impact on Disney; (2) suggesting means by which to cure his "inability," e.g., go to charm school; and, (3) warning that Disney would consider continued failure to cure "not being able to do the job" as "gross negligence."  Where was the BOD in protecting at least $140 million of Shareholder assets?  "After reviewing Mr. Ovitz's contract, which did not define what conduct would amount to gross negligence and malfeasance, Mr. Litvack said, he concluded that the complaints against Mr. Ovitz did not rise to the level of wrongdoing needed to deny him the severance. … Mr. Litvack said he had consulted other lawyers within Disney's legal department on the termination question, but he had not asked any lawyer outside the company to conduct a formal review or examine employment-law cases to reaffirm his opinion. … Mr. Litvack said he had talked to Morton A. Pierce, a partner at the New York law firm Dewey Ballantine, about Mr. Ovitz's termination.  He said he had used Mr. Pierce as a sounding board to 'bounce things off' about legal issues involving Disney.  The defense produced Mr. Pierce's records, which show that he billed Disney for 24 hours of work related to Mr. Ovitz's firing."  (Bloomberg, 12/1/04, "Ex-Disney Lawyer Defends Ovitz Payment")  Did Litvack have a hand in drafting the Ovitz’s employment contract where key terms were not defined?  It appears that "Pierce’s records" evidence only that Disney was billed for "24 hours of work" vis-à-vis what Pierce allegedly did or advised.  However, Litvack "had not asked any lawyer outside the company to conduct a formal review or examine employment-law cases to reaffirm his opinion."  Did Disney ask for a legal audit of the charges?  Was  "The Keystone Cops" a Disney production?

        Disney seems to have hedged its bets with its legal strategy.  If the evidence reveals that the BOD was asleep at the wheel and  that Ovitz's hiring and firing was presented to the BOD by Eisner as a fait accompli, Directors may, now, claim that Eisner had authority to hire and fire without BOD consent.  "Sidney Poitier ... serve(d) for nine years as a Walt Disney Co. director. ... Poitier ... said he believed it was within Eisner's purview as chief executive to fire Ovitz without board approval." (LAT, 12/8/04, "Actor's Life in Spotlight in Disney's Ovitz Trial")  Did he suppose that the BOD dealt with issues involving Ovitz's hiring and firing as the BOD had nothing better to do?  What else did he believe was "within Eisner's purview ... without board approval"?

        "Yes, the $140 million severance package was 'breathtaking.' But no, it did not constitute an outright breach of duty by Disney's board of directors, a judge in Delaware ruled today.  …. The lawsuit has highlighted just how much responsibility shareholders want corporate directors to assume. … By exonerating the directors, the decision suggests some limits to the liability, and vulnerability, of corporate boards for bad management decisions.  … ‘They must act in good faith to make informed decisions on behalf of the shareholders, untainted by self-interest,’ he (Judge Chandler) added. …  A court should judge directors on their intentions, not on their results. That kind of judgment should rest with the market: shareholders can sell their stock, customers can go elsewhere. Otherwise, directors may make all their decisions with an eye toward minimizing risk. … 'Are there aspects of Ovitz's hiring that reflect the absence of ideal corporate governance?' he wrote. 'Certainly, and I hope that this case will serve to inform stockholders, directors and officers of how the company's fiduciaries underperformed.'" (NYT, 8/9/05, "Judge Rules for Walt Disney Directors in Ovitz Case")  "Shareholders can sell their stock," but not a mention that Shareholders should have a viable means to replace Directors through the proxy process.  Now that Shareholders have been informed that the BOD "underperformed," how can they be held accountable for their "bad management."  

        Ironically, another Chancery court judge, in denying Roy E. Disney’s request to publicly disclose documents that he obtained pursuant to a Shareholder’s inspection rights, recently stated, "There are other avenues for bringing directors to account for their mismanagement, most notably by contesting elections and by instituting derivative litigation." (Roy E. Disney v. The Walter Disney Company, Delaware Chancery Court, Case No. 380 2004, Opinion on Remand 6/20/05, Page 13)   In the real world, those "avenues" are currently insurmountably barricaded.

        "A trial court judge erred in ruling that Walt Disney Co. directors did not violate their fiduciary duties in the hiring and firing of former Hollywood superagent Michael Ovitz, an attorney for Disney shareholders told the state Supreme Court on Wednesday. Attorney Steven Schulman argued that Chancellor William Chandler III … Chandler imposed an unfair burden of proof on the plaintiffs in ruling that they failed to rebut the presumptions afforded corporate directors under the business judgment rule, Schulman said.  Schulman argued that the plaintiffs had overcome that presumption by establishing that Disney directors had acted with 'gross negligence' in not scrutinizing Ovitz's employment and no-fault termination agreements, but that Chandler improperly required the plaintiffs to prove by a preponderance of evidence that the directors had acted in 'bad faith' or an 'absence of due care.' Chandler also erred in absolving the Disney directors of liability based on their individual actions rather than collective action, and wrongly concluded that former Disney CEO Michael Eisner had the authority to hire and terminate his longtime friend without the board's approval, the plaintiffs argued.  'The question is, in this case, did the board have a duty to act?' said Schulman, adding that Chandler's conclusion that the business judgment rule applied to Eisner and other corporate officers, not just Disney's directors, had no basis in Delaware law. (AP, 1/26/06, "Judge erred, attorney says in Disney appeal")  "[C]omments prompted questions from the bench. Chief Justice Myron T. Steele asked 'should we ignore the rule of law' no matter how 'careful the fact-finding?' Justice Henry duPont Ridgely asked whether the directors 'could have been a little tougher in negotiations.' And Justice Jack B. Jacobs questioned the failure of the Disney compensation committee to fully inform the board about the consequences of a nonfault termination of Mr. Ovitz." (NYT, 1/26/06, "Disney Shareholders Ask Court to Reverse Ovitz Pay Decision")


        "You may not know Frederic W. Cook, but if you are a shareholder or employee who has watched executive pay rocket in recent years, you are likely to be acquainted with his work. … In corporate boardrooms across America, Cook & Company is renowned and relied upon when pay is in play. … Mr. Cook’s willingness to attach his formidable name to the Business Roundtable’s study exonerating corporate compensation practices suggests that he is friend, not foe, to executives on the receiving end of lottery-sized payouts.  … The business is very profitable, but analysts say that large firms often use pay consulting as a loss leader so they can snare more lucrative consulting contracts. Any consultant that pushes back on executive pay packages runs the risk of putting other consulting contracts at risk. … In that context, some consultants say, the new S.E.C. disclosure rules would have been more robust if, in addition to mandating disclosure of the consulting firm’s identity, they also required a rundown of other services a firm provides to each of its clients. But they do not. Pressure to do more business with a compensation client, some consultants say, has given advisers an incentive to push the boundaries of executive pay practices. … [I]n testimony before Congress last year on the subject of executive compensation, Mr. Cook argued that a bill to try to rein in pay — the Protection Against Executive Compensation Abuse Act — was undesirable. Mr. Cook used most of his testimony to criticize news-media reports on executive pay." (NYT, 10/15/06, "Corporate America’s Pay Pal")  Does anyone believe that, without this article, BODs might never have realized the apparent conflict-of-interest in allowing CEOs to hire consultants to opine to the BOD upon the CEO's salary levels?


        "Chief executives of three financial companies who received outsize pay packages even as their shareholders lost billions in the spreading credit crisis are scheduled to testify before Congress on Friday.... After combing through thousands of documents, members of the House Oversight and Government Reform Committee, led by Henry A. Waxman, Democrat of California, will pose pay questions to Angelo Mozilo, the head of Countrywide Financial.... Members of the companies' boards will also testify about practices they used to devise the executives' pay and exit packages. Documents uncovered by the committee's investigation included minutes of board meetings and internal e-mail messages discussing pay practices. Among them were documents that showed Countrywide seeking out a second opinion after a compensation consultant hired by its board said Mr. Mozilo's compensation was inflated.  The second consultant, John England at Towers Perrin, appeared to serve as 'Mr. Mozilo's personal adviser, with the goal of achieving "maximum opportunity" for him,' the committee's memo said. Towers Perrin created a more lucrative package for Mr. Mozilo than the previous consultant had recommended.... Joseph P. Conway, a spokesman for Towers Perrin said, in a statement ... that Countrywide's board made the final determination on Mr. Mozilo’s pay.  ... Last December the committee heard testimony about the potential for conflicts of interest among compensation consultants that are hired by company boards even as they receive lucrative contracts from the executives whose pay they help design. ... 'The way these severance packages are constructed, the executive can't lose,' said James Reda, an independent compensation consultant in New York City . 'That has to change. There has to be more risk involved.' ... Later that month, after being invited to testify before the oversight committee, Mr. Mozilo agreed to give up $37.5 million in severance pay, consulting fees and perquisites such as use of the company jet."  (NYT, 3/7/08, "Panel to Review Payouts Given by Troubled Firms")  Who paid for the second consultant?  Was the Towers Perrin informed that there was a first consultant and the first consultant's recommendations?  Did the BOD ever question why a second consultant was necessary?  Did the BOD compare the recommendations and the bases for each?  "The report says two compensation consultants hired in recent years urged the board to cut back on certain aspects of Mr. Mozilo's compensation. The first was pay consulting firm Pearl Meyer & Partners Inc., which advised Countrywide in 2004 when it was discussing an extension of Mr. Mozilo's contract. ... A second consultant, Exequity LLP, in 2006 recommended reductions in Mr. Mozilo's compensation.... After the board's compensation committee proposed making those cuts ... Countrywide management hired another consulting firm, Towers Perrin, to review the board's proposal. Though the firm was being paid by Countrywide, Mr. Mozilo regarded the Towers Perrin representative, John England, as his own adviser, emails reviewed by the committee staff suggest. 'The board made a number of revisions to accommodate Mr. Mozilo and Mr. England ,' the report says. Among other things, the board put larger companies into the peer group used to gauge Mr. Mozilo's pay...." (WSJ, 3/7/08, "House Report Says Countrywide's Mozilo  Resisted Pay Cuts")  Did the BOD wonder about the independence of a consultant hired by "management"?  


        "Corporate executives play a critical role in advising directors and shareholders on the merits of taking the companies they run private.  Yet these same managers stand to make so much personally from participating in leveraged buyouts that it's difficult to see how they can offer objective advice.  Private-equity firms often shower executives with incentives to stay and either bring the company back to the public markets or sell it. To shareholders, this process is mostly opaque.  Once a company goes private, there's no duty to disclose all of the goodies being lavished on managers who stuck around. Only if a company later goes public does this come to light. That means investors must wait to assess the inducements that may have been dangled in front of executives who participated in many recent giant leveraged buyouts. ... These potential conflicts aren't always apparent.  As the urge to go private reaches a frenzy, shareholders should scrutinize the incentives managers may reap by cozying up to private-equity bosses." (WSJ, 11/18/06, "On Going Private: Investors Beware --- Same Officials Advising Holders on Merits of LBO May Stand to Profit Big")  What goodies are bestowed upon the Directors to bless the transaction?  A Latino description might be applicable --- "Vendidos!"


        Some Directors may have immaculate pedigrees, know their social graces, graduate from well-known institutions of higher learning, become members of the most prestigious/elite organizations, gain riches beyond belief, but are total blind to conflicts of interest and lack common sense. "In April 2001, directors of utility FPL Group Inc. faced a sticky problem. A few months earlier, they'd awarded top executives $62 million in bonuses linked to a merger.... Now the deal had fallen apart and shareholders were clamoring to get the money back. ... After three years and millions in legal bills, executives returned $9 million, based largely on a technicality. Insurers paid another $12.5 million. The FPL saga is an object lesson in why companies rarely recoup money paid to executives for results they didn't actually achieve. Although the concept seems simple, at least from an ethical point of view, so-called 'clawbacks' of executive pay are in practice disruptive, divisive and difficult to pull off. In addition to a murky legal environment, the process is complicated by compensation contracts and insurance provisions. Most boards don't try recovering the money. Those that do often get mired in years of litigation. ... FPL's clawback tale began in December 2000 when shareholders approved the company's $8 billion merger with Entergy Corp. The approval triggered payment of $92 million in cash bonuses to nearly 700 managers. Like many companies, Juno Beach, Fla.-based FPL, the parent of Florida Power & Light Co., had a 'change of control' provision in its compensation plan, designed to retain top talent during a merger or acquisition. FPL's provision was unusually liberal. It took effect even if FPL shareholders ended up owning a significant majority of the merged company. FPL also required the payments to be made when shareholders approved a deal, rather than waiting for it to be completed. Two-thirds of the money went to FPL's top eight officers. The chairman and CEO at the time, James L. Broadhead, received the biggest chunk -- $22.6 million. ...  In April 2001, the two companies called off the deal. Former FPL director Marshall Criser says it was only after the deal collapsed that he realized the merger bonuses had already been paid. Mr. Criser, a lawyer, says he expected the board to ask Mr. Broadhead and others to return the money.   ... Some directors upset about the payments felt they had no grounds to demand repayment, says Willard Dover, a lawyer and former FPL director. Mr. Dover says some directors also feared hurting relations with Mr. Broadhead and other officers, given the close ties between the executives and the board. Mr. Dover himself used to hunt with an FPL executive. At least three independent directors were friends of Mr. Broadhead.... Mr. Broadhead and FPL's general counsel, who also received the bonus, asserted publicly and to directors that the payments were justified by language in the compensation plans. ... In May 2001, they (FPL directors) formed a committee to review the payments. Directors relied heavily on advice from the company's management. To staff the committee, Mr. Broadhead recommended Mr. Dover and two other directors, and the board agreed. The committee also hired a law firm recommended by FPL's general counsel. After eight months of work, the committee replaced the law firm, citing an appearance of a conflict of interest. In court documents, the directors said they were unaware that the firm, Steel Hector & Davis, had earlier had the job of reviewing and approving the controversial compensation plan. After 16 months of study, the board decided in September 2002 not to pursue repayment of the bonuses. ... Meanwhile, the judge hearing the shareholder suits ruled against the company in a key preliminary ruling. In January 2004, Florida District Judge Alan Gold ... noted that the board's committee had been hand-picked by Mr. Broadhead, and that two of the three members had initially approved the awards as part of the compensation committee. The judge also questioned the independence of FPL's first set of lawyers. The ruling prompted FPL's board and executives to settle the shareholder suit in late 2004. Mr. Broadhead and other executives agreed to repay $22.25 million of their $62 million. Of that, the executives paid $9.75 million according to court documents; insurers covered the rest. ... [T]he long drama prompted changes. In a series of amendments starting in 2001, FPL's board revised the change-of-control provision to take effect only after a merger is completed. It cut potential bonuses in half and made it harder to trigger such a payment." (WSJ, 11/20/06, "Check, Please ---Companies Discover It's Hard To Reclaim Pay From Executives --- Even in Case of Malfeasance, 'Clawbacks' Are Divisive And the Rules Murky ---The Merger That Never Was")  If this is an "object lesson," Shareholders are in deep trouble.  Merger bonus incentives induce the urge-to-merge and result in conflicts of interest.


        Also, please see "'Fairness Opinions' Are Unfair," below.

        "[F]ew management actions have done as good a job of destroying value as have mergers and acquisitions. Some work out fine, but many do not. ... So why are public companies willing to pay more? An answer may come from the Journal of Finance article, written by Jarrad Harford of the University of Washington and Kai Li of the University of British Columbia . They found that corporate managers are often richer after a bad merger than they were before. ... Among mergers that left shareholders worse off than before, the managers emerged wealthier for the experience in three-quarters of the deals. ...  Pay consultants advising boards on pay for chief executives typically start by calculating the compensation at comparable companies.  A big merger can catapult a company into a bigger size category, making the old executive-compensation package appear to be very low compared with the new set of comparable companies.  So the bosses get big raises long before it is clear whether the merger is going to work out well. ... [T]he clear advantages to management of mergers -- even if they do not help the shareholders -- mean that the board should be involved in merger discussions from the beginning. ... [S]ome clever consultant will discover this paper and conclude that the answer is clear: Give management 20 percent of the company to assure they will be adequately motivated to keep the interests of shareholders in mind. (NYT, 4/20/07, "Owners Lose As Bosses Win In Bad Mergers ")  This absolutely shocking --- some CEOs are no better than rip-off artists and some consultants blindly crunch numbers, while BODs act like ostriches.  Truly shocking!


                5.    No Shame


        "[D]irectors are up for election to the Xerox board…  Three of them, brushed by the company's accounting scandal during the late 1990's, should spare themselves the embarrassment and back down.  Xerox … settled a huge and ugly civil accounting fraud case last year…. Xerox improperly recognized equipment sales of $3 billion, regulators concluded, 'to polish its reputation on Wall Street and boost the company's stock price.' … [T]he three members of the audit committee who were charged with overseeing the company's accounting during the years the misstatements were made remain on the board.  They are Hilmar Kopper, former chief executive of Deutsche Bank and a Xerox director since 1991; N. J. Nicholas Jr., a director since 1987 and a former president of Time Warner; and John E. Pepper, former chief executive of Procter & Gamble and vice president for finance and administration at Yale University. Mr. Pepper, a Xerox director since 1990, is the audit committee's chairman. … Not only did these people miss what regulators called a $3 billion accounting fraud, they were all on the audit committee in 2001 when it fired KPMG, its accounting firm at the time, after KPMG raised red flags about Xerox's books. …  The fact that these men have agreed to stand for re-election after such a dismal performance is yet another example of people in positions of power refusing to take responsibility for anything. … Time for the shareholders to take charge.  All three men are up for election.  All three should get the boot." (NYT, 5/16/04, "Don't They Know It's Time to Go?")  Those three Directors were re-nominated by their fellow Directors under current rules and regulations.  What does the New York Times propose as the means by which Shareholder "take charge" and give the errant Directors "the boot"?


        "Mercury Interactive Corp. … said three of its top executives (Chief Executive Amnon Landan, Chief Financial Officer Douglas Smith and General Counsel Susan Skaer) resigned after a company investigation found that they had manipulated the value of stock options for six years.  Its shares plunged 27%.  …The company also said that it had named Giora Yaron chairman…. The committee (of directors formed in June to investigate the options, after the SEC began an inquiry) also determined that three board members — Igal Kohavi, Yair Shamir and Yaron — should have questioned whether six option grants the board unanimously approved were properly dated.  Those members should not have relied on management to give them proper documentation for the grants…." (Bloomberg News, 11/3/05, “Executives at Mercury Interactive Step Down")  27% of Shareholder value up in smoke, but no mention as to whether the errant Directors will be held accountable and, if so, when and in what manner.  However, we do know that, after receiving criticism from his fellow Directors, but before all that smoke cleared, Yaron was promoted.  Go, figure!


        ''Shareholders are too removed from the boardrooms of the companies they own, and what happened at Enron is a fine reminder of why they should agitate for power in director elections. …. But while being on the bridge during such a shipwreck would be a career-ender for most, directors are different from you and me. Even those involved in notorious corporate debacles can still find a warm welcome in the occasional boardroom. … The Securities and Exchange Commission tries to bar directors that it feels are unfit to serve because they have been involved in securities law violations. … A spokesman for the commission said that it does not keep records of how many of the requests were granted by the courts. The S.E.C. has sought bars for Enron officers, but not its directors. Late last year, the S.E.C. notified three directors and audit committee members at Hollinger International, saying that they may be sued for their failure to spot fraud…. Two of them, Richard R. Burt, a former United States ambassador to Germany and former national security correspondent for The New York Times, and Marie-Josee Kravis, a senior fellow at the Hudson Institute, a conservative research organization, are directors at other public companies. … When problems erupt, it is nigh to impossible, of course, for shareholders of public companies to tell whether their directors were asleep at the switch or being actively misled. Some directors, however, manage to hit the trifecta by serving on boards of several companies that experience problems. …. Companies don't always volunteer that their directors were on the scene of a corporate governance mess elsewhere. … [R]eforms are not likely to come, alas, unless more shareholders yell about their exclusion from boardroom elections. Proxy season is upon us. For directors who put their shareholders second, withhold should be the word.''  (NYT, 1/29/06, ''Sticky Scandals, Teflon Directors'')  After Shareholders have "agitated" and/or "yelled" and/or "withheld," but nothing really changes, what more could Shareholders do?


        Some Director may be awake at the wheel, but they are at the wrong wheel.  Could this be another means by which CEOs control BODs?  "By 'studying a board's membership, structure and relevance to the core business, you can divine a great deal about the company as a whole' says BI publisher and business commentator Ralph D. Ward. As an example, the board of beleaguered auto giant General Motors at first glance checks off all the boxes for good governance. It has strong committees, very impressive board resumes (directors include Merrill Lynch CEO Stanley O'Neal and ex-Ernst & Young CEO Philip Laskaway), and all independent members save for CEO/Chair Rick Wagoner. But closer analysis shows 'some dry rot in the boardroom.'  Half of the GM board's directors have 'retired, former or emeritus in their titles.' Further, the directors may be blue-chip corporate statesmen, but 'none seem to have any experience actually making or marketing cars.' Ward notes that too many corporations have boards with 'no seeming relationship to the company's needs.'" (BoardroomINSIDER, 11/05, "How Smart Analysts Read The Boardroom 'Tea Leaves'")  Has anyone else wondered what industry specific knowledge qualified Madeline Albright to serve on the BOD of the NYSE?


        "The mere mention of 'Chainsaw' Al Dunlap sends shudders among corporate directors. ... With the benefit of a decade's hindsight, Charles Thayer -- one of the board members who hired Dunlap -- recently talked about lessons learned at a Florida chapter meeting of the National Association of Corporate Directors. ... But in 1994, Sunbeam needed 'dramatic action,' which led to the hiring of Dunlap, a turnaround specialist who earned his 'Chainsaw' nickname from deep cuts at troubled companies. Thayer, who was on Sunbeam's board from 1990 to 1997, says there are lessons about CEO succession that can be learned from Sunbeam. Though he backed Dunlap to become CEO, Thayer says they had different philosophies about running the business -- one reason Thayer left Sunbeam as Dunlap came on board. Dunlap's mentality was to fix it and sell it, not to rebuild the company. The flaw, Thayer said, is 'you've only got one exit strategy.' ... Dunlap, fresh from his 'turnaround' at Scott Paper, was hired to lead Sunbeam in 1996.  'We managed to get the most notorious turnaround artist in the country,' Thayer said.  Dunlap, who detailed his strategy in his book Mean Business, had become a Wall Street sensation.  At Scott Paper, he pumped the stock by chopping thousands of jobs and selling off assets. ... He tried the same formula at Sunbeam. ...  The biggest lesson?  Be careful about going for the quick fix.  As Sunbeam shows, the price for a community, employees and even board members can be costly." (Sun-Sentinel, 12/14/06, "Looking for a new boss? Don't do what Sunbeam did with 'Chainsaw Al'")  That's great!  The Directors knowingly hired someone with a "different philosophy" and abandoned ship.  They could have hired "Ming the Merciless"!


            "It is easy to catalog the ways Bob Nardelli failed Home Depot's shareholders. But the home-improvement giant's directors also botched things by abetting his poor stewardship. ... Not only did the directors twiddle their thumbs for seven years as Mr. Nardelli destroyed value ... but as thanks for this whopping underperformance, directors have showered him with a $210 million payoff.  Sure, some of this is deferred compensation, but it still amounts to one of the greatest payments for failure ever. ... Two directors have the most to answer for. Ken Langone, who runs the board's governance committee, has a poor track record for reining in greedy bosses. He was head of the New York Stock Exchange's compensation committee that awarded Dick Grasso much of his controversial pay. Mr. Langone declined to comment. Second is Bonnie Hill, who runs Home Depot's compensation committee. She sits on five public company boards, is active in numerous civic organizations and runs a company with her husband. She can argue that her attendance record is stellar and that there are no inherent conflicts in her multiple duties. But can she really stay on top of all these jobs? Mr. Nardelli's departure is good news for investors. But, unless the other directors who supported his regime can come up with a good defense, they should go, too." (WSJ, 1/4/07, "Nardelli's Failures Are Many") Wrong!  Less-than-effective Directors do not simply recognize the errors of their ways and leave as they have no shame.  Disgruntled Shareholders need a low cost and efficient means by which to show them the door.


        "The chief executive of Moody's Corp. told directors last year that the credit-ratings firm's push to increase profitability posed a 'risk' to the quality of the ratings process....  The Moody's CEO, Raymond McDaniel, insisted to (Congressional) committee members Wednesday that Moody's ratings weren't influenced by the bottom line.  But company documents suggested that he and other Moody's executives were torn between maintaining the integrity of the ratings process and easing standards in an effort to win more business." (WSJ, 10/23/08, "Moody's CEO Warned Profit Push Posed a Risk to Quality of Ratings") CEOs fail to fess-up even when faced with documentary evidence, which contradicts their statements. Accountability?  Where were the adults at the party?  What was the BOD's response --- "go for it"?  Let the cover-up begin! 


        "When David M. Poppe (Sequoia Fund) sat down a little over a week ago to write a letter to his investors, he knew he was taking an unusual step. ... His letter ... implored his firm's investors to vote against the re-election of one of Goldman Sachs's most prominent board members, James A. Johnson, a former chief executive of Fannie Mae. Mr. Poppe characterized Mr. Johnson's tenure as being "at the center of several egregious corporate governance debacles." Mr. Johnson also is a board member of Target, and Mr. Poppe also advises his investors to vote against his re-election if he is nominated again. It may be surprising that the former chief of Fannie Mae still remains the director of a public company as prominent as Goldman Sachs and Target. But perhaps more surprising, many other executives who had tumultuous reigns are also board members of major public companies: Charles O. Prince III, the former chief executive of Citigroup, who resigned under pressure in 2007 amid huge write-downs at the bank, is a director of Xerox and Johnson & Johnson. E. Stanley O'Neal, the former chief executive of Merrill Lynch on whose watch the firm loaded up on subprime debt that almost bankrupted the company, is a director of the aluminum giant Alcoa. And a number of other prominent executives could soon be added to that head-scratching list. Eduardo Castro-Wright, a vice chairman at Wal-Mart Stores who oversaw the company's Mexico unit and was identified by a former executive there as being part of a bribery scandal that was recently uncovered by The New York Times, is a director at MetLife. ...Mr. Johnson stepped down in 1999 (from Fannie Mae), but there has long been a debate about whether he was responsible for creating the culture that led to Fannie Mae's failure. In fairness to Mr. Johnson, the vast majority of losses racked up by Fannie were the results of loans bought after he departed. Mr. Poppe also cited Mr. Johnson's board memberships at the UnitedHealth Group, in which the company's chief settled claims of backdating stock options, and KB Home, in which its chief was convicted of felony charges for backdating. ... [I]n both cases, Mr. Johnson was on the compensation committee. "What does that say?" he asked. He then recounted a famous line from Warren E. Buffett: '"I've been on 19 boards and they put me on one comp committee — and they regretted it. They're looking for cocker spaniels, not Dobermans."' ... Does an executive's failed history at one company automatically disqualify him from serving on the boards of others? (NYT, 4/23/12, "'Tainted,' but Still Serving on Corporate Boards") Gee folks, isn't America great --- no accountability! It is a place where business "friendships" counts more than competence. It's the home of the Dysfunctional Family Restaurant.


    6.    Failure to Understand or Use Financial Statement Analysis

        Are Directors too busy to read the publicly available securities filings and/or unable to understand the vague and ambiguous statements made on their behalf?  Sticking one's head in the sand may no longer be a viable defense.  Corporate Directors and prospective Directors, performing "due diligence" before accepting directorships, should become financial-statement literate.        With minimal training in financial statement analysis and use of publicly available information, Directors should be able to detect various financial shenanigans and financial distress years before the stocks of those companies plummet or the companies entered into Bankruptcy Court proceedings.  (See, e.g., Financial Statement Analysis.)  However, even armed with indications of questionable accounting, financial mismanagement and/or operational problems, BODs would probably continue to trust the contrary protestations of Management as opposed to believing their own eyes.


            "Citigroup Inc. ... appears to be getting started on a restructuring of its board. The banking giant said in a statement on its Web site that its board 'is actively seeking new directors' and is placing a 'particular emphasis on expertise in finance and investments.'  The board has been criticized by shareholders and, in private, by some Citigroup executives. They are frustrated with the board's failure to sound the alarm as the bank piled up risks in the years before the credit crunch hit, saddling Citigroup with more than $20 billion in losses since last summer. The board has few members with experience in financial services. Only two outside directors ... have any banking background. ... Robert E. Rubin, the former Treasury secretary who is chairman of Citigroup's executive committee, has been singled out for sharp attacks. Some investors and executives say Mr. Rubin ... deserves blame for Citigroup's larger appetite for risk-taking. He also has drawn fire for his eight-figure pay package.  Mr. Rubin ... has defended his role by noting that he isn't responsible for risk-management or trading functions. ...  Citigroup said it was disclosing the search in response to inquiries from shareholders about the expected departures of a number of directors."  (WSJ, 4/1/08, "Citi Seeks Finance-Savvy Directors")  Is Citigroup just now realizing the value of BOD members with "experience in financial services"?  "In his speech, Mr. Obama noted that there was no point trying to best Mr. McCain in matters of experience, that what counted was good judgment.  Very true.  How can one have the latter without the former is a question for the rest of us to consider."  (WSJ, 4/1/08, "Does Obama Understand Defeat?")

            "If shareholders were to rise up en masse, the tremors among financial firms would be intense. Most of the other big U.S. subprime players have board elections in the next few weeks. Some have already replaced chief executives or other top officials, in an effort to put troubles behind them. Could directors be next? ...  But even though shareholders in the U.S. could toss out lots of bank directors, don't look for that to happen. A union-led effort to trace culpability into the boardroom is running into skepticism from investment heavyweights. ... After the business scandals of 2001 and 2002, some corporate boards were remade top to bottom, so new management could make a fresh start. A prominent case was Tyco International, where all the directors quit soon after the 2002 ouster of CEO Dennis Kozlowski, who was later convicted of fraud.  But Morgan Stanley and its kind aren't Tyco. The financial sector's stumbles are mostly about managers' hubris, sloppy analysis and a poor awareness of what happens when bull markets end. Those are pretty standard failings on Wall Street -- and they're a long way short of systemic fraud. As the RiskMetrics analysts say in a credit-crunch report to be released next week: 'Investors don't appear to be interested in turning directors into scapegoats for credit-related problems.' Directors can spot some trouble early, but they can't protect against everything. Their main recourses are to ask tough questions, replace problem bosses and help build better safeguards, all of which are happening at the more-resilient banks. Kicking out legions of directors just means that a new generation of boardroom novices has to learn those lessons afresh.  Frustrated investors might be better served by asking how banks can build stronger boards in the future." (WSJ, 4/2/08, "Wall Street Housecleaning May Bypass Boardroom") Is blaming "credit-related problems" an excuse for BODs that were unable or unwilling to recognize the trend toward "managers' hurbris, sloppy analysis and a poor awareness of what happens when bull markets end"? BODs are in place to catch "pretty standard failings" as well as "systemic fraud."  Shareholders can ask, "How banks can build stronger banks in the future," until the cows come home, but that is futile without an efficient and low cost means to nominate Director candidates.

            "Citigroup's announcement on Monday that it plans to stress finance and investing know-how in filling upcoming openings on its board of directors could be the tip of an iceberg. ... Loading a board with financial people, even at a financial-services company, makes for a bad mix, according to (Milan) Moravec (chief executive officer of Moravec & Associates, a management consulting firm). 'You'll have a bunch of technical experts who are not really very good at communicating with one another or at bringing about the right levels of constructive conflict and differences of opinion,' he said. 'They'll be likely to make the same kinds of poor decisions that were made before.' Indeed, having too many finance experts could undermine one of a board's chief functions, which is to ask 'the dumb question,' according to Keith Hall, a former CFO of Lending Tree who now sits on three boards (public company, private company, and non-profit organization). Asking and answering such questions could have insulated companies from exposure to the subprime mortgage meltdown, he suggested. ... Hall told, 'If a board had an environment supportive of members asking dumb questions, they might have asked, "'What are all these alphabet soup-like things like CDOs?  How do they really work?'" If you had probed further, could it have been revealed whether there was proper documentation of the underlying instruments supporting these mortgages? Perhaps the most important dumb question would be, "'What were the facts behind these subprime loans?'"" A different point of view was offered by Ramon Weil, a professor of accounting in the University of Chicago's graduate business school who has done research on the roles of finance executives on corporate boards. He said Citigroup's strategy is appropriate because it's a financial services company. At a manufacturing company, say, someone whose expertise is largely in finance rather than in manufacturing might not have much to offer as a member of the general board. Theoretically such a person is needed for the audit committee, but Weil pointed to problems there as well. 'The most surprising thing in my research has been how many CFOs don't know diddly-squat about accounting,' he said. 'I'm suspect of CFOs on boards who have never been involved with accounting. They know about financial markets, earnings reports, borrowing, and dividend policy, but they tend not to be real helpful on audit committees about the kinds of accounting issues that have gotten so many companies in trouble.'" (, 4/4/08, "Are CFOs Fit for Outside Board Seats?") What were "the smart questions," if any, that the Citigroup's BOD asked? If a Director is only capable of asking "the dumb question," is he/she able to understand the answers? 


       "Nortel Networks Corp. … had a profit of $40 million, its first positive quarterly result in four years. …  But the profits turned out to be illusory. … [T]he company inaccurately employed an accounting maneuver to make it look profitable, when in fact it wasn't. …. [T]he alleged manipulation centered on the misuse of an accounting entry known as accrued liabilities.  Accrued liabilities derive from the charges companies often take for matters such as merger costs, write-downs and, in Nortel's case, contractual liabilities. … Some former employees and critics say board members, many of whom were former ambassadors and Canadian corporate leaders, should have spotted the accounting problems earlier."  (WSJ, 7/2/04, Reversing the Charges: Nortel Board Finds Accounting Tricks Behind '03 Profits; A Telecom Star Manipulated Its Reserves, Hid Losses, An Investigation Discovers; How to Empty the Cookie Jar")


        Corporate Directors and prospective Directors may not reasonably rely upon securities analysts to inform them of questionable accounting practices and/or financial distress.  "Howard M. Schilit, an accounting expert who runs the Center for Financial Research and Analysis, an independent research firm, scoffed at the excuse that analysts could not have detected problems at Enron. 'Everybody is saying, "they hid from us," he said, but beginning in March 2000, he added, there were a string of warning signs in Enron's public securities filings. The problem, Mr. Schilit said, is that analysts who question the value of a popular company are branded as controversial. 'If you want to move up the hierarchy of the Wall Street establishment, you don't rock the boat,' he said." (NYT, 2/28/02, "Wall St. Analysts Faulted on Enron")  "John C. Hueston, a well-regarded — and aggressive — prosecutor from Southern California … advocated charging Mr. Lay with making false statements….  He (Hueston) interviewed securities analysts, seeking to understand what Mr. Lay had conveyed to the marketplace. He was shocked to find that most of them had not bothered to look closely at Enron's securities filings and were taking Enron's statements 'virtually at face value.'" (NYT, 6/4/06, "The Enron Case That Almost Wasn't")


        "[W]hen it comes to earnings, the bottom line is important, but it is the quality of that number that really counts. So, rather than talk to management ... stick to the facts -- or, as the case may be, numbers. ... In the wake of the government's efforts to help clean up corporate America ... there is no shortage of red flags to be found. The underlying problems haven't changed, but ... as anybody who spends time poking around the underbelly of financial statements knows, just because something is disclosed doesn't mean it is right; it simply means the company has dropped more bread crumbs, which ... could come in handy for financial sleuths...." (WSJ, 4/7/07, "These Days, Detective Skills Are Key to Gauging a Stock")  


        "Indian regulators and police are trying to unravel how the chairman of Satyam Computer Services Ltd., who has admitted to falsifying corporate figures, may have managed for years to fool his top financial officer and the company's audit committee. ... Some corporate-governance experts have faulted Satyam's audit committee. Some contend it didn't have adequate expertise under U.S. Securities and Exchange Commission standards and that it appeared to miss clues of wrongdoing. ... As it is required to do, the committee reviewed Satyam's quarterly and annual financial statements as well as internal controls...." (WSJ, 1/14/09, "Satyam Probe Scrutinizes CFO, Audit Committee")  Those clues might have become apparent had the BOD utilized Financial Statement Analysis.  

        "'The proposed acquisitions have two complicated aspects -- unrelated diversification, and related party transactions,' said Krishna Palepu, a Satyam director and a Harvard Business School professor of corporate governance who participated in the meeting by phone conference.... Mr. Palepu, who also resigned from the board in December, said ... that he had fulfilled his responsibilities on the board fully and appropriately." (WSJ, 1/16/09, "Satyam Minutes Show Directors Raised Questions")  Did he?  Professor Palepu is the co-author of Business Analysis & Valuation --- Using Financial Statements, which has long been one our Recommended Readings.  Did he prepare or cause to be prepared an analysis of Satyam's financial statements based upon the techniques set forth in his book? If not, why not? If so, what did he learn and when did he learn it?


        "Groupon Inc, the online coupon company that floated just months ago in the strongest IPO in years, has had recurring accounting problems that critics say show a need for more financial sophistication on its board. ... Groupon has asked an external auditor to look into the causes of its internal control weakness and has said it will beef up its own finance staff. But corporate governance experts questioned the financial background of the Groupon board's audit committee, which is supposed to oversee both its auditor and the company's own accountants. ... Members of the audit committee declined comment.  Groupon already had been criticized by some analysts and investors for aggressive accounting before it went public in November. Under questioning by the U.S. Securities and Exchange Commission and accounting experts, Groupon changed its accounting practices twice before the initial public offering. ... 'Groupon needs a new audit committee with much more financial expertise,' said James Post, a management professor at Boston University. ... Groupon's audit committee is not lacking business experience. It includes heavy-hitters such as Howard Schultz, chief executive of Starbucks Corp. Its audit committee chairman, Ted Leonsis, is a former AOL executive and chief executive of Monumental Sports & Entertainment, owner of several professional sports teams. The third member, Kevin Efrusy, is an entrepreneur and founder of IronPlanet, an online market for heavy equipment. CEOs are a plus for audit committees because they have the stature to ask tough questions of a company's management and auditors, corporate governance experts said. But they can be overburdened in the role of audit committee chairman, one of the most demanding on a corporate board. Heading Groupon's audit committee is not Leonsis's only board duty. He is also on the technology committee of Alcatel-Lucent SA and the boards of Clearspring Technologies, American Express Co, Rosetta Stone Inc, NutriSystem Inc, Georgetown University and two charities, according to a bio on Monumental's website. ... Groupon's directors, including its audit committee, have been named as defendants in multiple lawsuits filed against the company since it disclosed its control weaknesses on March 30. Groupon's shares are down by more than a third from their IPO price of $20....Shoring up audit committees was a key goal of 2002's Sarbanes-Oxley accounting reform act, passed by Congress after accounting scandals at WorldCom and Enron. To make audit committees better financial watchdogs, the act required them to be independent from management and made clear they had the authority to hire their own accounting advisers. ...Originally limited to people with accounting or finance experience, the SEC changed the rules to include chief executives who had supervised finance or accounting staff. Groupon has said Leonsis meets the SEC's definition of a financial expert. Even so, Groupon would benefit from having at least one person on the audit committee with deeper finance experience, such as an accountant or chief financial officer, corporate governance experts said." (4/12/12, Reuters, "Analysis: Groupon Accounting Problems Put Spotlight on Board ") It is like one who feels he/she is fluent in a foreign language as he/she can ask the right questions with the right accent, but is utterly unable to understand the native speaker's response.


                7.    Failure to Understand Transaction


        "A bankruptcy-court examiner said Dynegy Inc.'s board breached its fiduciary duty with an asset reshuffling that benefited billionaire Carl Icahn and other shareholders at the expense of creditors. ... The restructuring, executed before Dynegy's subsidiary filed for bankruptcy protection in November, was a 'fraudulent transfer' that moved 'hundreds of millions of dollars away from Dynegy's creditors in favor of its stockholders,' said the examiner, Susheel Kirpalani, in a 173-page report. ... Mr. Kirpalani said that while some directors 'did not even understand' that movement of the assets would shield shareholders at creditors' expense, others did. Those included Mr. (Carl) Icahn's board representatives, Vincent Intrieri and Samuel Merksamer. ... Dynegy moved assets related to coal-powered plants from the subsidiary, Dynegy Holdings LLC, to the parent in September ahead of the subsidiary's bankruptcy filing. That left the subsidiary's bondholders that were owed roughly $4 billion without a claim on those assets. Dynegy Holdings is Dynegy Inc.'s main operating arm. Dynegy Inc. then put the holding company and related subsidiaries in bankruptcy court, a move that hurt bondholders [Dynegy Holdings LLC] of without affecting the parent's shareholders. Those shareholders include Mr. Icahn, with two seats on the company's board.... In his report, Mr. Kirpalani said Dynegy has several potential defenses against the 'fraudulent transfer' claims. Dynegy's transfer of the assets was made with an intent to 'hinder and delay—but not necessarily defraud' the company's creditors, he said. In addition, he suggested some on the Dynegy Inc. board weren't aware that complicated transactions ahead of the holding company's bankruptcy would prove problematic.  Some directors 'did not appreciate that what may be good for Dynegy's ultimate parent, Dynegy Inc. may not be good for Dynegy Inc.'s insolvent subsidiary, Dynegy Holdings,' Mr. Kirpalani said. 'In light of the conduct of all but one of the members of the board of Dynegy Inc. as of Sept. 1, 2011…any plan that provides for these individuals to continue as directors would not be consistent with the interests of creditors and with public policy,' Mr. Kirpalani said. The movement of the assets capped a series of complicated maneuvers that rearranged Dynegy's corporate structure last summer. ... Dynegy's restructuring efforts began in earnest in April 2011, when the company hired law firm White & Case LLP and investment bank Lazard Ltd. to advise on ways to reduce the company's heavy debt load. ... In the end, Mr. Kirpalani said he believed a 'key motivation' behind moving the coal-fired-plant assets was to lower the value of the holding company's bonds and force creditors to do a deal because they would fear not being repaid. The end result took hundreds of millions of dollars from creditors and sent the value to parent-company shareholders, Mr. Kirpalani said." (3/9/12, WSJ, "Dynegy Asset Shuffle Called 'Fraudulent'") The plan was not too complex for a reasonable intelligent/diligent Director to understand --- isolate and extinguish/diminish the subsidiary's bondholders' claims against only the subsidiary's current assets, while the parent (and its shareholders) walked with the subsidiary's former (previously transferred upstream) assets. What advice did White & Case LLP and Lazard Ltd. provide to the (numb-skull members of the) BOD? What did "one of the members of the board" do that the Trustee recommends his/her retention? How can one intend to hinder and delay, but not intend to defraud?

        "Dynegy said Friday its board had 'fully believed' that Dynegy Holdings LLC, the subsidiary that held the coal-powered plants that were transferred, was solvent when it made the transfer. Dynegy said the allegation that the transfer of assets was fraudulent is wrong and that, in fact, the company believed it was helping reduce the debt of the subsidiary with the transfer and an exchange offer. The company added that a third-party expert delivered a valuation for the power-plant assets..." (WSJ, 3/19/12, "Dynegy Disputes Examiner's Report on Transfer") It would be interesting to learn more about the "third-party expert," especially whether he/she was supposedly "independent."

        "The three directors who oversee risk at JPMorgan Chase & Co. include a museum head who sat on American International Group Inc.'s governance committee in 2008, the grandson of a billionaire and the chief executive officer of a company that makes flight controls and work boots.

What the risk committee of the biggest U.S. lender lacks, and what the five next largest competitors have, are directors who worked at a bank or as financial risk managers. The only member with any Wall Street experience, James Crown, hasn't been employed in the industry for more than 25 years.  ... The bank has been under siege since CEO Jamie Dimon said May 10 that the firm's chief investment office suffered a $2 billion loss trading credit derivatives. He later called it 'a Risk 101 mistake.' ... Crown, 58, who is president of Chicago-based Henry Crown & Co. and lead director of defense contractor General Dynamics Corp., sits on the risk committee with Ellen Futter and David Cote. Futter, 62, is president of the American Museum of Natural History in New York, and Cote, 59, is CEO of Honeywell International Inc.  The committee, which met seven times last year and hasn't changed its composition since 2008, approves the bank's risk- appetite policy and oversees the chief risk officer.... JPMorgan, with $1.13 trillion of deposits, is the only one of the six largest U.S. lenders that doesn't have a former banker, regulator or finance professor on its risk committee.  ... Futter, a former president of Barnard College in New York, joined the JPMorgan board in 1997. Her re-election this year was opposed by Washington-based investor group Change to Win and shareholder advocate Glass Lewis & Co. over her previous experience on the boards of AIG and Bristol-Myers Squibb Co.  Futter headed the audit committee of Bristol-Myers, a New York-based drugmaker, during an accounting scandal that began in 1999 and that the company settled for $300 million to avoid criminal prosecution. She also served on AIG's compliance and governance committees, resigning in July 2008 before the insurer took a $182.3 billion bailout from the U.S. government. ... Futter was criticized in newspapers and industry publications after she joined AIG's board for accepting a $36.5 million donation for the museum from a charity run by then-CEO Maurice 'Hank' Greenberg.  JPMorgan is a corporate sponsor of the museum and gave $1.5 million for an exhibit about water, according to the organization's 2008 annual report. Dimon's family foundation donated $25,000 in 2009, according to tax filings.  ... The board reviewed the bank's charitable donations and determined that "none of them create a material relationship" that would impede the independence or judgment of its directors, according to company disclosures. Futter has received personal loans from JPMorgan, according to the company's proxy statement, and was awarded $245,000 in cash and stock for her work on the board last year. The bank didn't disclose the amount of the loans. ... Crown, who heads the risk committee, helps manage his family's privately owned Chicago-based investment firm. His grandfather, Henry Crown, amassed a fortune in hotels, railroads and meatpacking and once owned a stake in the Empire State Building. ... The younger Crown, who worked at bond-trading firm Salomon Brothers Inc. for five years until 1985, was a member of the search committee that chose Dimon to head Bank One Corp., acquired by JPMorgan in 2004. Dimon and Crown's father, Lester, are overseers of the Harvard Business School Club of Chicago. ... Crown's risk-management experience comes from his directorships at General Dynamics and sausage maker Sara Lee Corp. and his position at his family's investment firm, according to bank filings. Crown, who was awarded $300,000 for his board work last year....

Cote, who joined JPMorgan's board in 2007, has been chairman and CEO of Morris Township, New Jersey-based Honeywell since 2002. ... Honeywell has received loans and financial advisory services from JPMorgan, according to securities filings. The bank said it purchased building safety, security equipment and maintenance services from Honeywell, all of which were considered immaterial. ... 'There's nothing about their professional track record, nothing about their personal experience that suggests that they would have known the right questions to ask the chief risk officer that would have eliminated any of the potential dangers involved in this trading strategy,' said (Richard) Clayton (III), whose group opposed Futter for re-election to the board this year."  (5/24/12, Bloomberg, "JPMorgan Gave Risk Oversight to Museum Head Who Sat on AIG Board") Dumb! Dumb! Dumb! Will anyone be held accountable? No! No! No! Interrelationships that tolerate such mind-numbing incompetence will eventually doom any business. Stay tuned.

         D.      "Certain Relationships and Related Transactions"

         Directors have their own way of obtaining public welfare assistance --- they take it from their public Shareholders.  Many Directors erroneously believe that they are immune to the temptations that are inherent with conflicts of interest and will rationalize (with the help of expensive legal talent) the supposed propriety of their acts.   Conflicts of interest are still conflicts of interest whether or not they are disclosed in obscure filings with the SEC.  Conflicts of interest are prevalent in the corporate world as there is very little, if anything, that Shareholders can do to prevent being represented by conflicted Directors.  Formal disclosure only serves to rub salt into Shareholders' financial wounds.


        Various SEC Rules require Companies to disclose what is euphemistically labeled "Certain Relationships and Related Transactions," i.e., conflicts of interest.  Companies usually require Directors to complete a questionnaire setting forth that information on an annual basis.  Sometimes, BODs determine that the information is not "material" and do not publicly reveal it.   


        "One issue worth examining: If companies are doing business with directors or their firms, and how much. An analysis of the 30 companies that make up the Dow Jones industrial average, for example, found that at least 22 had such dealings, known as related-party transactions, with directors or executives last year; another two said they might, but the dealings didn't meet disclosure thresholds. … Five years ago, only 18 companies reported at least one transaction. … Although companies routinely downplay the importance of these dealings, saying they don't affect the directors' independent judgment, some experts said they are not necessarily benign. … Traditionally, the concern comes when transactions occur with directors, with experts worrying that they will compromise their independent judgment. … For investors, assessing the effect of these dealings is difficult. They're not in the boardroom to see how directors interact and when they might be pulling their punches." (Chicago Tribune, 8/28/05, " Independence and the ties that bind")   "A study ... by independent research firm RateFinancials, Inc. shows that nearly 40% of Standard & Poor's 500 component companies have business arrangements with parties that have ties to the companies or their management." (WSJ, 12/3/04, "'Related-Party' Deals Abound at Companies: Firms Say Arrangements Are Vetted by Their Boards; Critics Express Concern") 


        "Irwin Russell, (Michael) Eisner's (then Disney CEO and Chairman of the Board) personal lawyer … also objected to the new boss (Michael Ovitz). Nevertheless, as chairman of the compensation committee, he wound up negotiating the terms of Ovitz's employment. … Negotiations with Ovitz … went on for six weeks or so.… His employment agreement was still not complete when the Disney compensation committee met on September 26, 1995, to vote on it.  The meeting lasted an hour, and the full board met after that. … They also spent some time discussing and finally agreeing to pay committee chairman Irwin Russell a $250,000 fee for negotiating the contract." (Corporate Board Member, November/December 2004, "The Ghost of Michael Ovitz Still Haunts the Disney Board")  Wait one cotton-picking minute!  Russell is Eisner's personal attorney and Eisner wants to hire Ovitz.  Russell is the Chairman of the Compensation Committee.  Russell is paid a Director's fees to Chair the Committee.  Russell is hired to negotiate with Ovitz.  Russell is paid $250,000 for 6 weeks of work.  (It would be interesting to review the Legal Representation Agreement with Russell, learn the date when it was signed, observe the associated billing time slips and research comparable rates of other attorneys in the Los Angeles area.)  Russell, the negotiator, presented a proposed "not complete" contract to Russell, Chairman of the Committee.  The Committee approved contract and, thus, the negotiation work of Russell, and recommended it to the full BOD for approval.  The BOD, on which both Russell and Eisner sat, approved the "not complete" contract and the fee payment of $250,000 to Russell.  How many masters can one Director serve?  Lack of true independence comes with a price --- usually paid by Shareholders!  "When asked about a potential conflict of interest in having Mr. Eisner's personal lawyer, Irwin Russell, negotiate Mr. Ovitz's contract and then later negotiate Mr. Eisner's contract, Mr. (George) Mitchell said there was no need because Mr. Russell was trustworthy." (NYT, 11/24/04, "Chairman Tells of Shared Authority on Ovitz")  Club Fed is populated with those who were once considered "trustworthy."

        "The Securities and Exchange Commission reached a settlement with the Walt Disney Company yesterday over the company's failure to disclose fully its relationships with board members.... The order cited instances of relatives of four directors working for Disney, with shareholders not being told.  For example, the wife of a director, John Bryson, started to work in 1999 for a company in which Disney had a 50 percent interest, at a salary of more than $1 million.  Her husband joined the Disney board in 2000 as an independent director....  [T]he children of three directors - Reveta Bowers, Stanley P. Gold and Raymond L. Watson - all worked at Disney, earning salaries that ranged from slightly more than $60,000 a year to more than $150,000. ... Disney paid Air Shamrock, an airline owned by Roy E. Disney, for Mr. Disney's travel while he was vice chairman of the board and an officer."  (NYT, 12/21/04, "Disney Settles S.E.C. Complaint on Directors")   Was Gold's kid not allowed to work for Shamrock as Shamrock had rules concerning nepotism?  Was it not safe for Disney to travel via public carrier?  Not to worry.  There is always a seemingly rational explanation when Directors (and their families) pig out at the corporate golden trough.  On the other hand, Eisner would probably see no problem by benefiting his Directors with Disney's money.


        "Board members and senior executives of Marsh & McLennan, the giant insurance broker that has been accused of cheating customers, put millions of dollars into a partnership that profited by buying companies from Marsh and investing in companies that work with Marsh. … [I]t is unusual for a company's directors, who represent the interests of shareholders, to invest in company-managed private funds alongside the executives they are supposed to supervise. … Experts on corporate governance have complained that Marsh's board … is extremely weak and has not taken leadership as the insurance broker's legal problems worsen. … Marsh & McLennan … has not disclosed which outside directors invested in it, or how much money they put up. … Marsh has also not disclosed the fund's returns or its costs. … The disclosures about Trident may only add to a perception that Marsh, which advertises itself as a trusted adviser for insurance buyers and mutual fund investors, has had conflicts. …  In an October 1999 partnership agreement, it said that Trident and Marsh might have both potential and actual conflicts. … The potential conflicts of interest fell into several categories. Because they had personal stakes in Trident and received fees for its success, Marsh executives stood to profit by providing low estimates or otherwise understating matters if Trident bought companies from Marsh.  In essence, the executives would be selling Marsh's property to themselves.  In addition, Marsh itself might be able to make money on its Trident stake at the expense of its clients by encouraging those clients to buy insurance from companies in which Trident had invested. …  Despite the concerns about possible conflicts, Trident and Marsh conducted several deals together."  (NYT, 10/21/04, "Broker's Directors Used Partnerships for Private Profits")


        "Sleazy deals ... --- Krispy Kreme, what happened!? ... A more troubling transaction is the 2003 deal in which the chain bought back six stores ... that were partly owned by Krispy Kreme's former chairman and current director, Joseph McAleer.  It paid a total of $67 million, or $11 million per store --- which is more than three times what it paid for many other shops."  (Fortune, 11/1/04, "Krispy Kreme Is In The Hole --- Again")


        "The Best Buy Company said yesterday that a director, Mark C. Thompson, resigned from its board on May 4, citing a conflict of interest.  Mr. Thompson had a personal-service agreement with Ernst & Young, the company's auditor, during part of the time he served as a director….  Mr. Thompson, a former senior vice president of the Charles Schwab Corporation, served on the audit committee of Best Buy's board from March 2000 to August 2003.  He was paid $377,500 by Ernst & Young from December 2000 to April 2004…. Mr. Thompson did not disclose his work for Ernst & Young until the day he resigned, according to Best Buy's report."  (Bloomberg News, 5/15/04, "Best Buy Director Quits")  Is this beyond dumb?  At the least, Best Buy should take legal action for the return of all accounting fees paid to Ernst & Young and director fees paid to Thompson during the relevant period. Were the Directors ever asked to complete a questionnaire that should have revealed such a blatant conflict of interest?  "[T]hompson, was sitting on the boards of the three companies (Korn/Ferry International, Best Buy Co., TeleTech Holdings Inc.) while working (consulting) for Ernst & Young. … Mr. Thompson was one of four outside directors comprising Korn/Ferry's nominating and governance committee when he decided against standing for board re-election last fall. … Korn/Ferry separately paid a firm chaired by Mr. Thompson, Network Public Broadcast International, Saratoga, Calif., $234,000 between late 2000 and mid-2002….  Before this week, Korn/Ferry hadn't publicly disclosed the payments received by Mr. Thompson, who joined its board in 2000, on the grounds they weren't material. …  'We didn't know anything' about Ernst's payments to Mr. Thompson's firm until Best Buy's filing last month, he (Don Spetner, Korn/Ferry senior vice president) added."  (WSJ, 6/8/04, "Ernst & Young Faces Informal SEC Inquiry Of Consultant's Pay")  Was Thompson an honor student at the Lay & Ebbers School of Ethics?  Of course, none of the payments had any "material" impact on anyone's decision-making process.  Also, the disclosures did not have a "material" impact on Thompson's decisions not to run for re-election to the three BODs.  We will next be told that there's some choice oceanfront property still available for sale in Arizona.

        "Ernst & Young LLP agreed to pay $2.8 million to settle Securities and Exchange Commission allegations that it compromised its independence by engaging in separate business dealings with a director of three of its client companies. The New York-based accounting firm was also censured. It settled the SEC's administrative proceeding without admitting or denying the allegations. The SEC said Ernst & Young paid $377,500 between October 2002 and May 2004 to Mark C. Thompson for hosting interviews with business leaders that were packaged into CDs and audio books. At the time, Mr. Thompson was serving on the boards of three companies that were E&Y clients and voted to retain E&Y as the companies' auditor, according to the SEC. Mr. Thompson also sat on one company's audit committee, which is responsible for hiring, firing and overseeing outside auditors. ... E&Y spokesman ... said in a statement that the firm has revised its independence policies and procedures. ... Mr. Thompson, without admitting or denying the SEC's claims, agreed to return $123,917 of his directors' fees, including interest...." (8/7/08, WSJ, "E&Y Settles SEC Case In $2.8 Million Pact")  What about the $377,500 that E&Y paid him?  Suspension of ethics pays?  Well, perhaps, Thompson had a few attorneys fees.  What policy changes did E&Y make?

        "Two trustees for one of the world's largest retirement systems, TIAA-CREF, have resigned over their relationship with a business venture they formed with TIAA-CREF's independent auditor Ernst & Young.… The two trustees, Professor Steven A. Ross of the College Retirement Equities Fund (CREF) and William H. Waltrip of the Teachers Insurance and Annuity Association of America (TIAA), resigned from their respective boards effective Nov. 30, 2004.  In August of 2003 Ernst entered into an agreement with a company owned by the two trustees, among others, and a majority of which was owned by Ross.  The venture was created to develop intellectual property and other services to value corporate stock options."  (CBS MarketWatch, 12/4/04, "Two TIAA-CREF trustees resign")  Are we seeing a pattern with Ernst?  Perhaps, Ethics 101 should have been a required course.  "The saga marks another embarrassment for Ernst....  In April, the SEC suspected the Big Four accounting firm ... because of a 1990s business venture with audit client PeopleSoft Inc. ...  TIAA-CREF said neither Mr. Ross nor Mr. Waldrip disclosed their Ernst relationship on their officer-and-trustee questionnaires for 2003 or 2004, which contained questions about whether either had an affiliation with Ernst.  Mr. Ross, a finance professor at Massachusetts Institute of Technology and a director at Freddie Mac, and Mr. Waldrip, a former chairman and CEO of Bausch & Lomb Inc., didn't return phone calls."  (WSJ, 12/6/04, "TIAA-CREF Faces Question On Governance")  Were there other required disclosures by the dynamic duo that were not made elsewhere?


         Directors' financial interests may be extremely complex and not easily determined from publicly available reports filed with the SEC.

        In 2001, Christopher J. Pappas and Harris J. Pappas (collectively "Pappas") became Directors, substantial shareholders, subordinated lenders and the CEO, COO and President of Luby's, while they continued to own and operate their own restaurants ("Pappas-affiliates"), a privately-held organization.  Ernest Pekmezaris ("Pekmezaris") was the Chief Financial Officer ("CFO") of Pappas-affiliates and became the CFO of Luby's.

        Luby's entered into the Affiliate Services Agreement ("Agreement") with the Pappas-affiliates.  Peter Tropoli ("Tropoli"), Senior Vice President-Administration, signed the Agreement on behalf of Luby's.  Frank Markantonis ("Markantonis"), who later became a Director of Luby's, represented the Pappas-entities in that transaction.  Luby's disclosed, "Peter A. Tropoli, the Senior Vice President-Administration of the Company, is an attorney who, from time to time, has provided litigation services to entities controlled by Christopher J. Pappas and Harris J. Pappas.  Mr. Tropoli is the stepson of Frank Markantonis, a director of the Company," and that Markantonis's "principal client is Pappas Restaurants, Inc."  A search of the Internet revealed that, on March 19, 2001, the Houston Business Journal reported that both Tropoli and Markantonis were jointly representing the Pappas-entities in the same disputed contested matter.  State of Texas Bar records showed that both Tropoli and Markantonis shared the same address and telephone number.  Another Internet website indicated the both Pappases, Pekmezaris and Tropoli contributed at least $5,000 each to the same political candidate.

        The Finance and Audit Committee of Luby's was to "review" the Agreement and related dealings.  Director Ronald K. Calgaard ("Calgaard") was the Chairman of the Finance and Audit Committee.  He also was employed by and a Director of Austin Calvert & Flavin, Inc., which received compensation for providing investment services to Luby's.  Pekmezaris, as CFO of Luby's, selected the provider and reviewed the quality of those investment advisory services.

        Thus, Luby's created obvious conflicts of interests: (1) Pappas-affiliates, owned by Directors Pappas, had financial dealings with Luby's; and, (2) a pattern of circular supervision was created, i.e., under the advisory agreement, Pekmexaris, CFO of both Luby's and Pappas-affiliates, reviewed the acts of the employer of the Chairman of the Audit Committee, and, under the Agreement, the Chairman of the Audit Committee "reviewed" Pekmexaris's acts as CFO of Luby's.

        The Committee extensively complained to both Luby's and its external auditors, Ernst & Young, as to the relationships and extent of related public disclosures.  Calgaard has since resigned his Directorship from Luby's.

        Some of the Committee's Yahoo! Message Board posts, e.g., "Would Caesar's Wife Blush?," "Who's Watching the Store?," "Torn Between Two LUBers," "Freudian Slippage," "Good Enough for Mickey Mouse," might be of interest. 


         "Fog Cutter Capital Group on Friday gave Andrew Wiederhorn, its prison-bound chief executive officer, a deal perhaps unprecedented in the post-Enron era of corporate reform: a continued position atop the company's organization chart with full salary even as he spends 18 months in federal prison.  Wiederhorn also received a $2 million 'leave of absence' payment…. The new compensation package, including the payment and annual salary of $350,000, amounts to $4,611 a day of Wiederhorn's confinement before time reduced for good behavior.  The $2 million leave of absence payment also matches exactly the sum Wiederhorn agreed Thursday to pay in restitution to victims of the Capital Consultants scam.  Wiederhorn also remains eligible for an annual bonus. Wiederhorn pleaded guilty to two felony counts in U.S. District Court after the investigation into the collapse of Portland money manager Capital Consultants. … The moves were approved by the company's six-member board of directors, which includes Wiederhorn and several directors with close ties to him. …  Corporate boards are put in place primarily to watch out for shareholders' interests. … Wiederhorn, his wife and close associates own or control nearly 60 percent of Fog Cutter's stock.  Institutional investors in the company include Charles Schwab, Deutsche Bank and Axa Rosenberg Investment Management. … Wiederhorn admitted to filing a false tax return and paying an illegal gratuity to Jeffrey Grayson, former CEO of Capital Consultants. Grayson's firm was a major lender to Wilshire Credit Corp., one of several companies then controlled by Wiederhorn….  Capital Consultants, which managed union pension money, collapsed in September 2000, costing its clients about $350 million. The largest of Capital Consultants' failed loans was $160 million to Wilshire Credit. … The claims against Wiederhorn did not involve Fog Cutter…."  (Oregonian, 6/5/04, "CEO heads to prison with full pay, bonus")  Perhaps, in determining the fairness of the arrangement, Shareholders should consider the new set of business/financial skills that Wiederhorn will be able to develop while in prison.  Another bonus to Shareholders will be his enhanced networking opportunities.  As the Business Roundtable strives to protect the Directors at the top 100 so-called "squeaky-clean" Companies, it should consider the lack of accountability of Directors at the other 13,900 Companies.

        "Andrew Wiederhorn spent more than a year in prison after pleading guilty to two felonies related to a financial scandal. He recently returned to his Portland , Ore. , mansion, his wife, six children and the helm of his investment company (Fog Cutter Capital Group Inc.).  Now he's waging a war over something he didn't get back -- his membership in the prestigious Multnomah Athletic Club. … In the late 1990s ... Mr. Wiederhorn couldn't pay back $160 million borrowed from a pension-fund money manager called Capital Consultants. As it turns out, the government says Capital was a fraud. It seized the firm, but not before Capital had lost $350 million belonging to investors, including union pension funds. ... Mr. Wiederhorn continued to prosper. He started Fog Cutter Capital…. After a five-year investigation into the collapse of Capital Consultants, Mr. Wiederhorn pleaded guilty to filing a false tax return and for paying the head of Capital an 'illegal gratuity.' (Wilshire forgave Capital's chief $3.4 million in personal loan guarantees, violating a federal law that bars giving 'anything of value' to a pension-fund adviser.) Mr. Wiederhorn calls these violations technical and says he was just following the advice of lawyers and accountants."  (WSJ, 5/22/06, "How Not to Curry Favor With a Club: Say It's Full of Crooks")


        "[E]ven those companies disclosing family ties aren't uniformly giving investors information about those ties, sometimes opting to hold back exact compensation figures or even names. … Walgreen listed nine employees related to board members or executives in the drugstore chain's 2005 proxy. … Walgreen didn't say how long these relatives have been on the payroll, and its 2004 proxy contains no such disclosure. It didn't name the relatives or give the titles of their executive relations, either. … Citigroup's 2004 proxy disclosed for the first time that it employed several relatives of executives and directors. The financial-services company didn't say whether the relatives had worked for Citigroup prior to 2003. But a Wall Street Journal article at the time pointed out that six employees related to Chief Executive Charles Prince or other executives or directors were each paid more than $200,000."  (WSJ, 12/13/05, "Disclosing the Family Ties That Bind")


        "When Marsh (Supermarkets Inc.) … hired Merrill Lynch & Co. to explore a sale….   [A] dozen interviews and a review of Marsh's regulatory filings suggest another problem: At least three of the seven ostensibly 'independent' members of the 10-person board had financial or family ties that might have made them reluctant to challenge Chairman and CEO Don Marsh on important decisions.  For example, the chairman of the Compensation Committee is restaurateur Stephen M. Huse, whose daughter Kimberly is married to Don's son, company executive Arthur Marsh. The company does not mention the relationship between Huse and the Marsh family in proxy statements or other regulatory filings.  The other two members of the Compensation Committee --- J. Michael Blakley, CEO of Indianapolis building contractor The Blakley Corp.; and James K. Risk III, CEO of Lafayette electrical equipment distributor Kirby Risk Corp.--collectively received nearly $2 million in business from the company over the past five years. Corporate governance experts look askance at doling out lucrative business to board members, saying it can lead them to acquiesce to decisions they otherwise might question. …NASDAQ adopted rules in November 2003 designed to curtail boardroom cronyism. The rules don't permit family members to sit on compensation committees, though they don't define whether that includes people who aren't direct relatives, such as Huse. … The proxy statement shows Don Marsh is far from the only Marsh family member taking home a substantial paycheck. Don's son David, the company president, received $477,000 in salary and bonus last year. In addition, seven others who are Marshes or married to Marshes collectively earned $1.6 million last year, the proxy statement shows. For example, former spokeswoman Jodi Marsh, who is in the process of divorcing David Marsh, earned $163,077."  (IBJ, 2/4/06, "The ties that bind?")


        "Five of the seven directors are listed in the company's proxy statement under the heading of having 'certain relationships and related transactions' with Image (Entertainment Inc.), even though those five are also billed as 'independent directors,' or those without other ties to the company. … Determining whether a director is independent is a subject of debate. Some boards have argued that having directors with some ties to the business is a good thing, because it ensures these directors truly understand the company whose board they sit on. Governance watchdogs say such ties are conflicts that cloud the ability of directors to give impartial counsel." (WSJ, 9/6/06, "Determining Board Independence Debate Heats Up About Outside Directors' Ties To Image Entertainment")  Who decides the meaning of the word "some"?  Further, if "some ties" is "a good thing," many more ties must be better.  Reductio ad absurdum! 


        "Should lawyers serve on corporate boards? The practice has declined in recent years as scrutiny of board members has increased and law firms have grown wary of potential liability. But some firms permit the practice, which can have client-development benefits. Recently, the issue has come to a head in a matter involving Topps Co., a New York producer of trading cards, collectibles and candy. Jack Nusbaum is a Topps director and the chairman of the company's main outside law firm, Willkie Farr & Gallagher LLP. He has been criticized in public letters by another board member about the dual roles. The protesting board member, Arnaud Ajdler, is a managing director of an investment firm that is a large shareholder in the company. The firm opposes a takeover offer of Topps from a buyout group. Mr. Nusbaum supports the deal. In public documents, Mr. Ajdler has said Willkie Farr stands to make more than $2 million in legal fees from a deal."  (WSJ, 6/13/07, "Dual Role of Topps Director Revives Old Conflict Debate")  Details of the "legal fees" agreement might be interesting, e.g., a contingency fee based upon the dealing closing, which would be a real conflict on interest.


        "During fiscal 2008, the Compensation Committee determined that maintaining a lease on a private airplane was no longer a cost-effective method for providing business-related transportation to our Named Executive Officers and Directors. The airplane was used only for business-related travel, and personal use was not permitted. With the termination of the lease on the airplane, it also became increasingly difficult and cost prohibitive to access our Canadian fish camp. Consequently, the fish camp, which was only used for business entertainment purposes, was offered for sale during 2008. The only offer to purchase the fish camp came from Terry L. Haines, our former Chief Executive Officer and President. Ultimately we negotiated with Mr. Haines to sell the fish camp for a purchase price of $55,000 and the transaction closed during fiscal year 2009."   Proxy Statement, A. Schulman Inc. filed 11/24/08.  BOD gone fishin'?


        E.      Lame Excuses


        Ira Milstein, a 76-year-old attorney who is well known within corporate governance circles, has criticized the ability and tendency of CEOs to control the flow of corporate information that reaches Boards of Directors.  "'Think of how unreasonable it is that the CEO can decide today what goes to the board,' he said."  (Reuters, 7/13/03, "CEO Pay, Courts Now Hottest Button")  The unspoken assumptions are: (1) members of Boards of Directors do not have the intelligence to recognize that they may be making decisions based upon insufficient and/or inaccurate information; (2) intimidated by CEOs, they are reckless in exercising their fiduciary duties; (3) they are too timid to complain about the situation to the CEO and fellow Directors; and/or (4) if their complaints go unheeded, they are unable resign and request that their written complaints be published in the Company's next proxy statement.  The responsibility to be informed and to take appropriate action lies with the Directors.

        "The New York attorney general ... (is making efforts) to determine whether Mr. (J. Ezra) Merkin had defrauded universities and charities when he invested their money with Mr. Madoff.... Many of the institutions are now suing Mr. Merkin, claiming that they lost millions of dollars when he had invested money with Mr. Madoff without telling them. ... [M]r. Merkin collected over $40 million a year in fees from them to support his lavish lifestyle. ... [V]ictims include Yeshiva University, where Mr. Merkin was a trustee. ... When Yeshiva University expressed concerns over possible conflicts about investing with Mr. Merkin since he was a trustee, Ira M. Millstein, the respected corporate governance lawyer, blessed the relationship so long as it was disclosed." NYT, 1/16/09, "Inquiry Started of Financier Who Invested With Madoff")  This gives new meaning to the word "it."  Which part of the "relationship" did Milstein "bless"?  How about full disclosure?


        (NYSE Chairman John) "Reed ... has his own embarrassment to deal with. ... [H]e got the Webb Report [internal report relating to Grasso's compensation] and declined to release it.  The only reason that he has hinted at has been lame:  There are things in there that might embarrass certain people."  (Fortune, 2/9/04, NYSE Dick Grasso's Pay: The Sequel")


        “Regulators preparing a lawsuit against Richard A. Grasso, the former chairman of the New York Stock Exchange, may question the validity of the board vote that gave him the right to a $139.5 million payout, according to lawyers who have been briefed on the investigation.    At issue is a contentious board meeting on Aug. 7, when directors took up the issue of Mr. Grasso's compensation even though it had been added to the agenda only that morning.  … Despite the absence of several board members well versed in the details of Mr. Grasso's pay package and the absence of the exchange's compensation consultants, board members voted to give him the right to withdraw $139.5 million in pension and deferred salary payments before retiring. Prosecutors are also examining whether Mr. Grasso or others close to him may have manipulated the decision-making process so that his package appeared on the meeting's agenda at the last minute, said a lawyer in Mr. Spitzer's office who has been briefed on the investigation. …  [T]hey are questioning whether the exchange's corporate bylaws may have been violated by the compensation committee's decision on the morning of Aug. 7 to put the question of Mr. Grasso's pay on the agenda for the full board meeting later that day.  … [D]irectors who attended the meeting said that they had no advance warning that the question of whether Mr. Grasso should receive $139.5 million would be up for discussion.  … Prosecutors are now expected to contend that the late addition to the agenda left directors inadequately prepared to debate a matter with such deep financial, legal and operational ramifications for the exchange.  Moreover, three directors with the expertise to raise questions pertaining to the complex financial details were not in attendance. According to public minutes, two new members of the compensation committee, Laurence D. Fink, the chief executive of BlackRock Inc., and Herbert M. Allison Jr., the chief executive of TIAA-CREF, were not present.  Also, Henry M. Paulson Jr., the chief executive of Goldman Sachs, who had just stepped down from the compensation committee, was on vacation in South America at the time; he had vigorously opposed the principle of paying such a sum while Mr. Grasso remained in office.  Because the contract was not on the agenda, the independent consultants hired by the exchange to help board members understand the more arcane aspects of Mr. Grasso's deal were also not in the room that day, according to executives who attended. … The end result was a meeting that was dominated by directors who supported Mr. Grasso's right to take out his money.… And while it remains unclear whether such a legal strategy would be successful in court, it does underscore the extent to which the board at large was kept in the dark about Mr. Grasso's pay, raising the question as to whether the vote it took was valid."  (NYT, 3/26/04, "Regulators May Challenge Votes That Approved Grasso's Pay")  Wait a New York minute!  Did the so-called "independent" Directors who attended the meeting complain about the lack of adequate notice and seek to have the subject continued to a future meeting?  When the absent Directors returned from their vacations and were recuperating at their respective country clubs, did they not read their copy of the Meeting Minutes?  Did they talk with one another about being sandbagged?  Did they raise the issue at another BOD meeting by asking that the prior vote be rescinded and the matter be reconsidered?  Grasso may now argue that any silence "ratified" the prior acts of the BOD.  "Richard A. Grasso … is making his case loud and clear:  Mr. Grasso's compensation was approved by an all-star board of Wall Street and corporate chief executives." (NYT, 5/23/04, "There, in Grasso's Corner, Is That Oliver North?")


        "He (Michael Eisner) discourages directors' getting to know one another outside of board meetings, the better to remain the sole source of information for each." (LAT, 2/16/04, "Are Disney's Directors Only Eisner's Puppets")  What did Eisner do?  Did Eisner forbid Directors from communicating with one another?  If so, did they wonder about Eisner?


        "The mortgage-finance giant (Fannie Mae) ousted Mr. (Franklin D.) Raines in the wake of regulatory findings that it broke accounting rules. ... Raines has argued that he acted in good faith to certify Fannie's accounts. ... Mr. Raines is a director of PepsiCo... Mr. Raines also stepped down from Pepsi's audit committee, which he previously chaired."  (WSJ, 1/28/05, "Ex-CEO of Fannie Will Vacate Seats On Two Boards")  When serving as Chairman of the Audit Committee at PepsiCo, Raines was probably lauded as a financial maven.  However, when potential liability arises from his financial chores at Fannie Mae, he will probably argue that he reasonably relied upon some poor schlep in Fannie's Accounting Department.


        "Raytheon directors punished the chief executive, William H. Swanson, by taking away almost $1 million from his 2006 compensation yesterday because he failed to give credit for material that was in a management book he wrote. … The punishment also comes as Raytheon has stopped circulating the book, 'Swanson's Unwritten Rules of Management,' a folksy book that turned Mr. Swanson into a management sage and earned him praise from business leaders… But many of the rules were later found to have been taken from a 1944 engineering classic, 'The Unwritten Laws of Engineering,' written by W. J. King, an engineering professor at the University of California, Los Angeles. Of Mr. Swanson's 33 rules, 17 were in the 1944 book, often word for word.  In addition, The Boston Herald reported yesterday on its Web site that Mr. Swanson had lifted four rules — 1 through 4 — from a list of maxims collected by Defense Secretary Donald H. Rumsfeld and published in The Wall Street Journal in 2001 as Rumsfeld's Rules. The first rule in both Mr. Swanson's and Mr. Rumsfeld's list is the same: 'Learn to say "I don't know." If used when appropriate, it will be used often.' … A statement issued by Warren B. Rudman, Raytheon's departing lead director, and Michael C. Ruettgers, the company's incoming lead director, said the Raytheon board … 'takes this matter very seriously' … and said the board had 'full confidence' in him. … In an interview yesterday, Mr. Rudman said 'the board decided, and I think properly, that there is a great difference between an unintentional error, in which you have simple negligence, and an intentional act that breaches sound ethical conduct.' 'Based on the evidence, we decided that this was unintentional and not negligent. It was just poor judgment.' … On Tuesday night, Raytheon issued a statement on Mr. Swanson's behalf that said the source for his book came from material he had collected over the years and had given to a member of his staff to prepare a presentation that he was to give to Raytheon engineers.  "Bill knew that some of the material was from the things he had read and collected over the years," the Raytheon statement said. … At the annual meeting yesterday, Mr. Swanson issued another mea culpa. Bloomberg News said he told shareholders: 'I did not properly check source material. I apologize to those whose material I wish I had treated with greater care.'"  (NYT, 5/4/06, "Chief's Pay Is Docked by Raytheon")  This may be an all time low in excuses issued by BODs, which says more about the quality of Directors than CEOs.  It is obvious that the CEO is a plagiarist.  To simultaneous label the CEO’s admittedly intentional acts as "unintentional error," i.e., "negligence," and " unintentional and not negligence" makes one wonder what the BOD was smoking or thought Shareholders were smoking.  Now, Shareholders should know what kind of ethical standards are required to earn the big bucks.  If a BOD and CEO will blow such smoke on ethical issues, what are they capable of doing on accounting or governance issues?


        "The chairman of Citigroup's audit and risk committee, C. Michael Armstrong, who has overseen more than $22 billion in write-offs, is poised to resign from that post under pressure from shareholders....  Mr. Armstrong, the former chairman and chief executive of AT&T, has been a Citigroup director since 1989 and is a longtime friend of Sanford I. Weill, the bank's former chairman. He has served on the audit and risk committee for 14 years, and has been chairman since 2004. It is not clear who will succeed him. Citigroup's board has begun a broader search for at least three other directors, zeroing in on those with 'expertise in finance and investments.'  None of Citigroup's 10 independent directors have extensive Wall Street résumés, and only one added recently was a former finance chief. ... Citigroup's risk management practices have come under intense scrutiny, and shareholder groups, led by the A.F.L.-C.I.O., have lobbied board representatives for Mr. Armstrong's removal from the audit committee panel.... Mr. Armstrong was not departing from either Citigroup's audit and risk committee or the board.  ... Mr. Armstrong has overseen the audit and risk committee as Citigroup expanded its loan book at an astonishing pace. It piled into complex securities, like collateralized debt obligations, and ramped up production of home loans. ... In meetings with shareholder representative, Mr. Armstrong said that committee members sensed something was wrong.... But he acknowledged that they did not ask the right questions about its capital markets exposure." (WSJ, 4/8/08, "Citigroup Director Expected to Quit Key Committee")  What did the BOD sense was wrong?  Through the legal concept of "constructive knowledge," one is deemed to know what he/she would have learned had he/she conducted a reasonable investigation of what he/she suspected.  What questions did the BOD ask, of whom and when?  Armstrong served 14 years on the audit and risk committee.  Presumably, he learned something about Citigroup and its products and associated risks in that time.  Shareholder lobbying efforts at Citigroup seem to be somewhat ineffective.  


        "In his first annual meeting at Merrill Lynch & Co., John Thain defended directors from the '20/20 hindsight' of shareholders who blame them for the Wall Street brokerage's mortgage-related losses. ... [M]errill struggles to understand the 'downside' of complex financial instruments.  Audit-committee head Ann Reese, former chief financial officer at ITT Corp., rose from her seat to reply to a shareholder who suggested directors deserve some of the blame for Merrill's woes.  She said the board 'challenged the exposure' Merrill had to mortgage securities. Ms. Reese said Merrill's stake in CDOs wasn't elevated to the board's attention until 'late in the process.'  Ms. Reese's remarks were a rare time for shareholders to hear a nonexecutive director at a Wall Street firm defend performance." (WSJ, 4/25/08, "Thain Defends Merrill Board on Credit Crisis")  What criteria was in place to determine whether an issue should have been "elevated" to the BOD?  How and when was the exposure "elevated"?  When/how did the BOD "challenge the exposure"?  What were the results of the "challenge"?  What assurance is there that similar exposure will not reoccur?


        "(James A.) Johnson also was associated with an executive compensation controversy at United HealthCare, where he served on the board. The insurer's chief executive, William McGuire, resigned after it was reported that he had been granted more than $1.4 billion in stock options. Some of that money was returned as a result of legal settlements, but McGuire still left with more than $800 million. Karl Cambronne, a Minnesota lawyer for shareholders suing for the return of some of those funds, slammed Johnson this week in an interview, saying Johnson received at least $9 million in profit from options he cashed while serving on the board.  'Jim Johnson served on both the compensation and audit committees at various times. . . . It is difficult to fathom how someone who was paid as much as he was as a board member didn't take more proactive steps' to prevent improper compensation practices, Cambronne said.  Nell Minow, co-founder of the Corporate Library and a shareholder advocate, acknowledged that Johnson sat on boards where excessive compensation was authorized. But in the case of United HealthCare, she said, Johnson -- once he grasped the problem -- acted aggressively to resolve it. 'Even though I don't agree with everything he has done, I do respect the way he responded to those cases where there were problems. He did show real responsiveness,' Minow said." (LAT, 6/12/08, "Obama advisor Jim Johnson resigns amid criticism")  Hello! What was the "problem" that Johnson later "grasped" --- super mega obscene depletion of Shareholder assets in favor of McGuire?  How long did it take Johnson to grasp the problem?  About one second?  Did it occur after an expression of public outrage?  What did Johnson do to act "aggressively"?  Resign after public exposure of his lack of diligence?  A corporate litigator should realize McGuire probably had a hand in setting Johnson's board member pay.  Thus, Johnson was "proactive" by granting McGuire $1.4 in stock options. Hmmm!


        Academia chimes in to assure Shareholders and others that the current system of corporate governance "generally works well." In "Corporate Governance After the Financial Crisis," Professor Stephen Bainbridge neglects to mention for whom it "generally works well" or measurement criteria. The Committee responded to the academic's statements.


        F.        Lame Ideas


        "(Ira) Millstein cited the 2003-2004 Public Company Governance Survey by the National Association of Corporate Directors … 'You have the situation where they're (Directors) not doing what they're supposed to be doing, but they know what they're supposed to be doing, so hopefully it will improve,' Millstein said."  (, 2/24/04, "Corporate Boards Need to Do More to Reform")  Directors are knowingly not doing what they are supposed to be doing and Shareholders should be "hopeful"Directors, who knowingly are not doing for Shareholders what they are supposed to be doing, are breaching their fiduciary duties and should be removed from office.


        "Paul W. MacAvoy and Ira M. Millstein, the authors of 'The Recurrent Crisis in Corporate Governance' … answer decisively…. urging a single reform: ‘Nothing short of separating the roles of board leadership and management leadership will suffice. … [T]he authors think it's the right medicine. … [T]he authors suggest that boards move to split the chairman and CEO jobs only as the old guard retires. …. If too few companies adopt the change, the authors say, it can be made mandatory. This carries diplomacy too far, however. You can campaign for a cause or for a compromise, but not really for both."  (WSJ, 2/18/04, Book Review)  "An influential proxy-advisory service, Institutional Shareholder Services … has recommended withholding support for Eisner, citing the company’s unwillingness to divide the duties of chairman and chief executive. … George Mitchell … said the Disney board had relied on the advice of its corporate-governance adviser, New York attorney Ira Millstein, in deciding that any division of the roles should come later, when the company is ready to hire another chief executive." (, 2/24/04, "Disney Officials Defend Corporate Governance")  One could reasonably wonder whether Disney employed Millstein's services knowing, from his publicly expressed philosophy of corporate governance, it would obtain the exact opinion it wanted to hear.  Millstein's position is reminiscent of the question asked by a lawyer, a self-proclaimed Patriot and a delegate to the Second Continental Congress in 1775, whose law firm earned substantial fees by representing English commercial interests in the Colonies.  He asked, "Can't we just put this whole thing off until King George leaves office?"  (See, Lame Excuses, above.)


        Directors do not recognize the truism that those who hire advisors with conflicts of interest do not receive independent advice.  "If the drama unfolding around the Walt Disney Company were a movie, you might call it 'Six Degrees of Martin Lipton.' … [W]hen the Comcast Corporation made its $54 billion hostile offer for Disney, Mr. Eisner knew just whom to call - that's right, Mr. Lipton. After all, the bid was as much a takeover offer as it was a referendum on Mr. Eisner's management.  There is just one small problem.  Mr. Lipton … was hired by Mr. Eisner to advise Disney's board - whose job it was to consider firing him.  And guess who hasn't lost his job yet? …  Indeed, if there was any dissension on Disney's board about the fate of Mr. Eisner before Mr. Lipton arrived on the scene, there is none now. … After Mr. Lipton's arrival, several independent Disney directors raised the issue of whether they should be seeking out their own lawyers and bankers to help evaluate the situation separately from Mr. Eisner and management.  Naturally, the idea was summarily rejected, according to executives close to the board.  The board's other advisers were hardly independent, either: Alan D. Schwartz, president and co-chief executive of Bear Stearns, is a close friend and longtime adviser to Mr. Eisner.  Gene T. Sykes, a managing director of Goldman Sachs, has similarly had a long relationship with Mr. Eisner, as has Morton A. Pierce, a partner in Dewey Ballantine, the company's regular outside counsel. … In his latest role, Mr. Lipton is working against one of his biggest former clients: C. Michael Armstrong, who used to run AT&T but is currently chairman of Comcast." (NYT, 4/18/04, "Disney's Lawyer, Mouseketeer's Friend")  There may be a modus operandi here.  Martin Lipton was previously criticized for representing the NYSE and while offering legal advice to Richard Grasso.  See, Directors Have Been Asleep At The Wheel "The lawsuit … contends … Mr. Grasso cultivated close personal relationships with Wall Street power brokers like Martin Lipton, the well-known mergers and acquisitions lawyer at Wachtell Lipton Rosen & Katz.  … Mr. Ashen offered detailed new evidence intended to show how Mr. Lipton was offering advice to Mr. Grasso with regard to many aspects of his pay package, including how to deal with the reverberations of disclosing such a large payout.  Mr. Lipton at the time was chairman of the exchange's advisory committee and was also advising the Big Board on its governance practices.  A friend of Mr. Langone, Mr. Lipton — along with Mr. Langone and Mr. Grasso — served on the board of New York University, where he is chairman.  Throughout 2003, Mr. Lipton offered strategic advice to Mr. Grasso with regard to his package, going so far as to counsel him against forgoing the additional $48 million he was owed, according to former directors. … In an e-mail message that he wrote in September … Mr. Lipton said: '[a]s a friend, I did advise Dick with respect to his taking his accumulated benefits and the related public disclosure.'"  (NYT, 5/25/04, "Suit Seeks Return of $100 Million Given to Grasso")  Why was Lipton not named as a defendant?  Will the NYSE seek return of any compensation paid to him or his law firm?  Or, is he just "untouchable"?

         "Has Martin Lipton, the legendary mergers-and-acquisitions lawyer, lost his edge? ...[T]he behavior of some of his clients has raised questions about whether the legal ace is always giving such good advice -- especially in the field of corporate activism. Mr. Lipton is an advocate of what may best be termed the 'Just Say No' approach to shareholder activists. ... Mr. Lipton isn't, of course, saying what advice he actually dispenses behind closed doors, nor is it clear if his clients were acting on his advice. ... But the actions of several of the attorney's high-profile clients in the face of uppity investors are consistent with his published views. ... But it isn't just in the realm of corporate activism that Mr. Lipton's clients have arguably made missteps. The Bancroft family, which controls Dow Jones, seems to have mishandled its negotiations with News Corp.'s Rupert Murdoch over a possible sale of the company. ...[T]he family's tactics don't seem to have left the Dow Jones board in a particularly strong position to negotiate for more money from Mr. Murdoch, even if they have persuaded him to make some concessions on editorial independence. At least Mr. Lipton will have his legacy as the father of the poison-pill defense to fall back on, right? Not necessarily. Three years ago, a majority of Standard & Poor's 500 companies had such takeover protections on their books, according to research prepared by the Corporate Library.  Now just a third of America's top companies have them. At that rate, by the time Mr. Lipton turns 80 in four years, the pill will be virtually extinct." (WSJ, 7/6/07, "Sage Advice? 'Just Say No'")  Mr. Lipton, there always comes a time to hang up the gloves and go gracefully.  "Wachtell remained confident in its strategy throughout the trial (Hexion v. Huntsman, where Hexion, represented by Wachtell, wanted to walk away from a merger agreement) last fall.  Even after the trial concluded, as the two sides waited for (Delaware Chancery Judge Stephen) Lamb's ruling, Wachtell's Martin Lipton personally guaranteed victory for Apollo (owner of Hexion) cofounder Leon Black, according to individuals familiar with the matter."  (, 4/1/09, "The Big Fall")  A mere mortal would be up on charges before a state bar association for making such a personal guarantee.  After a ruling in favor of Huntsman, Hexion paid $1 billion to settle the matter.

        "'Come on, you can say it. I’m a professional entrencher of management.'  So joked Martin Lipton, the co-founder of corporate America's favorite law firm, Wachtell, Lipton, Rosen & Katz. ... [H]is joke wasn't much of a joke.  ... Mr. Lipton has been the ultimate consigliere to Wall Street and Fortune 500 companies. ... Mr. Lipton has given chief executives and their boards the advice they want to hear — that even in this age of shareholder rights it’s O.K. to stiff-arm the people who actually own the company. He seems to hold shareholder activists — one-time renegades who are now seen as heroes by much of Wall Street — with something akin to contempt.  ... His latest memo ... a manifesto about the responsibilities of board members, Mr. Lipton wrote that 'limits on executive compensation, splitting the role of chairman and C.E.O. and efforts to impose shareholder referenda on matters that have been the province of boards should be resisted.' What is more, he suggested that boards should resist 'the trend of having the audit committee or a special committee of independent directors investigate almost all whistle-blowing complaints, recognizing how disruptive such investigations are, and being judicious in deciding what really warrants investigation.'  It is as if Mr. Lipton wants to return to an era when chief executives could do whatever they wanted, when boards were mainly rubber stamps and shareholders had only one way to express their discontent: sell their shares. But he can’t turn back the clock, which is why Mr. Lipton’s advice isn't just wrongheaded. It’s dangerous. ... He is an unapologetic apologist for the days of the Imperial C.E.O. The problem for Mr. Lipton is that nowadays shareholders often have more power than he does. Last winter, his advice to Home Depot about how to deal with angry investors backfired.  Two weeks later, the board reversed course and fired Mr. Nardelli, a personal client of Mr. Lipton's. ... The list of advice gone wrong goes on and on: Michael D. Eisner got booted from Disney, Phil Purcell got kicked out of Morgan Stanley and Richard A. Grasso lost his job at the New York Stock Exchange. In each instance, Mr. Lipton represented the board and pushed for the status quo — until he couldn't anymore, and someone got the ax.  ... And many competitors envy his fat fees. Rather than charge by the hour, Mr. Lipton sets his pay for projects upfront. No negotiation. (Good work if you can get it.) Of course, virtually nobody in the business, rivals included, is willing to say a bad word about Mr. Lipton publicly, even on the intellectual merits of his views. His power is too large and the Wall Street cabal too tight."   (NYT, 1/8/08, "Questioning an Adviser’s Advice") Imperial CEOs need imperial Esquires.  Does anyone see an ethical problem when an attorney represents both the BOD and CEO when the issue revolves around the CEO's tenure?  It is interesting that he can re-sell the same advice when any BOD should know, in advance, what it would be.  Perhaps, it is exactly the advice they wish to receive.


        Some "blind trusts" are not as blind as they should be.  "John Thain ... recently filed to sell options for 212,000 Goldman shares. The filing was made on behalf of the blind trust set up by Mr. Thain to control his stake in Goldman after he was tapped to run the Big Board. ... When Mr. Thain's appointment at the Bog Board was announced, questions were posed as to how he would handle his stake in Goldman if it posed a conflict of interest.... Goldman's dealings at the NYSE include its Spear, Leeds & Kellogg unit, which is one of the seven NYSE specialists that oversee the buying and selling of assigned NYSE stock."  (WSJ, 3/24/04, "Thain Files to Sell Goldman Options")  How blind is a blind trust when the identity of the investments is known?


        "Dozens of companies are avoiding new rules intended to make their boards more independent from management....  These companies are able to escape the new rules ... by designating themselves as 'controlled' companies in which more than 50% of the voting power rests with an individual, a family or another group of shareholders who vote as a block....  Dillard's Inc. disclosed that it planned to avoid the rule requiring a majority of directors be independent and that an independent nominating committee select director candidates.  The family ... retains 99.4% of the voting power through Class B shares.  The company's bylaws allow the family to elect eight of its 12 directors although the Dillard family holds less than 10% of shares outstanding. ... A Dillard's representative said shareholders knew when they bought the stock that the family had the right to elect a majority of the board."  (WSJ, 4/28/04, "Loophole Limits Independence")


        "Intel Corp., Time Warner Inc., JPMorgan Chase & Co. and seven other major companies have agreed to sit down with union representatives in a work group to study the feasibility of majority elections for corporate directors.  … The union-corporate agreement, reached this week, also includes Merrill Lynch & Co., ChevronTexaco Corp., Constellation Energy Group, Wyeth, The Gap Inc., Baxter International Inc. and Cinergy Corp…. The work group members have committed to meet at least three times between June and November and prepare a report before the next proxy season that includes findings and outlines areas of agreement and disagreement.   [T]he unions proposed the work group during discussions with the 10 companies.  The unions invited companies to join the group, based on their willingness to negotiate in good faith on majority voting."  (ISSFriday, 3/4/05, "A 'Model for Constructive Dialogue:' Unions Withdraw Majority-Voting Resolutions at 10 Companies")   It is readily foreseeable that the companies would agree that only the most innocuous proposals are "feasible."  "Work group" is just another bureaucratic tactic to postpone that result until some time in the distant future.  It is time for "union representatives" to stop panning for the cameras and take effective action.

        "Caterpillar's response to the proposal in its proxy statement also raises the issue of what happens if a director doesn't receive a majority vote, saying the position may become vacant or the director could remain in office until replaced by the board." (Chicago-Tribune, 4/10/05, "Majority vote hot topic for boards")


        "Before American International Group Inc.'s independent directors gathered on Sunday to decide the fate of chairman Maurice R. 'Hank' Greenberg, many had a burning question: Could they bring their own lawyers along?  The word came back that the directors' personal lawyers wouldn't be allowed into the meeting - only counsel retained by the group as a whole."  (WSJ, 3/16/05, "AIG Considers Cutting Greenberg Ties: After Enron, WorldCom, Directors Display Higher Level of Concern Over Their Own Legal Liabilities")  The "word came back" from whom?  Did it come back from the Secretary of AIG, who serves at the pleasure of CEO Greenberg?  Did it come back from "counsel retained by the group as a whole," who did not want his/her advice challenged by other attorneys?  Did it come back from the non-independent Directors?  Upon what reasoning was the "word" based?


        "Mr. Grasso also added former NYSE board member H. Carl McCall to his complaint against the NYSE alleging Mr. McCall was negligent in handling the $187.5 million pay package that led to Mr. Grasso's ouster in September 2003." (WSJ, 3/16/05, "Defamation Claim by Grasso Against NYSE's Reed Is Dismissed")  The State of New York has the burden of proving that Mr. Grasso's pay package was unreasonable.  In defending, Mr. Grasso only has to poke holes in the state's case against him to prevail.  With this new claim, Mr. Grasso will be affirmatively required to prove that Mr. McCall's acts caused him damage.  Accordingly, Mr. Grasso will have the burden of proving that his pay package was justified.  Or, perhaps, Mr. Grasso will attempt to prove that Mr. McCall was inept in the accepted ways of transferring immense sums of corporate assets into the pockets of corporate executives and avoiding public scrutiny.  Will the potential added benefits be justified by the assumed risk?  Stay tuned, sports fans.


        "The fight over proxy access has moved from the Securities and Exchange Commission to the federal courts. The American Federation of State, County and Municipal Employees (ASFCME) Pension Plan is seeking a court ruling to force American International Group Inc. (AIG) to include the pension fund's access resolution at the ballot at the company's annual meeting in May. AFSCME sued Feb. 25 in federal court in Manhattan after the staff of the SEC's Division of Corporate Finance advised AIG on Feb. 14 that it could omit the binding proposal, which seeks to amend the company's bylaws to allow shareholders to nominate directors.  The SEC staff, through the agency's no-action process, earlier allowed the exclusion of similar proposals at Walt Disney Co., Halliburton Inc., Qwest Communications International Inc. and Verizon Communications Inc., even though the resolutions are modeled after the SEC's proxy access rule. …  The lawsuit contends that the ASFCME proposal is legal under the law of Delaware (where AIG is incorporated) and is a proper subject for a shareholder vote. …. Professor Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware , said other shareholders have sued in federal court after the SEC allowed companies to omit their proposals--with 'mixed success.'"(ISSFriday, 3/4/05, "AFSCME Sues AIG Over Proxy Access")  Let's do the math and add in some common sense.  How much will ASFCME pay its attorneys to prosecute the legal action?  Even if AFSCME prevails, what does it gain?  It may obtain the right to include a proxy access proposal, which is subject to Shareholder vote that may not be binding upon AIG.  How much would it cost for AFSCME to run a slate of Director candidates by filing a bare bones proxy statement with the SEC and telephoning its fellow Institutional Shareholders to support those candidates?  A cost/benefit analysis would be appropriate.  Sometimes, it is easier to convince the uninformed public that one is doing something positive rather than to actually do it.

        "The nation's largest union of government workers has sued American International Group Inc. over the insurance company's refusal to include a proposal in its proxy materials that, if approved, would allow investors to nominate directors to its board. … ‘We have no choice but to seek relief in the courts because of the current stalemate on proxy access rulemaking at the [SEC],’ Gerald W. McEntree, chairman of AFSCME's pension plan, said in a statement. … The proposal sought to amend AIG's bylaws to allow shareholders who own 3 percent or more of the company's stock for at least one year to nominate individuals for its board of directors and have their names listed on materials sent to shareholders for a vote. … The insurer said Section 14(a) of the Securities and Exchange Act allows it to exclude a proposal if it falls within 13 enumerated categories, including if the proposal 'relates to an election for membership on the company's board of directors.' … [I]n February the SEC's division of corporation finance issued a "no-action" letter to the insurer stating it would not recommend the initiation of an enforcement action if AIG excluded AFSCME's proposal from the materials. In its suit filed in the U.S. District Court for the Southern District of New York, AFSCME said the rule only precludes proposals that advocate or oppose the election of specific candidates in specific elections. The pension fund said its proposal is about procedure and federal securities laws require its inclusion." (Securities Litigation & Regulation Reporter, 3/10/05, "Union Sues Insurer AIG Over Access to Shareholder Voting Materials")  The AFSCME is mistaken.  It does have a choice --- file a bare-bones proxy statement with the SEC, whereby it could nominate a slate of Director-candidates, and solicit votes from its fellow Institutional Shareholders.

        "AFSCME Loses Ruling in AIG Suit … A federal judge on March 22 rejected a request by the American Federation of State, County & Municipal Employees (AFSCME) Pension Plan to order American International Group to include the union's proxy access proposal on its 2005 ballot. The union fund sued AIG after the staff of the Securities and Exchange Commission allowed the company to exclude the proposal, which is modeled after the SEC’s 2003 draft proxy rule. … According to a copy of a ruling … U.S. District Judge Louis Stanton in New York agreed with the SEC staff’s decision that the AFSCME proposal could be omitted under SEC Rule 14a-8(i)(8) as relating to the election for membership on the board of directors.  The judge also noted that the issue of proxy access is not for the courts to decide. 'The function of the court is to apply the law as articulated by legislatures or their authorized regulatory agencies, not independently to create new legal obligations in this carefully regulated field,' Stanton wrote." (ISS Friday Report, 3/24/05, "AFL-CIO Releases 2005 Key Votes Scorecard")  One can only wonder as to the amount of time and effort expended by the AFSCME and whether it could have been better spent.


        "Hollinger International Inc., which has been under shareholder pressure to overhaul its board, said six (Richard R. Burt, Daniel W. Colson, Henry A. Kissinger, Shmuel Meitar, Richard N. Perle and James R. Thompson ) of its 11 directors won't stand for re-election at the newspaper publisher's annual meeting in January. …   The announcement follows last week's indictment by U.S. prosecutors of Conrad Black, the company's former chairman and chief executive, on eight counts of fraud. The indictments against Mr. Black and three other former Hollinger executives stemmed from more than $80 million in payments made to him and other executives related to sales of Hollinger newspapers. … Hollinger said the board's nominating and governance committee, chaired by Mr. Kissinger, has been working with search firm Spencer Stuart to identify new candidates to the board.  (WSJ, 11/21/05, "Hollinger Seeks Successors to Fill Six Board Seats")  What's wrong with this picture?  Kissinger, who was not competent enough to recognize the alleged grandiose theft that occurred on his watch, is leaving the BOD, but is in charge of selecting all successor BOD members.


        "An admission that the chief executive officer of RadioShack Corp. misrepresented his academic credentials highlights a dilemma for corporate directors in the post-Enron, Sarbanes-Oxley world: What type of ethical breach requires dumping a top executive? … [A]fter two days of sticking by David Edmondson, RadioShack directors said they will retain outside counsel to investigate the matter and advise them on what to do. … Mr. Edmondson said that he believed he had received a ThG diploma, and not a bachelor's of science degree, as he previously claimed. But the 46-year-old CEO also acknowledged he couldn't document the ThG diploma, typically a certificate with fewer requirements than a bachelor's degree. Questions about Mr. Edmondson's academic credentials were first raised Tuesday in an article in the Fort Worth Star-Telegram. … Directors may justifiably worry, governance experts say, that such incidents can suggest broader problems with integrity, honesty and judgment. … Another vexing problem in such instances: If a board ignores a CEO's ethical misdeed, what message does that send to the other employees? Subordinates either infer the company doesn't take ethical breaches seriously, or think that top executives treat themselves differently than other employees. … RadioShack's code of conduct says the company takes ethical violations seriously. … In his résumé, Mr. Edmondson had claimed he had a bachelor's degree from Pacific Coast Baptist College in San Dimas, Calif, the Star-Telegram reported. But the college never offered degrees in psychology…."  WSJ, 2/16/06, "Ethical Breaches Pose Dilemma for Boards: When to Fire a CEO?")  It is interesting that the BOD has retained "outside counsel to investigate the matter," i.e., tell the BOD how ethically it should act.  Is this the new low level to which corporate out sourcing has sunk?   Also, one wonders about the competence of those conducting the initial vetting process, which did not detect the then potential CEO's résumé inflation.  Zero-tolerance seems to apply only to poor working stiffs, but not to those in the pinnacles of corporate power.

        "David J. Edmondson resigned as the chief executive of RadioShack yesterday, only days after he told investors that he intended to stay on despite the revelation that he had lied to the company about his education by claiming two college degrees when he had none.  Leonard H. Roberts, the executive chairman of the company, who had chosen Mr. Edmondson to be his successor as chief executive, announced the departure, which he said was a mutual decision between the board and Mr. Edmondson. … Mr. Roberts said the board knew 'some, but definitely not all' of the issues that were raised last week. 'What we thought we knew then, we did not know,' he said in a conference call with reporters. 'In retrospect, I wish we had not made that statement.' He declined to specify which facts had not been known. … But last Wednesday, the company issued a statement from Mr. Edmondson admitting, 'I clearly misstated my academic record and the responsibility for these misstatements is mine alone.'  The board then announced an investigation, which was canceled yesterday after he resigned."  (NYT, 2/21/06, "RadioShack Chief Resigns After Lying")  What was the purpose of the out sourced investigation when the CEO already admitted his falsehoods?  


        ''Shareholders across the nation are finally awakening to the fact that some corporate directors must be forced to live up to their duties and mind the store for the owners they are supposed to represent. To this end, shareholders will be asked to vote this spring on scads of proposals seeking changes in director elections at annual meetings. These so-called majority-vote proposals would require a company to accept, or at least consider, the resignation of any director who receives fewer than half the votes cast at the annual meeting. So woeful is the state of shareholder democracy in America that such a modest step is seen as real progress. Happily, one institutional investor has decided to forgo the incremental approach and deliver a potent punch to two directors it views as not up to the job. That investor is LongView Funds, a family of mutual funds run by the labor-union-owned Amalgamated Bank. Last week, LongView submitted a proposal to CA Inc., the company formerly known as Computer Associates, asking its shareholders to vote to remove two directors at its coming meeting: Alfonse M. D'Amato, a former senator from New York who served on the board when significant misconduct was going on at the company, and Lewis S. Ranieri, a former vice chairman of Salomon Brothers and the chairman of CA's board. Mr. Ranieri joined the CA board in 2001 after the company's accounting practices had been questioned. LongView recommends that CA shareholders oust him because, as LongView sees it, he failed to get to the bottom of the company's problems quickly and to put things back on the right track. … The proposal also noted that while Mr. Ranieri advised shareholders in 2004 that CA would not tolerate former executives retaining compensation they received based on false revenue numbers, the company has not tried to recover money from any executives who received unjustified pay based on erroneous accounting. … CA may try to keep the LongView proposal off its proxy by challenging it before the S.E.C. That would be an interesting sign of the board's attitude toward the shareholders it is supposed to represent and their rights to vote. The beauty of the LongView proposal is its simplicity. It does not require an expensive shareholder campaign to unseat a director in favor of another candidate. Nor does it ask the S.E.C. to create any new rights for CA shareholders. It simply asks that CA shareholders be allowed to remove directors by a majority vote of the shares outstanding -- something they are entitled to do under the laws of Delaware, where the company is incorporated.'' (NYT, 4/2/06, ''One Share, One Vote: One Big Test'')  The problems are that SEC Rule 14a-8 explicitly restricts shareholder proposals from dealing with the election of directors and such proposals are not binding.

        ''The S.E.C. …  has ruled that CA can exclude the proposal from its proxy, meaning that its shareholders will not be able to vote for or against the two directors. The best the shareholders can do, if they are disappointed in their performance, is to withhold support for the directors. That is an exercise in futility, because they win re-election anyway. By allowing CA to exclude the proposal, the S.E.C. relied on federal law, which essentially holds that proxy proposals are not supposed to be used as vehicles for changes in board composition. Such changes should instead be made in full-blown proxy fights, featuring dissident slates of directors for shareholders to consider. The S.E.C. has ruled this way many times before. …. But with director accountability so much on shareholders' minds, what better time than now to reconsider how to give owners more power in the election -- or ouster -- of directors who purport to serve them? Longview has appealed to the S.E.C. to review its position on the CA proposal. In a letter to the commission sent on Friday, Cornish F. Hitchcock, a lawyer who represents the fund, summed it up this way: 'The issue is whether the commission will interpose itself between a company and its shareholders when the shareholders believe that certain directors should be removed from office and when state law empowers such removal.'  Unfortunately, the S.E.C.'s view that such proposals should be excluded from proxies gives shareholders hoping to change the makeup of their company's board a deeply unsatisfying choice. They must either put up a dissident slate, which costs millions of dollars, or accept a nonexistent role in director elections. … And it will probably mean less vigilance from directors who know that, barring a disaster of Enron proportions, they cannot be fired.'' (NYT, 6/25/06, ''Soviet-Style Proxies, Made in the U.S.A.'')


        "The Coca-Cola Company announced an innovative plan yesterday for paying outside directors: If earnings per share do not rise fast enough over a three-year period, directors will receive nothing. But they will get a significant raise if earnings perform as expected. … [I]t ran into criticism from corporate governance experts who expressed fear that directors could face conflicts of interest. …. [L]ast year the S.E.C. issued a cease-and-desist order barring Coca-Cola from violating accounting rules.  … The S.E.C. said that while that accounting treatment was legal, Coca-Cola violated securities laws by not disclosing the channel stuffing and its effect on profits. … James D. Robinson III, the chairman of the Coke board's committee on corporate governance, said in an interview that the board had ample protections in place to prevent earnings manipulation…. [D]irectors might face a conflict if confronted with a possible merger that would depress earnings for a few years but that held the potential to be of great value in the long run."  (NYT, 4/6/06, "Coke's Board to Get Bonus or Nothing")  We’ve previously heard the "ample protections in place" story, e.g., at Enron where special purposes entities were used with off balance sheet financing.  This new scheme has serious potential problems, e.g., not independently wealthy Directors might face pressures to cooperate with management in earnings or financial statement manipulation to meet all-or-nothing performance targets; earnings per share, the sole performance metric utilized in the Coca-Cola plan, is among the measures most easily subject to manipulation; Directors might be subtly persuaded to lower expectations for overall corporate performance goals for management;  and/or struggles over setting performance targets could distract from Directors' primary responsibility to ensure that management is focused on the creation of long-term shareholder value.


            Sometimes a quick reversal may constitute evidence of a lame idea.  "It may sound strange, but when the wolves are scratching at your door, it helps to invite them in. That's because these wolves, accustomed to harsh words and ridicule, are often satisfied with a few kind words and a gesture of respect. '[Corporations] should have a constant open-door policy,' says Nell Minow, co-founder and editor of The Corporate Library, and a prominent shareholder activist since the early 1990s. A little communication goes a long way. During a proxy fight with Reader's Digest in the late 1990s, the CEO gave her a private meeting without his entourage. 'That was so disarming and so candid that it bought a lot of credibility with me,' Minow says.  Robert A. G. Monks, Minow's longtime partner in the fight for improved governance, also withdrew a resolution against Sears, Roebuck after meeting with the CEO." (Forbes, 7/13/06, "How To Fight Off Shareholder Activists")  Assuming that the activists had bona fide major grievances, which they had thoroughly investigated before launching their campaigns, it is surprising that they could be so easily resolved.  Or, was it a matter of lack of initial due diligence and/or a little ego stroking going along way where nothing was resolved!


            "[B]oards at major companies apparently still put a good deal of -- well, stock -- in stock recommendations.  New research shows that if half of the analysts covering a company drop their stock-recommendation rating one notch -- from 'buy' to 'hold,' for example -- that increases by nearly half the likelihood that the big boss will get the ax within six months.  The research, by Margarethe Wiersema of Rice University and Mark Washburn of the University of California, looked at CEO successions in Fortune 500 companies from 1996 through 2000. The impact of downgrades was above and beyond the effects of declining profits or even falling share prices. …  'For a long time corporate boards tended to be too complacent about inferior executive leadership,' Prof. Wiersema says. 'Now the pendulum may have swung too far in the opposite direction,' with boards firing CEOs 'in the midst of major shifts in corporate strategy.'" (WSJ, 8/5/06, "'Sell'=Fire: Analysts' Views Cloud CEOs' Jobs")  Hopefully, there is no cause and effect relationship between the stock analysts' recommendations and BOD actions.  If there is, investors are in deep trouble.


        A CEO, even though he is not a major shareholder, believes that he controls the BOD.  ''George Perlegos, who probably never thought he might lose his job, wants to fire the independent directors of the Atmel Corporation, a Silicon Valley semiconductor company. Mr. Perlegos founded Atmel in 1984, took it public in 1991 and was its chairman and chief executive until this past weekend. Then the five independent directors voted to fire him as chief executive and to remove him as chairman. While they were at it, the board fired three other executives, including another director, Gust Perlegos, an executive vice president who is George's brother.  By George Perlegos's account, before he was removed as chairman he called a special shareholders meeting for Oct. 5 to fire the five independent directors who had decided to fire him. The company claims that the meeting had not been called before Mr. Perlegos was fired. A Delaware judge will hear arguments next month, but it would seem to be appropriate to bring the owners into this. If not, the company will be run by a board that includes the two fired executives as it seeks to deal with lawsuits they filed. However it ends, this is a situation that never could have happened without Sarbanes-Oxley and the other reforms that followed the Enron scandal. … Without that rule, the independent directors would not have had the votes to fire the Perlegos brothers. … Given that the former chief executive had no employment contract, it would seem the board would have the power to fire him for any reason. That is not how the Perlegos brothers see it. They … argue that the directors violated their fiduciary duties.'' (NYT, 8/11/06, ''Atmel's Mess: You're Fired. No, You Are.'') 


        "VNU's board recommended in March that shareholders accept the private-equity firms' bid, but the shareholders instead rose up in a rare and vociferous revolt. The shareholders questioned why they should sell for a small premium to VNU's share price -- leaving on the table the profits the private-equity firms were likely to reap from quickly restructuring the company. Instead, the shareholders wanted to force the company to fix itself so they could enjoy the fruits of the changes themselves. … Corporate boards have typically recommended the offers, too, since they were reluctant to turn away private-equity advances for fear of offending shareholders looking to make a profit on their shares.  But after a handful of private-equity firms over the past two years generated massive quick profits -- sometimes more than $1 billion in just a few months -- the firms are facing rising discontent from the shareholders and directors they count on to approve company sales. Warren Buffett, chief executive of Omaha, Neb.-based Berkshire Hathaway Inc., recently warned his shareholders that private-equity firms are 'deal flippers' that use financial engineering to eke out quick gains rather than nurturing companies for the long term. … Some shareholders also are concerned about the potential for conflicts of interest when company managers recommend private-equity bids, then stay on to reap fortunes after a takeover. … Many private-equity executives say the battle could signal tough times ahead. Now, they say even after a board recommends a takeover, private-equity firms may increasingly find they need to negotiate again with shareholders, who are demanding more of the potential profits for themselves." (WSJ, 8/17/06, "In Twist for Private Buyouts, Some Shareholders Fight Back")  The BOD, in order to ascertain whether to recommend any proposal, should know what the buyer proposes to do and be able to estimate the buyer's potential profits and, then, make full disclosure to Shareholders.


        "A special committee of Apple Computer Inc. directors that examined backdated stock options included one board member (Jerome York) who had been involved with awarding Apple options to executives and another (Eric Schmidt) whose former company is scrutinizing option grants made while he was its chief executive. … Apple also said nothing about what role, if any, its directors had in the problematic option grants, nor has it revealed details about the board's role in investigating the grants. The company also hasn't said who approved the options with the problematic dates." (WSJ, 10/11/06, "Apple's Options Probe Could Raise Conflicts")


        "Martin Lipton ... is the nation's pre-eminent takeover lawyer and founding partner of Wachtell, Lipton, Rosen & Katz.  He invented the poison pill in the 1980s, a device that entrenched me-first managers threatened by takeover artists. More recently, Mr. Lipton has become the apologist for embattled chief executives who don't like shareholders sounding off on excessive pay and cozy boards. Last week, he sounded a grave warning at the 25th annual Institute on Federal Securities in Miami. ... Directors are under siege, he averred, thanks to shareholder activists who are 'destroying the role, focus and collegiality of the board of directors.' Finally, Mr. Lipton thundered: ''We cannot afford continuing attacks on the board of directors. It is time to recognize the threat to our economy and reverse the trend.'' ... [T]he sheer desperation in Mr. Lipton's speech, called 'Shareholder Activism and the Eclipse of the Public Corporation,' subverted the more intellectually challenging elements of his argument, leaving what remained something of a rant. ...[H]is thesis -- that owners are bent on wrecking the companies they have bought and upon which they hope to build a prosperous retirement -- doesn't make much sense. He seems to see shareholders as infants who should stay in their cribs and leave big corporate decisions to wise men on the board, in the corner suite and, of course, in law offices. ... If Mr. Lipton had focused his diatribe on marginal activists with kooky agendas or hedge funds keen on instant gratification, it would have been more credible. But he seems to consider even thoughtful people, who are trying to persuade directors to exercise their fiduciary duties, as enemies of corporate America. ...  If the public corporation is an endangered species, as Mr. Lipton argued, it is not because of shareholders. Those who owned stock in Enron, WorldCom, Adelphia and Tyco did not create the scandals that rocked those companies and sowed mistrust among others. Selfish managers and passive directors did that work handily. ... Greater shareholder involvement in director elections and other board matters is coming, in part because so much wealth has been destroyed at companies with lax oversight. Mr. Lipton's fear-mongering about its consequences will please his corporate clients, but it won't stop the train." (NYT, 2/11/07, "Memo to Shareholders: Shut Up")  


       The idea of a Chairman/CEO plus a Lead Director (as opposed to an Independent Director serving a Chairman) is seriously flawed.  "I have served on the boards of three major American corporations.... [T]he chairman/CEO plus lead director model is actually worse that the chairman/CEO model, because investors falsely believe the lead director has the power to protect their interests.  In fact, the lead director has little practical power and is frequently selected by the chairman/CEO.  In America, the chairman is still the chairman, will all the respect and influence that title bestows on the holder." (WSJ, 7/9/08, Opinion: "How to Rein in the Imperial CEO")


        "As much as $75 billion of Lehman Brothers Holdings Inc. value was destroyed by the unplanned and chaotic form of the firm's bankruptcy filing in September, according to an internal analysis by the company's restructuring advisers. A less-hurried Chapter 11 bankruptcy filing likely would have preserved tens of billions of dollars of value, according to a three-month study by the advisory firm, Alvarez & Marsal. An orderly filing would have enabled Lehman to sell some assets outside of federal bankruptcy-court protection, and would have given it time to try to unwind its derivatives portfolio in a way that might have preserved value, the study says. ... 'While I have no position on whether or not the federal government should have provided further assistance to Lehman, once the decision was made not to provide further assistance, an orderly wind-down plan should have been pursued. It was an unconscionable waste of value,' said Bryan Marsal, co-chief executive of the advisory firm who now serves as Lehman's chief restructuring officer. Mr. Marsal estimates that the total value destruction at Lehman will reach between $50 billion and $75 billion, once losses from derivatives trades and asset impairment are combined. Much of the destruction of value came from the bankruptcy filing of the parent guarantor, Lehman Holdings. The filing triggered a cascade of defaults at subsidiaries that held trading contracts. That created what is known as an 'event of default' for Lehman's derivatives. This resulted in a termination of more than 80% of the transactions with counterparties -- typically major European and U.S. banks such as J.P. Morgan Chase & Co., said Mr. Marsal. In all, the bankruptcy canceled 900,000 separate derivatives contracts. The problem for creditors is that this also terminated contracts in which Lehman was owed money. Mr. Marsal said a few extra weeks would have allowed Lehman to transfer or unwind most of its 1.1 million derivatives trades, preserving more cash for creditors. Overall, the losses from derivatives trades and related claims cost Lehman's unsecured creditors at least $50 billion, according to the analysis. The findings, yet to be made public, eventually will be presented to the U.S. Bankruptcy Court and to Lehman's creditors. 'This filing, which was pretty much dictated to the board of directors at Lehman that weekend, occurred with no planning,' said Mr. Marsal, whose New York firm was hired by Lehman's board around 10:30 p.m. Sept. 14. That was just hours before Lehman filed for the largest bankruptcy in U.S. history, after the U.S. government declined to offer its backing. ... 'Had fundamental rules of crisis management been followed, much of the value that was lost by the unsecured creditors would have been prevented. This loss in value was a big hit to the public holders and could have been mitigated,' Mr. Marsal said. Mr. Marsal also criticized the way Lehman sold off assets. The unplanned bankruptcy pushed down prices for Lehman assets in an already depressed market." (WSJ, 12/30/ "Lehman's Chaotic Bankruptcy Filing Destroyed Billions in Value")  In what manner was the bankruptcy filing decision "pretty much dictated to the board of directors"?  Who is the dictator-in-chief?  Why was there "no planning" by the BOD?  Could it be that the former rulers of the financial universe were/are incompetent?  Will this BOD remain unaccountable by invoking the (lack of) business judgment rule?


        "This week New York Sen. Chuck Schumer is expected to introduce the Shareholder Bill of Rights Act of 2009. ... In its current form, the bill would ... grant stockholders a new right to include their own director nominees in the corporation's proxy statement. ... And it would require that all directors receive a majority of votes cast to be elected. ... Excessive stockholder power is precisely what caused the short-term fixation that led to the current financial crisis. As stockholder power increased over the last 20 years, our stock markets also became increasingly institutionalized. The real investors are mostly professional money managers who are focused on the short term. It is these shareholders who pushed companies to generate returns at levels that were not sustainable. They also made sure high returns were tied to management compensation. The pressure to produce unrealistic profit fueled increased risk-taking. And as the government relaxed checks on excessive risk-taking (or, at a minimum, didn't respond with increased prudential regulation), stockholder demands for ever higher returns grew still further. It was a vicious cycle. .... The stockholder-centric view of the current Schumer bill simply cannot be the cure for the disease it spawned."  (WSJ Opinion, 5/12/09, "Schumer's Shareholder Bill Misses the Mark") This is the type of propaganda one has come to expect from Martin Lipton of the New York law firm Wachtell, Lipton, Rosen and Katz, whose corporate clients pay for such pabulum.  Lipton never explains what "excessive shareholder power" means and whether/how it relates to Shareholder access to the corporate ballot.  He has determined that Shareholders caused all corporate foibles even though Shareholders have no effective means to hold Management accountable for its actions.  He, also, considers Management so feeble-minded that it does whatever any Shareholder desires without consideration of the consequences.


            "Two major labor groups renewed their push to unseat one of Citigroup Inc.'s longest-serving directors, C. Michael Armstrong. In a letter sent Friday to Citigroup Chairman Richard Parsons, the AFL-CIO and American Federation for State, County and Municipal Employees asked for a meeting to discuss their concerns about Mr. Armstrong and their desire for a say in new board nominees. The unions have criticized Mr. Armstrong, former chairman and chief executive of AT&T Corp., for his role heading Citigroup's audit and risk-management committee before the financial crisis. 'We're focused on holding a director accountable whose failure to oversee and manage risk cost taxpayers hundreds of billions of dollars and brought his firm to the brink of collapse,' said Daniel Pedrotty, the director of the AFL-CIO's office of investment. Mr. Armstrong has previously defended his tenure on the New York company's audit committee, saying he isn't to blame for Citigroup's problems. ... Mr. Parsons has pledged to revamp the board with a majority of new members, recruiting seven so far. ... The 17-member board still has eight directors who served in the run-up to the financial crisis, including Mr. Parsons." (WSJ, 1/19/10, "Two Unions Push for Resignation Of Armstrong From Citi's Board")  If Armstrong claims that he isn't to blame, did he state who is to blame?  If Parson's agrees that Armstrong should leave the BOD for his alleged failure to oversee and manage risk, is Parsons not admitting that he (Parsons) should also resign?  The unions may receive a "Return to Sender" response to their letter.   They need to use something that has the impact of a telegram!


            "Shareholders of Merck sued in 2004, contending that current and former company officers and directors had breached their fiduciary duties in the marketing of the painkiller Vioxx, causing investors to lose billions. And all the shareholders got for their suit was a settlement agreement.... Plaintiffs have also asked for $12.15 million to cover legal fees. ... The settlement agreement requires Merck to enact some innovative governance reforms, like hiring a chief medical officer to serve as something of an independent ombudsman, charged with monitoring product marketing and safety. The agreement also tasks board members for the first time with safeguarding research ethics and drug safety. And it calls for two new committees — one to look after product safety and another to address risks to the company. ... But some analysts say that these kinds of changes don't address deeper problems in corporate culture, like errant leadership or obsequious directors, that are factors in many business disasters. After all, they said, Enron's stringent code of conduct did not prevent accounting fraud. ...  Indeed, to former investment bankers like John Gillespie, the co-author of a book on corporate governance called 'Money for Nothing,' the Merck settlement agreement seems like pretty small potatoes in the face of such staggering shareholder losses. Moreover, Mr. Gillespie said, because executives concerned about lawsuits are loath to acknowledge any mistakes, it's almost impossible for companies to take corrective action 'beyond window dressing." (NYT, 4/2/10, "Does Merck Agreement Pave a Road Toward Change?")  The wimpy agreement served as a diversion to permit the attorney's to extract (without at trial on the merits) $12.15 million from the Company (current shareholders) vis-à-vis the Directors.  More bad deeds go unpunished.


          "[T]he 8-K that teen retailer Abercrombie & Fitch (ANF) filed yesterday has to be one of the wackiest we've ever seen. ... As the filing notes, CEO Michael Jeffries, who has a penchant for using ANF's corporate jet for personal use, racking up over $1 million in a year when Abercrombie's stock fell by over 60%, will receive $4 million not to use the corporate jet as much under his amended employment contract filed yesterday. If Jeffries spends over $200,000 a year on personal use, he'll have to (insert huge sigh here) reach into his own pocket! ... [Y]ou have to wonder what ANF's board was thinking here when they made this decision."  (, 4/14/10, "Holy Cannoli at Abercrombie…")


            "A coalition of public pension funds is recommending the ouster of three Massey Energy Co. board members, saying the safety committee members failed to carry out their duties in light of the April 5 coal mine explosion in which 29 workers were killed.On Tuesday, a letter signed by pension fund leaders in eight states, which together own about 1.36 million shares, or about 1.57% of Massey's shares, urged shareholders to oppose the May 18 reelection of Massey President Baxter F. Phillips and outside directors Richard M. Gabrys and Dan R. Moore.  Retired Adm. Bobby R. Inman, the board's lead independent director, said he is seeking three or four members, but potential directors 'don't want to serve until they see what happens at the annual meeting.' ...  Massey board members who fail to win a majority of votes must offer to leave. The corporate-governance committee recommends whether the board should accept the resignations... " (WSJ, 5/12/10, "Massey Directors Opposed By Funds")  Pension fund leaders in 8 states could not amass more than 1.57% of the stock, which is much less than the 5% level needed to get a BOD candidate's name on the corporate proxy statement under the SEC's proposed new rules.  Have the pension fund leaders suggested replacement BOD candidates?  Has a corporate-governance committee ever recommended that their corporate cronies leave a BOD?


        "The mystery isn't why Hewlett-Packard is likely to part ways with its chief executive, Léo Apotheker, after just a year in the job. It’s why he was hired in the first place. ... Interviews with several current and former directors and people close to them involved in the search that resulted in the hiring of Mr. Apotheker reveal a board that, while composed of many accomplished individuals, as a group was rife with animosities, suspicion, distrust, personal ambitions and jockeying for power that rendered it nearly dysfunctional.  Among their revelations: when the search committee of four directors narrowed the candidates to three finalists, no one else on the board was willing to interview them. And when the committee finally chose Mr. Apotheker and again suggested that other directors meet him, no one did. Remarkably, when the 12-member board voted to name Mr. Apotheker as the successor to the recently ousted chief executive, Mark Hurd, most board members had never met Mr. Apotheker.  'I admit it was highly unusual,' one board member who hadn't met Mr. Apotheker told me. 'But we were just too exhausted from all the infighting.' ... There were so many hard feelings. It became difficult to conduct business in a civil manner.” Still grappling with Mr. Hurd’s messy departure (H.P. sued him after he joined the rival Oracle as its president, later dropping the case), the company began a search for his successor. Four directors — Lawrence Babbio, John Hammergren, Marc Andreessen and Mr. (Joel Z.) Hyatt — volunteered to form the search committee. Some other directors were immediately distrustful. They suspected that some colleagues hoped to advance their own ambitions, including in at least one case to be the next chairman. Others were so angry over Mr. Hyatt's support for Mr. Hurd that they declined to participate in any committee he was on.  Running H.P. might seem to be one of the best jobs in corporate America. But the committee quickly discovered that a company whose board had summarily fired its last two chief executives was a hard sell to top candidates, said people involved in the search.  Among those who rebuffed H.P., they said, was Virginia Rometty, a  senior vice president at I.B.M. Ray Lane, a managing partner at Kleiner Perkins and a former president of Oracle, also rebuffed their approach but indicated he might be interested in being chairman.  According to directors, the committee narrowed the field to three candidates. Mr. Babbio favored an internal candidate. But before Mr. Hurd's ouster, he had told the board that he did not feel anyone at H.P. was ready to assume the top job. Mr. Andreessen favored Scott McNealy, a  co-founder  and chief executive of Sun Microsystems.  Mr. McNealy was a candidate who worried other directors, given his outspoken personality and his track record at Sun Microsystems, whose stock had dropped precipitously with him at the helm. That left Mr. Apotheker, who had lasted just seven months as chief executive of the German software giant SAP. While reasonably well known in Europe and in software circles, he was relatively unknown in Silicon Valley.  As one executive said, 'We had a joke: the code name for the search was Léo Apotheker. Because no one had heard of him.'  'Léo had a lot in his favor, and a lot of deficiencies,' said one board member. Everyone thought he was extremely smart and knew the global software business. Among the deficiencies may have been the circumstances under which he left SAP, but when I pressed various directors, no one seemed able to recall just what those were.  'I know there was a satisfactory explanation, and we did look into it,' one person told me. Others did not want to comment. (It has subsequently been reported that while Mr. Apotheker was at SAP, the German company was sued and admitted that it had infringed on Oracle software copyrights after stealing them. SAP has said he was not responsible for the part of the company where the theft occurred.)  Before a final vote on Mr. Apotheker, H.P. search committee members again urged other directors to meet him. No one took them up. At least one director, Ms. Salhany, tried to slow the process, worrying aloud that 'no one has ever met him. Are we sure?' But her concerns were brushed aside. 'Among the finalists, he was the best of a very unattractive group,' one director said.  However hasty the process, board members felt they had little choice. 'I believe the search committee did a good job. They worked hard. There were very few choices,' one participant said. 'So many people they called said they weren't interested. People didn't want to follow in Mark's footsteps. But Mr. Apotheker was a mistake. We all made it. Sometimes you make a mistake.'  ... Whatever the board does now, ultimately it is going to need to examine itself.  How did it let things get to this? That, at the very least, should be the subject for inquiry by yet another committee." (NYT, 9/21/11, "Voting to Hire a Chief Without Meeting Him ") Directors who are "too exhausted" to fulfill their fiduciary duties should be put out to pasture. No American intelligence agent interviewed "Curveball," either. Same results - disaster!


        "Say on pay" has failed to remedy BODs lavishly rewarding failure.  "Just last week, Léo Apotheker was shown the door after a tumultuous 11-month run atop Hewlett-Packard. His reward? $13.2 million in cash and stock severance, in addition to a sign-on package worth about $10 million, according to a corporate filing on Thursday.  At the end of August, Robert P. Kelly was handed severance worth $17.2 million in cash and stock when he was ousted as chief executive of Bank of New York Mellon after clashing with board members and senior managers. A few days later, Carol A. Bartz took home nearly $10 million from Yahoo after being fired from the troubled search giant.  A hallmark of the gilded era of just a few short years ago, the eye-popping severance package continues to thrive in spite of the measures put in place in the wake of the financial crisis to crack down on excessive pay. ... 'We repeatedly see companies’ assets go out the door to reward failure,' said Scott Zdrazil, the director of corporate governance for Amalgamated Bank’s $11 billion Longview Fund, a labor-affiliated investment fund that sought to tighten the restrictions on severance plans at three oil companies last year. 'Investors are frustrated that boards haven’t prevented such windfalls.' ... Yet so far, few investors have gone to battle. Only 38 of the largest 3,000 companies had their executive pay plans voted down, according to Institutional Shareholder Services. Even then, the votes are nonbinding. ... Practices such as large cash payouts and having shareholders pay the tax bill for departing executives are on the decline, especially after the uproar over the $200 million-plus exit packages of Hank McKinnell of Pfizer and Robert Nardelli of Home Depot in the last decade. ... At Burger King, John Chidsey, its chief executive, departed in April with a severance package worth almost $20 million, despite severely underperforming McDonald’s. ... Another chief executive received severance payments after his company was accused of fraud. At Beazer Homes, Ian McCarthy was ousted as chief executive three months after the company settled with the S.E.C. for filing misleading financial statements. Mr. McCarthy was forced to repay about $6.5 million. But what the government took away, Beazer’s board gave back. Mr. McCarthy was awarded a severance package worth about $6.3 million — and was reimbursed for up to $10,000 of legal fees associated with his termination. ... Perhaps the biggest reason that golden parachutes persist is that corporate boards hire superstar chief executives, rather than groom strong managers inside the company for the top job. That gives outsiders a stronger hand to demand all kinds of upfront stock awards and lucrative severance deals when they are hired. So when things do not work out, that 'golden hello' turns into a 'golden goodbye.' ... Lloyd Doggett, a Democratic representative of Texas and senior member of the House Ways and Means Committee, said excessive severance packages were 'outrageous.' 'The whole concept that the only way to get rid of bad management is to buy them off is fundamentally wrong' he said." (NYT, 9/29/11, "Outsize Severance Continues for Executives, Even After Failed Tenures") So, Scott, what are you going to do about it? Did you ever consider initiating a proxy fight? Actions speak louder than words. Would BODs be so generous if they felt they were dealing with their own money? And, what is Doggett going to propose to clean up this do-do?


“‘Board doctors’ charge up to $250,000 to come into company board rooms, provide in-depth assessments and encourage directors to make tough decisions they may otherwise avoid on their own.  … The intents or results of checkups vary. Some boards want the outside advisors to identify their weakest members before others do, while others need to reduce the information overload board members may experience due to 800-page briefings distributed before meetings. Some boards want the ‘doctors’ to weigh in on strategic matters, such as how much directors should prod executives to consider a takeover. And some boards just want the consultant to make it easier to cut dead weight. After all, 36 percent of directors think someone one their board should be replaced, but they identify directors’ discomfort in doing so as the biggest obstacle, according to PwC research cited by WSJ.  The WSJ report mentions one director who played Sudoku during board meetings for six years straight. Executives complained to the outside advisor, saying they felt a lack of respect. When this was communicated the board chairman, he or she addressed the behavior, and the Sudoku-playing board member decided not to stand for re-election.” (2/20/15, Becker’s Hospital Review, “Do you need a doctor to diagnose your board's ailments?”) Corporate governance is sick and needs a shot when Board Members are afraid to state their opinions or are too lazy or unable to do the jobs for which they are handsomely paid.  


        G.        Unworkable Purported Safeguards


                   1.    Director "Independence" Is A Myth


        Legislative and regulatory attempts to define "independence" of Directors are for public consumption, but are ineffective in curing conflicts of interest and CEO undue influence.  


        "The New York Stock Exchange hopes to make it easier for corporate directors to meet the Big Board's new independence requirements -- even before those rules are fully in place. … [T]he NYSE tried to revise the rules quietly, without seeking public comment on them.    Even before the SEC approved the NYSE's new rules, the exchange loosened its definition of who constituted an independent director.  Originally, for instance, the NYSE would have required companies to look back five years to see if directors had any conflicts of interest that might jeopardize their independence.  Under the adopted rules, the exchange only requires a three year look-back period.  Now, the exchange is trying to loosen those rules further. … [T]he NYSE proposed that independent directors be allowed to have closer ties to their companies' auditor than it currently would permit.  As the rules currently stand, directors would not be considered independent if they worked for the company's auditing firm in the last three years or if their 'immediate family members' worked for the company's auditing firm in the last three years.  The rules consider spouses, parents, children, siblings, in-laws and anyone who shares the director's home, other than a domestic employee, an immediate family member.  But under the proposed revisions, most of which will go into effect immediately if the SEC approves them, the NYSE would only look back three years to see if the director or his immediate family member actually worked on their own company's audit.  Even if a director or family member was a partner with or employed by the company's audit firm in the past three years, they could still be considered independent under the revised rules, as long as they themselves didn't work on the audit.  Further, the NYSE narrowed the definition of who constitutes a family member.  If the SEC approves the changes, the NYSE would only consider spouses, minor children or adult children sharing a home with directors to constitute their immediate family. (, 9/9/04, "NYSE's Independence End-Around Puzzles Onlookers"If the definition of "independent" might cause some unemployment to fellow members of the Director-class, the definition will be changed.

        "The New York Stock Exchange is preparing to put more heat on listed companies to explain how they decide who can be called an 'independent' director. ... [T]he NYSE's current rules have too many loopholes.  Investors have been troubled by various ties between directors and their family members and the companies where they serve --- only to hear with dismay from officials explaining that they are complying with NYSE standards. ... Under the proposed NYSE rule, the company would have to explain why the relationship is immaterial and thus doesn't taint the director's independence."  (WSJ, 12/8/06, "NYSE Seeks Tighter Standards For Listing Independent Directors")  What can one do if one doesn't agree with the explanation?


        "Wells Fargo & Co. plunked down $1.5 million for a piece of land in a fast-growing Denver suburb where the bank wanted to build a branch. One beneficiary was Wells Fargo director Richard D. McCormick… (who) owned 25% of the limited liability company that held the two-acre plot…. Because that company sold the land to Wells, Mr. McCormick was no longer considered an independent director of the bank under Internal Revenue Service rules. It also put him in conflict with Wells's own independence guidelines. Yet Mr. McCormick remains independent for purposes of sitting on the bank's board…. Most companies, however, keep mum about such relationships unless they determine those dealings to impinge upon a director's independence. …[F]inancial ties between directors and corporate executives remain common and don't necessarily cost directors their coveted independent status. … Defining director 'independence' is part of the issue. Rules governing what constitutes independence vary among regulators and exchanges. … Wells Fargo concluded that Mr. McCormick's passive role in the LLC, as well as the fair price Wells Fargo paid for the land, meant the deal 'would not impair his ability to exercise independent judgment' on behalf of shareholders…."  (WSJ, 6/29/06, "Directors' Financial Ties Test Rules Disclosures Raise Concerns About Independent Status; Wells Fargo's Land Deal")  Did Wells Fargo submit McCormick to an adversary proceeding where the issues of "fair price" and "impair his ability" were determined by an "independent" finder of fact?  Nope.  The CEO may have said a blessing the issues and they disappeared.


        "Hollinger International Inc. invested in a venture-capital fund and a conservative magazine linked to outside directors Richard N. Perle and Henry A. Kissinger, raising new questions about the board's independence in the wake of a widening financial scandal. ...  There isn't any indication ... of ... anything illegal. ...[T]he payments highlight the subtle financial relationships between companies and otherwise independent directors.  And the payments take on a starker light in the wake of investor accusations that the board stood by while Hollinger made large payments to Lord Black, who resigned as CEO last month....While the board says that it didn't approve the $15.6 million payment (to the CEO and others), the fee was disclosed in a March 2002 SEC filing that said the payment had been approved by the board.  The board didn't dispute that until investigators started looking into the payments. ... Along with financial investments, Hollinger also made contributions to political causes linked directly to directors." (WSJ, 12/3/03, "Hollinger's Investments Are Linked To Board's Perle and Kissinger")  Hollinger's SEC 10K [3/28/02] filing states, "The Company's independent directors have approved the terms of these payments." [Emphasis added.]  That SEC filing contains the signatures of Messrs. Perle and Kissinger and others.  "In the 1990's, Mr. Kissinger, Mr. Perle and Mr. Andreas all served as directors at the times when they were also getting paid (by the company) for their advice to Lord Black. ... Mr. Perle ... also served as chairman or co-chairman of Hollinger Digital, a unit of the parent company...  In that capacity, he was paid $300,000 a year and $2 million in bonuses..., figures that have not previously been disclosed." (NYT, 12/22/03, "Friendship and Business Blur in the World of Media Baron") "[T]op executives 'looted' the publisher of at least $300 million, in part by approving the sale of newspaper operations for as little as $1, an investor lawsuit contends.  The lawsuit filed by Cardinal Value Equity Partners says the board and its audit committee often granted approval of transactions relying only on assurances from executives who stood to personally benefit from the deals, with no outside evaluation."  (Chicago Tribune, 1/3/04, "Lawsuit: Hollinger Approved Bargain Deals")  "In 1999 … Hollinger International Inc. bought a profitable weekly newspaper … for $1.75 million.  Less than two years later, Hollinger sold the paper.  The price: $1.  The buyer was … Lord Black and his second-in-command. … Directors, who approved the deal retroactively, were told that the paper had lost $70,000 in the previous year … and that no one else was interested in buying the paper….  In the month after the deal closed, the Mammoth Times earned $119,700….  The board was not aware of the earnings…."  (WSJ, 1/30/04, "Behind Paper Sales, Lord Black Played A Double Role")  This information comes to us under the category of "How dumb can they come?"  One would expect that the BOD would demand certain information.  Why was Management seeking the BOD's approval only after the deal closed?  What caused a profitable newspaper to become unprofitable in less than 2 years?  What efforts had Management been making to cure the situation?  Why were those efforts, if any, unsuccessful?  Why did members of the Management team believe that they could not turn around the paper as members of Management, but could do so if they owned the paper directly?  What were their expectations of personal gain?  What efforts were made to seek other buyers?  What, if anything, was the result of each of those efforts?  

        "The report characterizes Hollinger International's directors as being asleep at the switch for years...." (WSJ, 8/31/04, "Hollinger Board Faces Criticism In Coming Report")  "The report, released yesterday, harshly criticizes some directors but essentially clears others, saying they were entitled to assume that others were paying attention to what was going on. … The report lets most of the directors off with little more than a mild rebuke for not having shown much curiosity in how the business was run." (NYT, 9/1/04, "Misdirected: The Trouble With Hollinger's Board")  "Members of the audit committee come under particular fire. Its members - Ms. (Marie-Josée) Kravis, an economist and wife of the financier Henry Kravis; the former Illinois governor, James R. Thompson; and Richard R. Burt, a former ambassador to Germany, were 'ineffective and careless,' the report stated." (NYT, 9/1/04, "Hollinger Files Stinging Report on Ex-Officials")  The lesson is that one need not be an independent thinker to be legally classified as "independent," and to collect the big bucks.  

        "Issuing his first public statements since being heavily criticized in an internal report for rubber-stamping transactions that company investigators say led to the plundering of the company, Mr. Perle now says he was duped by his friend and business colleague. … Lord Black approved plans that ultimately earned Mr. Perle more than $5 million - including a bonus formula that rewarded Mr. Perle for the successful investments he placed on behalf of a subsidiary of Hollinger but did not subtract for the losers. … The report said that Mr. Perle told the committee he often signed documents without reading them, and it singled him out among the directors for conflicts of interest. … From his vacation home in southern France late Friday.... Perle said that he was misled."  (NYC, 9/6/04, "Under Attack, Director Says Hollinger's Black Misled Him")  Directors do not bite a hand while it's feeding them.  It is another story of what happens when the feeding stops. "The Securities and Exchange Commission has warned a former Pentagon adviser, Richard N. Perle, that it might sue him for his role in the suspected looting of Hollinger International, the media company once controlled by Conrad M. Black.  … Mr. Perle said that he never profited from the deals." (Bloomberg News, 3/24/05, "Hollinger Director Warned")

        "Unfortunately, most members of the Board also saw Hollinger as (Conrad M.) Black's Company. They weren't selected by institutional shareholders for board seats, they were selected by Black. Black was infinitely skilled in reinforcing the aura that he, not the Board, had ultimate responsibility for decisions at Hollinger. Board members knew that … Black named every board member, and was free to replace anyone who disagreed with him. No shrinking violet, Black would not hesitate to push the Board wherever he wanted them to go. … As a group, the Hollinger Board (and particularly the Audit Committee) was not alert and didn't notice when Black and (F. David) Radler were driving their bloated fee requests past them. .. [T]hey should have been concerned that the total amounts paid to Black and Radler under one pretext or another represented essentially 100% of the Company’s adjusted net income for seven years. This financial fact raised the possibility that Black and Radler were violating their fiduciary duties on a massive scale. … Black's ultimate control couldn’t eliminate the requirements of Delaware law that the business of a company be managed by a board of directors. … Black called the shots, and he wanted a Board filled with prominent people who wouldn’t make waves. Black got what he wanted…."  Report of Investigation by the Special Committee of the Board of Directors of Hollinger International Inc. (August 30, 2004) (We have linked to our annotated pdf searchable copy of the Report of Investigation.)

        "Hollinger International Inc. shareholders … are gearing up for a fight to overhaul the company's board of directors….  Shareholders say that … board members have been slow to resolve the legal battles created by the ouster two years ago of former Chairman and Chief Executive Conrad Black, who faces civil-fraud charges by the Securities and Exchange Commission for allegedly diverting funds from the company. … Shareholders say they are worried that the directors, many of whom were appointed by Mr. Black, may have their own reasons for stalling. … The board's audit committee was criticized for its lax oversight in a 2004 company report on Mr. Black's financial dealings at the company, because the audit committee approved the bulk of the payments to Mr. Black. Shareholders are pressing the company to present a fresh slate of directors at its annual meeting in January."  (WSJ, 11/11/05, "Hollinger Holders Prepare to Revamp Board, Pay Plan")  Does a Shareholder "press" by asking the current Directors to, pretty-please, nominate other Director-candidates to replace themselves?  If the Shareholders believe that the current Directors are conflicted and less than competent, how can the Shareholders reasonably trust them to effect such selections?  What would/could the Shareholders do if the current Directors prefer to stay in their cushy chairs and prevent a more detailed investigation of their past actions (or lack thereof)?

        "The Securities and Exchange Commission has notified three high-profile current and former directors of Hollinger International Inc. that they may be sued for failing to spot fraud that senior executives of the newspaper company are suspected of committing. The notices were issued to James R. Thompson, Richard R. Burt and Marie-Josée Kravis…. The three directors made up Hollinger's audit committee from 1998 to October 2003…. Mr. Thompson is a former governor of Illinois and a partner with the law firm of Winston & Strawn; Mr. Burt is a former United States ambassador to Germany; and Mrs. Kravis is the wife of the financier Henry R. Kravis and a member of the boards of the Ford Motor Company and IAC/InterActiveCorp. … If the S.E.C. does file a civil suit against Mr. Thompson, Mr. Burt and Mrs. Kravis, it would be an unusual attempt to hold independent directors to account for not being vigilant enough about a suspected fraud. … The Hollinger special committee report, written under the direction of Richard C. Breeden, a former S.E.C. chairman, … depicted Mr. Thompson, the audit committee chairman, as too trusting of Lord Black and Mr. Radler, and Mr. Burt and Mrs. Kravis as too ready to go along with Mr. Thompson. … [A] group of Hollinger's current and former independent directors, including the three audit committee members who received the Wells notices, agreed to settle a shareholder lawsuit against them for $50 million." (NYT, 12/16/05, "S.E.C. Puts 3 Hollinger Directors on Notice")  That's a big "if"!  Shareholders might hope that, IF the SEC does bring a civil action, it will seek meaningful remedies.

        "Hollinger International's board was once known for celebrity directors, including former Secretary of State Henry Kissinger and former Assistant Secretary of Defense Richard Perle. … [T]he board has gained notoriety for lax oversight. … [T]he legal costs of the board's somnolence are coming back to haunt Hollinger. … (whose) directors, most of whom have since left. … According to the company's recent SEC filing: 'The following legal fees have been advanced on behalf of directors and executive officers who served as such in fiscal year 2005: [Conrad] Black $4,320,420; [Barbara] Amiel Black $857,235; [Richard] Burt $692,538; [Dan] Colson $552,308; [Henry] Kissinger $56,579; [Shmuel] Meitar $159,920; [Richard] Perle $4,655,491 and [James] Thompson $173,339.'  The company says it will submit bills to its insurer to get reimbursed for the legal fees." (WSJ, 5/13/06, "Big Legal Bills Are Attached To Big Names in Hollinger Pact, But Insurer Will See the Tab")  What are the odds that Hollinger’s insurer will seek to recoup its losses from the former Directors?  Most likely, the insurance company will raise its D&O premiums to Hollinger in order to recoup those losses/expenses and, Shareholder assets will be taxed.

        "The Securities and Exchange Commission has notified former Defense Department adviser Richard Perle that regulators won't bring charges against him in connection with a case involving his service as a Hollinger International Inc. board member. … Mr. Perle served on the executive committee of Hollinger International from 1994 to 2003, along with former Hollinger Chairman Conrad Black and former Hollinger Chief Operating Officer David Radler.  The SEC filed civil-fraud charges against Messrs. Black and Radler in 2004, accusing them of engaging in undisclosed transactions that benefited them but hurt the newspaper-publishing company. …  A 2004 report for Hollinger International's board found that Mr. Perle 'repeatedly breached his fiduciary duties as a member of the executive committee' by failing to evaluate several consent forms that authorized many of the transactions." (WSJ, 10/24/06, "SEC Won't Charge Perle In Hollinger Board Probe")  It will be much harder to walk on the civil side!


        Directors may not be "independent" when they have their own financial interests to serve and cronyism is rampant.  Further, Directors change governance rules relating to age to suit their own needs and appoint fellow Directors without a Shareholder vote.  "As the Coca-Cola Company searches for a new chairman and chief executive, some investors and analysts are as concerned with who is doing the looking…. The selection committee is so dominated by longtime insiders - on the panel are Warren E. Buffett, chairman of Berkshire Hathaway … and Donald R. Keough, a former Coke president.... …  'It's cronyism,' said Marc Greenberg, an analyst at Deutsche Bank. … The concern, he said, is that the selection committee 'is run by 75-year-old guys that are out of touch.'  James B. Williams, a Coke director since 1979 and a search committee member, says that although the panel members are 'close,' they frequently consult with other directors.    Coke's most influential directors have long dominated both the finance and management development committees…. In addition to Mr. Keough, Mr. Buffett and Mr. Williams, the panel includes Herbert A. Allen, chief executive of Allen & Company, the investment firm; James D. Robinson III, co-founder and general partner of RRE Ventures and chairman of RRE Investors; and Barry Diller, chairman of InterActiveCorp, an online services company. Mr. Diller, who joined in 2002, is the only panel member who has been on the board less than 15 years. … Mr. Keough, who heads the nominating panel, is also the chairman of Mr. Allen's company and sits on the board of InterActiveCorp and Berkshire Hathaway.  … The directors also do quite a bit of business with Coke.  For example, the McLane Company, which is part of the Berkshire Hathaway conglomerate of Mr. Buffett, bought $103.9 million of fountain syrup in 2003 and received $11 million in agency commissions relating to the sale of Coke products, according to Coke's proxy.  Even so, Mr. Buffett is what Coke calls an 'independent director.'  Mr. Allen, Mr. Keough and Donald McHenry, president and owner of the IRC Group, a consulting firm, are not independent directors because of business deals or consulting agreements with the company. … [C]orporate governance experts say Coke … should be concerned about the ties among panel members.  Last month, Coke lifted its requirement that directors not stand for re-election after age 74, and it appointed Mr. Keough, 77.  Corporate governance advocates say appointing Mr. Keough without allowing shareholders to vote smacks of bad practices, although many companies name their directors this way." (NYT, 3/20/04, "Analysts Question Value of Coke's Old   Further, Directors change governance rules relating to age to suit their own needs and appoint fellow Directors without a Shareholder vote.  "As the Coca-Cola Company searches for a new chairman and chief executive, some investors and analysts are as concerned with who is doing the looking…. The selection committee is so dominated by longtime insiders - on the panel are Warren E. Buffett, chairman of Berkshire Hathaway … and Donald R. Keough, a former Coke president.... …  'It's cronyism,' said Marc Greenberg, an analyst at Deutsche Bank. … The concern, he said, is that the selection committee 'is run by 75-year-old guys that are out of touch.'  James B. Williams, a Coke director since 1979 and a search committee member, says that although the panel members are 'close,' they frequently consult with other directors.    Coke's most influential directors have long dominated both the finance and management development committees…. In addition to Mr. Keough, Mr. Buffett and Mr. Williams, the panel includes Herbert A. Allen, chief executive of Allen & Company, the investment firm; James D. Robinson III, co-founder and general partner of RRE Ventures and chairman of RRE Investors; and Barry Diller, chairman of InterActiveCorp, an online services company. Mr. Diller, who joined in 2002, is the only panel member who has been on the board less than 15 years. … Mr. Keough, who heads the nominating panel, is also the chairman of Mr. Allen's company and sits on the board of InterActiveCorp and Berkshire Hathaway.  … The directors also do quite a bit of business with Coke.  For example, the McLane Company, which is part of the Berkshire Hathaway conglomerate of Mr. Buffett, bought $103.9 million of fountain syrup in 2003 and received $11 million in agency commissions relating to the sale of Coke products, according to Coke's proxy.  Even so, Mr. Buffett is what Coke calls an 'independent director.'  Mr. Allen, Mr. Keough and Donald McHenry, president and owner of the IRC Group, a consulting firm, are not independent directors because of business deals or consulting agreements with the company. … [C]orporate governance experts say Coke … should be concerned about the ties among panel members.  Last month, Coke lifted its requirement that directors not stand for re-election after age 74, and it appointed Mr. Keough, 77.  Corporate governance advocates say appointing Mr. Keough without allowing shareholders to vote smacks of bad practices, although many companies name their directors this way." (NYT, 3/20/04, "Analysts Question Value of Coke's Old Guard")  "Until the end of last year, Mr. (former U.S. Senator and current Coke Director Sam) Nunn was a member of the law firm King & Spaulding LLP, which earned about $13.8 million from Coke for legal services." (WSJ, 4/13/04, "Calpers Withholds Votes for Directors At Coke, Citigroup")  "Mr. Keough is a childhood friend of Mr. Buffett...." (WSJ, 5/4/04, "Behind Coke CEO Search, a Struggle on Strategy")  "Coke has been overseen by a mostly old-boys club of directors that one corporate governance expert calls the 'Coca-Cola keiretsu' because it so resembles the web of interlocking relationships typical of corporate boards in Japan. ... (Douglas) Ivester had alienated ... some big bottlers, including Coca-Cola Enterprises (on whose board sat Warren Buffett's son Howard). ... In early December 1999 ... Ivester was met at a Chicago airport by Warren Buffett and Herbert Allen, who delivered a bombshell.  They had lost confidence in his leadership.  Ivester agreed to retire, assuming that the two Coke directors represented the whole board...  But at a special board meeting ... Ivester's departure came as such a shock that board members asked if he was sick or if something horrible had happened at the company they weren't aware of, and were angry that he would walk out with the company in turmoil.  ... Ivester was out, but bad feelings in the boardroom lingered for years. ... In 2001, Allen & Co. gave Coke advice to the tune of $3.5 million; in 2002 Allen's various interest got $2.75 million, and last year an Allen affiliate, one in which his son and Keough's are both principals, received some $10 million. ... In the three-way bidding for Quaker, Coke, represented by Allen & Co., offered the sweetest deal.... Somebody computed that roughly $28 million would go to Allen & Co."  (Fortune, 5/31/04, "COCA-COLA --- The Real Story --- How did Coca-Cola's management go from first-rate to farcical in six years?  Tommy the barber knows")  If Buffett and Allen exceeded their authority to cause Ivester to resign; the rest of the BOD should have stood up to Buffett and Allen and asked for their resignations.  They satisfied their fiduciary duties to Shareholders by having "bad feelings ... for years."  On the other hand, Buffett and Allen are cool guys to be around, and the Shareholders of Coca-Cola might never learn of  what really occurred.  Also, if the Shareholders do eventually learn the truth, there is nothing they could do about it.


        "MBNA, the largest independent credit card lender in the world, is revamping its board of directors, but … One director … is Benjamin Civiletti, a former U.S. attorney general, whose law firm does work for MBNA.  Another is James Berick, a retired lawyer who is a longtime adviser to the Lerner family - and the godfather of Randolph Lerner, who became chairman of MBNA after his father died in late 2002.  Berick, 70, was a partner in a law firm, Squire, Sanders Dempsey, which provides legal services to MBNA.  His son, Daniel, is a partner with the firm and serves as the Lerner family's lawyer.   Despite Berick's close ties to the Lerner family and his former law firm's business relationship with the company, MBNA said in its proxy that the board had decided that he and Civiletti were independent according to the standards set by the New York Stock Exchange. (It did not mention that Berick is Randolph Lerner's godfather.) …  MBNA should have disclosed in its proxy that Berick is Randolph Lerner's godfather. Omitting that fact … violated the spirit of the New York Stock Exchange's requirement that boards spell out the factors they considered in judging a director's independence.  MBNA also did not mention is that Berick and Alfred Lerner's daughter, Nancy Lerner Beck, are two of the four trustees of Town Country Trust, a real estate investment company that shares offices with MBNA in New York. The Lerner family foundation owns about 11 percent of Town Country Trust, according to its proxy statement." (NYT, 4/8/04, "Firm not moving fast enough to name independent directors")  "Berick … was Alfred Lerner's college roommate…. Berick retired from Squire Sanders & Dempsey, a Cleveland law firm, in 2002.  Berick's son, Daniel, remains as a partner at the firm, which counts MBNA among its clients. James Berick was chairman of MBNA's compensation committee, which set the pay for Lerner and co-founder Charles M. Cawley.  Cawley, who retired in December, received total compensation of $45.5 million last year, putting him at the top of the list for CEO pay, according to a recent survey by Bloomberg News.  Lerner received total pay of $51.8 million in 2001, his last full year with the company.  Civiletti ... is chairman of a Washington law firm, Venable LLP, which works for MBNA.  Civiletti's son, Andrew, also a lawyer, is employed in MBNA's legal department.  MBNA said it considers both Berick and Civiletti independent because MBNA business accounted for less than 1 percent of 2003 revenues at their law firms."  (TheNewsJournal, 5/2/04, "MBNA adds new faces to board")  What does 1% mean in dollar terms?  There is a simple solution to the independence issue as services provided by law firms are somewhat fungible.  A 1% loss of revenue should not devastate the two law firms.


        "Institutional Shareholder Services says that the billionaire investor (Warren Buffet) isn't an independent board member due to his position as an affiliated outsider and a member of the board's audit committee…  McLane Co., a subsidiary of Buffett's Berkshire Hathaway, paid Coca-Cola $103.9 million last year for fountain syrup and other products.  In 2003, Coke gave McLane $11 million in agency commissions related to the sale of the company's products to customers. … Dairy Queen, the fast-food and ice cream company and another holding of Buffet's, paid Coca-Cola $2.2 million for fountain syrup and other products, and Coke gave Dairy Queen and its subsidiaries $688,000 for promotional and marketing incentives for corporate and franchise stores." (CBS.MarketWatch, 4/9/04, "Coke holders urged to drop Buffett")


        "Ever since Joe L. Allbritton took control of the Riggs National Corporation in 1981, the bank's board has been a cozy blend of family, friends and business associates.  Mr. Allbritton's wife, Barbara, who has no banking experience, served on the board for several years in the 1990's.  His son, Robert, joined the board in 1994 at 25, and today is both a director and the chief executive of Riggs.  Other familiar faces on the board include Joe Allbritton's close friend, Jack Valenti, the president of the Motion Picture Association of America, who has been a director since 1986 and heads the important compensation committee, and Steven Pfeiffer, a lawyer whose firm does work for Riggs and who has been a director since 1989. Over the years, the board allowed Mr. Allbritton, who served as chief executive until 2002, to pursue risky lines of business and maintain a cost structure fattened by perks like a corporate jet. Bank analysts also say that he lost touch with Riggs's bottom line while cultivating the relatively small bank's glamorous international operations.  Now, though, the board's vigilance is coming under greater scrutiny. Riggs is mired in several federal money laundering investigations involving its accounts, and analysts say that banking regulators will hold directors accountable for how effectively they monitored Riggs's anti-money-laundering practices. … [T]hese responsibilities are clear-cut and include a documented compliance program that is regularly reviewed by the board.  If there are gaps, the board is required to push management to close them. … Analysts and lawyers say that a board's supervisory responsibilities, including the monitoring of anti-money-laundering practices, typically reside at the holding company level for most banks. But Riggs declined to discuss exactly where those responsibilities reside at the bank. … Six of the bank's 12 board members are company insiders, and outsiders include people like Mr. Valenti who are close to Mr. Allbritton or have a financial relationship with the bank.  Other outside directors include Mr. Pfeiffer; Charles Camalier, a lawyer whose firm provides legal services to Riggs; and Eddie Williams, president of the Joint Center for Political and Economic Studies, a Washington research center; Mr. Allbritton and his wife have helped the center raise funds. Riggs has also provided funds for Mr. Williams's organization, and the Joint Center lists the bank as one of its leading corporate donors.  Analysts say that these financial bonds may make Riggs' outside directors less objective than they should be, especially when their responsibilities involve monitoring a complex institution like a bank."  (NYT, 4/15/04, "Board Oversight at Riggs Bank Under Scrutiny")


        "At most corporations, new rules to ensure that a majority of directors are independent and serving shareholders' interests are finally in effect. But just how assiduously are they being followed? … The way the New York Stock Exchange and the Nasdaq market wrote their rules, it is pretty much up to a company's board to judge whether a director is truly independent. And some boards - the one at Computer Associates, for example - appear to be taking liberties. …But the rules also note, correctly, that it is impossible to anticipate all the situations that may compromise a board member's independence. … In other words, relationships matter. … Computer Associates' board, led by Lewis S. Ranieri, a former Salomon Brothers vice chairman, says the chairman of its audit committee, Walter P. Schuetze, is independent. But this view can certainly be questioned, given that, according to the proxy, the company paid $125,000 in 'additional director fees' for 'his extraordinary services in connection with the audit committee investigation concerning the company's prior revenue recognition practices.' None of the other audit committee members received additional payment for the investigation. … Before joining the Computer Associates board in 2002, Mr. Schuetze served as a consultant to the company on financial matters; he received $100,584 in fees and expenses in fiscal 2002.  Last summer, with prosecutors investigating Computer Associates' accounting practices, the company authorized the audit committee of its board to conduct an ‘independent investigation’ into the company's activities relating to recognition of software sales. … Typically, when there is an internal investigation, a board hires independent experts to conduct it. Since Mr. Schuetze led the one at Computer Associates, he then, as chairman of the audit committee, had to review the adequacy of his own inquiry. That presents a potentially glaring conflict. Gary Lutin, an investment banker at Lutin & Company who is conducting a forum for Computer Associates shareholders, said: 'Based on the information C.A. has provided so far, all we know is this: that directors who are being sued, personally, decided to give one of their colleagues a $125,000 bonus for heading up an investigation of the evidence against them, and that they decided to call their colleague independent. This is not a foundation for confidence.'" (NYT, 8/29/04, "Just a Friendly Group of 'Independent' Directors")  For more on so-called "independent investigations," see Internal Investigations Are Riddled With Conflicts of Interest, below.


        "Franklin D. Raines ... has dominated Fannie Mae since he became chairman and chief executive officer five year ago.... Some 'independent' directors have relationships that appear to create potential conflicts.  Frederic V. Malek, for instance, is a partner with Mr. Raines, the CEO, in a group of investors seeking to bring Major League Baseball back to Washington, where Fannie is based. …  Other directors have connections with organizations that have benefited from Fannie's largesse. …  Fannie Mae's charitable foundation is a donor to some institutions associated with board members.  According to the foundation's Web site, it has awarded more than $500,000 in grants to Howard University in Washington over the past two decades.  H. Patrick Swygert, president of Howard University, is a Fannie board member.  Until recently, one of Mr. Swygert's sons held a marketing job at Fannie.  The foundation has awarded $280,000 of grants over the past eight years to the Aspen Institute, where Ms. Korologos was chairman from 1996 to 2000."  (WSJ, 9/24/01, "Mae Day: Fannie's Now at Mercy of Outsiders")


        "New rules intended to bolster the autonomy of corporate boards to make them better watchdogs allow companies to count as  'independent' some directors with financial ties to the businesses they serve and other potential conflicts. … Defenders of the rules say they aren't meant to cover all possible conflicts, which is why they also require companies to determine whether outside directors have any other issues that might impair their independence. … A different wrinkle can be seen at Citigroup, where two directors on the 17-member board, Ann Dibble Jordan and Franklin Thomas, are counted as independent even though they had children employed by the financial giant in 2003 who were paid $350,000 and $236,500, respectively, according to the company's most recent proxy, released March 16, 2004.  The NYSE rules say a director can't be considered independent if he or a family member receives more than $100,000 a year in compensation; salaries don't count.  Citigroup said its employment of the directors' children is 'not material to an independence determination.'"  (WSJ, 3/3/05, "In Boardrooms, 'Independent' Is Debatable")


        ''The fight for three board seats at the Acxiom Corporation, an information management company in Little Rock, Ark., is shaping up to be a kind of referendum on whether investors abhor or adore entrenched and imperial chief executives.  In one corner stands Charles D. Morgan, Acxiom's leader, an executive at the company for 30 years. In the other corner is ValueAct Capital, Acxiom's largest shareholder, which contends that Mr. Morgan has billed Acxiom for his personal pursuits, stacked its board with pals and spurned its value-enhancing management ideas. …  Acxiom … had used shareholder money in recent years to sponsor Nascar and other racing teams in which Mr. Morgan and his son participate, to lease a Falcon jet from a Morgan-controlled company that has flown to Cabo San Lucas 32 times since late 2001, to contribute to institutions whose trustees are Acxiom directors, and to pay companies owned by Morgan family members for consulting and other services. … Acxiom's board certainly includes some big-name Arkansans: Thomas F. McLarty III, former White House chief of staff to President Bill Clinton, has been a director since 1999; and William T. Dillard II, chief executive of Dillard's Department Stores, has been on Acxiom's board since 1988. Other Acxiom directors include Mary L. Good, dean of the school of Information Science and Systems Engineering at the University of Arkansas at Little Rock, a board member since 2004, and Ann Die Hasselmo, a former president of Hendrix College in Conway, Ark., a director for 13 years. Stephen M. Patterson, an Acxiom director since 2000, is vice chairman of the trustees of Hendrix.... Mr. Morgan has forged strong ties to Acxiom directors. He serves on the board of Hendrix College and was its chairman for eight years through May 2001.  Acxiom has contributed $1.4 million in recent years to Hendrix and paid $226,000 to fund research projects last year at the University of Arkansas at Little Rock . … Acxiom also paid the McLarty Management Company, run by Mr. McLarty, $260,000 in commissions for services rendered in 2002-3. The company's newest independent director, Michael J. Durham, chief executive of Cognizant Associates, a consulting firm in Dallas, is chairman of the Asbury Automotive Group, a car dealership whose vice chairman is Mr. McLarty. Mr. Durham is also an 'executive member' of Mr. Morgan's golf course development in Cabo San Lucas. … Ms. Good, the Acxiom director, spoke on behalf of the company's board and described it as completely independent of management and rigorous in its duties to shareholders. … But Mr. Morgan's hobbies and family relationships have come into play at the company he runs. Since 1999, for example, Acxiom has spent $7.6 million to sponsor a celebrity Nascar truck racing team and Grand American road racing team, both of which were controlled by Mr. Morgan and his son Rob until 2004.... [F]rom 1999 to 2001, Acxiom paid a company owned by Mr. Morgan's wife, Susie, a former Miss Arkansas, more than $450,000 in fees for personnel staffing services. Mr. Morgan's son-in-law, Rodney Ford, has been involved with three companies that have sold services to Acxiom in recent years, including CognitiveData Inc., which has current dealings with Acxiom.''  (NYT, 5/14/06, ''Gentlemen, Start Your Proxy Fight'')  Let's try to understand.  The CEO of a company with publicly traded stock spends lavishly on family projects.  The Directors knowingly allow it to continue.  The company directs large sums to the Directors and/or their pet projects, in additional to paying them Director fees.  The BOD spokesperson, a dean of an Arkansas engineering school, deems the Directors ''completely independent.''  That statement does not say much for corporate ethical education at her school.


        "UnitedHealth's … CEO William McGuire got a lucrative stock-options grant in October 1999….  Dr. McGuire's pay package in 1999 was approved by the board's compensation committee. The head of that panel, New York investment manager William Spears, was listed in the company's proxy statement as an independent director. But board-hired attorneys this month disclosed that Mr. Spears also managed money on behalf of Dr. McGuire's children -- and that Dr. McGuire in early 1999 put up $500,000 to help Mr. Spears reacquire ownership of his firm from a larger financial conglomerate. How did other directors feel about such ties? … McGuire-Spears links hadn't been disclosed to them. If they had known more, pay issues might have been handled differently."  (WSJ, 10/23/06, " A Healthy Boardroom Is United and Focused On Lending a Hand ")  


        "The most sought-after corporate board members are those who curry favor with fellow directors, not those who are active in standing up for shareholders, a new academic study has concluded. ... The study by business professors James Westphal of the University of Michigan and Ithai Stern of Northwestern University suggests that directors - who are supposed to be watchdogs for shareholders - still are not independent enough. ... 'Our findings indicate that directors who engage in monitoring and control behavior are effectively punished in the director labor market,' Westphal and Stern wrote. 'They are less likely to be selected onto additional boards, and thus they are less likely to become central in the board network' that exists throughout corporate America. The study, which appears in the current issue of the Academy of Management Journal, is based on survey comments from directors at 300 randomly selected companies." (Reuters, 4/30/07, "Secret of board member success? Sucking up")


        "When it comes to corporate boards and diversity, the conventional wisdom is simple: Diversity is good. When directors are too alike, the thinking goes, they look at problems—and solutions—the same way. There's no one to challenge prevailing ideas, or to speak out on issues important to certain groups of customers and employees. By contrast, diversity leads to more innovation, more outside-the-box thinking and better governance. Sounds great. And it is, in theory. Unfortunately, few boards that pursue diversity ever see the wished-for returns. Many report no significant change in their performance, while others bog down in conflict and gridlock. Why the gap between potential and reality? Why does it appear to be a lot easier to appoint a diverse board than to make it function well? Blame it on human nature: As much as diversity is something we prize, the truth is that people often feel baffled, threatened or even annoyed by persons with views and backgrounds very different from their own. The result is that when directors are appointed because their views or backgrounds are different, they often are isolated and ignored. Constructive disagreements spill over into personal battles. But the solution is not to give up and avoid diversity. Rather, boards need to minimize the friction that diversity often introduces. To unlock the benefits, in short, boards must learn to work with colleagues who were selected not because they fit in—but because they don't. Our research sheds light on some of the hurdles that diverse boards face...." (WSJ, 1/25/10, "Why Diversity Can Backfire On Company Boards")  This is corporate propaganda for lack of diversity.  What are the details of "our research," and the identity of the "few boards"?  This is purely an undocumented opinion, but, in substance, describes a BOD as nothing more than a good ole' boys club.


                2.    Former Directors Won't Spill The Beans


        Some Directors resign or decline to stand for re-election due to disagreements with the Company's operations, policies or practices.  Yet, they fail to inform the Shareholders of the problem(s) that they perceive and sheepishly disappear into the night.  A Director, who leaves a Company's BOD, can legally require the Company to include a statement of any disagreement in the Company's next proxy statement.  However, the Director knows that a "noisy withdrawal" from one Company would prevent him/her from ever being "selected," "chosen" or "recruited" as a Director at any other Company.


        "Mr. [Rueben] Mark had grown weary of his self-appointed role as conscience of the board, and so had some of his fellow directors.  ... His colleagues ... deflected his input.  ... Mr. Mark walked upstairs to Mr. [Sandy] Weill's office and said he wanted to leave the Citigroup board.  Mr. Weill ... is always sensitive to market reaction to events.... The Citigroup chief then made a suggestion: Why not, instead of resigning, simply not stand for re-election this spring?" (WSJ, 3/10/03, "After Sandy --- Slow Quest for a Weill Successor Is Ruffling Feathers at Citigroup")   


        "Hollinger announced ... four board members had resigned following a vote against its audit committee's recommendations to make certain management and board changes.  It did not say what those changes were."  (Associated Press, 1/21/03, "Hollinger Understated Its Taxes; Board Members Quit After Vote")


        "The American International Group, the insurance giant, said yesterday that two directors, William S. Cohen and Carla Hills, would not stand for re-election to its board. …  It was not immediately clear why Mr. Cohen, who is chief executive of the Cohen Group, and Ms. Hills, the chief executive of Hills & Company, are leaving the board.  An A.I.G. spokesman, Joe Norton, declined to comment on the reasons for their departures. Calls to the two directors were not returned.  (Reuters, 2/14/06, "2 Will Leave A.I.G. Board")  BOD members could easily explain their departure by stating, "I am just too busy with other lucrative commitments." Shareholders should wonder when that tried and true recipe is not followed.


        If they spill a few beans, Directors attempt to close the can when they realize that they, too, sat silently on the BOD when the dastardly deeds occurred and that they might have some negative exposure to their public reputation.  Stanley P. Gold has given suspect testimony.  "'[H]e (Michael D. Eisner) made a huge mistaken, the board (at Disney) made a huge mistake, but all in good faith' when the decision was made to hire Mr. (Michael S.) Ovitz in September 1995. ... In a case that turns on a board's duty and ability to make informed decisions, Mr. Gold contended (in prior deposition testimony) that five directors were 'unprepared and ill equipped to manage the oversight and executive strategic direction' of a company like Disney."  (NYT, 11/13/04, "Ovitz Fired for Management Style, Ex-Disney Director Testifies")


        "Before going public in January with a litany of corporate-governance concerns, Integral Systems Inc. director Bonnie Wachtel sought advice from friends and colleagues about a hypothetical situation that mirrored her own. All save one counseled that the hypothetical director stay mum. Ignoring the majority view, Ms. Wachtel didn't just inform her fellow Integral directors that she wouldn't stand for re-election. She left behind a scathing paper trail for investors: copies of letters she wrote to the board in which her criticisms about Integral's executive-compensation policy and other governance matters are detailed. … In 2004, a new law required companies to disclose the circumstances -- and the resignation letters -- when a director resigns or declines to stand for re-election because of a disagreement. …  In a separate recent email to The Wall Street Journal, she asserted that the compensation committee was not involved in designing management's 2005 bonus plan, only in approving it. … Before the new federal disclosure rules went into effect in late summer 2004, companies were required to announce director departures after a dispute only if the director explicitly requested that his or her resignation letter be made public. … Some critics challenge the notion that anything much has changed. Directors, the critics say, are still reluctant to speak their minds as much as they should, as evidenced by increasingly escalating pay packages for top executives. The pervading philosophy of collegiality at all costs is seen as one culprit -- compounded by steady, and often handsome, paychecks for the directors themselves. … For departing directors, it's often a tricky decision whether to issue a formal protest letter. … As for Ms. Wachtel, she counsels: 'The best antidote for all corporate-governance problems, including compensation, is adequate shareholder representation on boards. ….'" (WSJ,4/10/06, "Breaking the Code of Silence")  One should wonder about the corporate ethics of her "friends and colleagues," who rendered advice to "stay mum" and who may inhabit other corporate boardrooms.


            "Mr. (Ken) Lay said the crisis began on Oct. 17, 2001, with the first of a series of Wall Street Journal articles that focused on business dealings between Enron and two outside partnerships run by the company's then chief financial officer, Andrew Fastow. The government contends that these partnerships, known as LJM1 and LJM2, were used to manipulate Enron's finances.  However, Mr. Lay said that in 2001 he and Enron's board believed the LJM connection, and Mr. Fastow's role in it, had been proper. 'We thought The Wall Street Journal was on a witch hunt against Andy Fastow and maybe Enron.' By Oct. 24, Mr. Lay said his own confidence in Mr. Fastow began to ebb, partly because of the finance chief's admission to two company directors that he had made about $45 million from the LJM relationship. Mr. Lay testified that he was "shocked" by the number. … That same day, Enron removed Mr. Fastow as chief financial officer."  (WSJ, 4/26/06, "Enron Founder Ken Lay Defends Actions Prior to Bankruptcy Filing")

            "Judge Simeon Lake has been a picture of control in his Houston courtroom during the trial of former Enron executives Kenneth Lay and Jeffrey Skilling [D]efense lawyer George 'Mac' Secrest.… showed a draft of a lengthy (never sent) letter to the newspaper in defense of the company from one of its directors, Herbert 'Pug' Winokur. Without any objection from prosecutors, Judge Lake cut Mr. Secrest off. 'What's the relevance of this?' the judge asked." (WSJ, 4/26/06, "Lay Lawyer Tests Judge's Patience")  The letter may answer the question, "What did Pug know and when did Pug know it?"  Further, each reason why Pug did not send the letter might reveal that the BOD no longer "believed the LJM connection, and Mr. Fastow's role in it, had been proper."  If so, questions should focus of the BOD's actions or lack thereof after receiving the information.


            "Some members of New Century's board were uncomfortable with what they believed was a lack of acumen displayed by certain accounting and financial managers at the company. Others, like the director Richard A. Zona, appeared to have had early concerns about whether the company was being conservative and thorough enough in various aspects of its accounting. In one of two resignation letters that Mr. Zona drafted in late 2005 but never submitted to the board, he called New Century's management team 'dysfunctional.' A former vice chairman of U.S. Bancorp and a former partner at Ernst & Young, Mr. Zona ... had not left the board because other directors persuaded him to stay.  ... Mr. Zona and some of his fellow directors did ask New Century's management and KPMG whether the lender was setting aside enough money to repurchase loans rejected by Wall Street.  In 2005 and 2006, the number of mortgages sent back to New Century skyrocketed as some borrowers became delinquent in payments as early as the first few months after taking out a loan, indicating shoddy lending practices...."  (NYT, 4/13/08, "A Lender Failed. Did Its Auditor?")  It may not have dawned upon Zona, but, the pleas by his fellow BOD members may have been based upon their own best interests and not their desire to continue to share BOD creature comforts with him.  If Zona resigned and submitted a critical letter of resignation, New Century would have been required to file a copy of the letter with the SEC and, thus, their dirty little secret would become public knowledge.

         There are exceptions.  Some letters are more opaque than others.  Here are a few:


         "The resignation letter of Robert N. Burt, who was chairman of the nominating and corporate-governance committee and a member of the audit committee at Janus (Capital Group Inc.), didn't detail his concerns. Mr. Burt said only that he felt strongly that the 'strategic option we are pursuing' isn't in the best interest of company shareholders. … Mr. Burt also declined to divulge the nature of the strategic option."  (WSJ, 10/31/05, "Janus Takeover Rumors Swirl After Director's Resignation Disagreement Over Strategy Prompts Deal Speculation; Firm Says It's 'Not for Sale'")


        "It is not every day that shareholders get a peek inside the corporate boardroom to see how effectively — or not — their representatives, the directors, are overseeing management. That's why the four-page resignation letter from Michael P. Berry, an independent director at Corinthian Colleges, is so riveting.  It describes a compliant board that sits comfortably in the pocket of Corinthian's management. … Mr. Berry was on Corinthian’s board for three years; during that time he served on the company's compensation, audit, and nominating and corporate governance committees. He has held senior positions at Harvard and done executive stints at Barnes & Noble, Disney and the Cheesecake Factory. … According to Mr. Berry, directors of Corinthian do not see meeting materials ‘until the very last minute' and are not encouraged to add items to the meeting agenda. 'You know for three years I have been very troubled that the board has permitted there to be meetings before, during and after the board meeting,' he wrote, 'where individual board members are privy to information not available to the entire board.'  Mr. Berry went on: 'I emphatically do not agree with your statement to me and to the board during our last meeting that your philosophy of the board's role was "'that it is for management to propose and the board to dispose.'"' … Corinthian's directors reject Mr. Berry's characterization of them as lapdogs. … Mr. Berry's letter came after he was advised that the board had voted unanimously not to invite him to stand for re-election…. Mr. Berry certainly wins points for being so direct about his years at Corinthian. But don't expect him to be deluged with calls to join other boards. After all, a director with his kind of candor is not what today's me-first managers want." (NYT, 9/25/05, "Ouch! A Director's Parting Shot")


        "A bombshell dropped by a departing director of XM Satellite Radio Holdings Inc. shows corporate governance reforms have created a new breed of independent board members who are louder, more powerful and less likely to go down without a fight.  In a letter XM released on Thursday, departing director Pierce Roberts said his warnings about a 'significant chance of a crisis on the horizon' had been ignored by the board and senior management. Roberts thinks the company should rein in spending rather than focus on the faster subscriber growth favored by the board. His departure follows the loud exit by Barbara Kaczynski, the audit committee chairwoman at Take-Two Interactive Software Inc. in January. She accused management of failing to keep the board informed on key issues related to the discovery of sex scenes in its 'Grand Theft Auto' video game series. …  But some experts argue a resignation accompanied by a warning about looming problems ought to be a director's last resort. … It did not used to be like this. In the days before a wave of corporate scandals -- highlighted by Enron and Worldcom -- … directors usually went quietly, no matter how upset they were. … Some say a noisy departure is not the best way to go unless there is strong evidence of fraud or some other wrongdoing. They argue directors have a responsibility to stay on the board until problems are sorted out. … In the case of XM Satellite, the company said Roberts and other board members were at odds over how to balance subscriber and revenue growth against profitability, a situation where he might have made some headway if he had stayed on. … [P]ublic spats with directors tend to happen at smaller companies, but each incident should be considered separately." (Reuters, 2/16/06, "XM bombshell signals new boardroom attitude")


        "[H]P revealed that it had spied on directors and reporters. Though (Lawrence W.) Sonsini was not involved in the spying campaign, his advice in two circumstances has drawn intense scrutiny.  In May, director Thomas J. Perkins resigned.  He says he quit over the board's handling of its leak inquiry, but Sonsini concluded after interviewing him that Perkins didn't resign over a disagreement with HP.  Had Sonsini found otherwise, the company would have had to notify the SEC.  Perkins also told the board that he was a victim of 'pretexting' — impersonating someone to gain access to private records.  Sonsini told him that the practice was 'within legal limits,' but when disclosing the spying, the company said its outside lawyer 'could not confirm' that the tactics 'complied in all respects with applicable law.'" (LAT, 12/16/06, " HP's board dismisses Sonsini as counsel")  Sometimes, there are attempts to muffle a noisy exit.


            "Many laws and regulations have been adopted in the past 25 years to curb executive compensation. But there is no substitute for judgment and integrity by corporate directors. A case in point is Tennessee Commerce Bancorp, a one-branch commercial lender that in June awarded big raises and stock options, to Chief Executive Arthur Helf and three other officers. Mr. Helf's annual salary more than doubled, to $400,000, from $190,000; the others received similar boosts. ... [T]hree directors had resigned. ... ... The raises were awarded after the company commissioned a compensation survey from Clark Consulting. Many boards employ consultants to help set executive salaries, but critics say the studies are often designed to support raises. Mr. (Fowler H.) Low said the study was 'flawed,' in part because it compared Tennessee Commerce with bigger banks. ... The executives who are also directors -- Mr. Helf, Mr. Sapp and Chief Administrative Officer H. Lamar Cox -- each voted on the raises for the other two. That seems to violate the spirit, if not the letter, of the bank's proxy, which states that officers don't 'participate in discussions or vote on matters relating to their compensation.' ... Yet Mr. Low, who is 75 and retired, says he felt compelled to resign. 'The executive officers/directors have concluded that the board can be manipulated in whatever manner deemed desirable,' he wrote in his resignation letter. 'I have to question whether we are a board of directors -- or a board of directed.' Another director sees it differently. Dorris 'Eli' Bennett hints that he was troubled by the process, though he won't say how he voted. But Mr. Bennett, who owns a tool-and-die company, thinks he can be more effective by staying on the board. If directors think the board acted improperly, 'the worst thing you can do is quit,' he says." (WSJ, 8/8/07, "How Hefty Pay Raises Undid an Insular Board")  What could Bennett do to "be more effective by staying on the board"?  


            "The structure of our board also has a number of concerns for me. All of us except Austin and Shawn fall into some interconnected web. While the web passes SEC muster, I believe that the tightness of that interconnected web may well be getting in the way of impartial board oversight. It is also worth noting that there are the 'in-town' and 'out of town' board members. I have often wondered how much gets decided by the in-towners before the out of towners arrive."  (2/3/09, Memorandum From Thomas W. Hallagan, AMSF 8-K)


            "A prominent director at WellCare Health Plans Inc. resigned Wednesday and raised questions about accounting practices at the Medicare and Medicaid company. Regina Herzlinger, the head of the board's audit committee and a professor of business administration at Harvard Business School, said internal audits found WellCare overbilled.... Ms. Herzlinger said those problems, which the company corrected last year and this year after an internal auditor discovered them, are evidence of weak accounting. Ms. Herzlinger said she had hoped to provide oversight, as chairwoman of the audit committee, but that the board didn't renominate her for re-election at this year's annual shareholder meeting. She alleges that the board forced her out for asking questions about accounting problems and corporate governance. WellCare said good corporate-governance practices require it to bring in new board members periodically to provide a fresh perspective. ... WellCare ...  has been scrutinized for its accounting in the past. In May, it paid Florida $80 million to settle federal and state criminal probes into allegations that it had defrauded Florida benefits programs for low-income adults and children of $40 million by inflating what it spent on care. As part of that agreement with the U.S. Attorney for the Middle District of Florida, WellCare accepted responsibility for the actions that led to the government's investigation and agreed to retain an independent monitor to prevent further abuse or faulty reports to state health-care programs. ... The independent monitor, Stan Twardy at Day Pitney LLP, in Stamford, Conn., said he was aware of the issues raised in Ms. Herzlinger's resignation letter. ... Ms. Herzlinger says problems continue at the company.... A board member since 2003, Ms. Herzlinger claims that a special board committee created in 2007 to monitor the multiplying probes consisted of two other directors who wouldn't share that committee's findings with her and the rest of the audit committee." (WSJ, 4/24/10, "Director Resigns at Wellcare Health")  The title "independent monitor" sounds impressive.  Does one have to know someone and/or know something to qualify for such a cushy appointment? Does the "independent monitor" have authority and long and short-term financial incentives to take action on the "issues raised", i.e., investigate and, if necessary, force corrections?

            "On April 23, an apparently long-simmering spat in the boardroom of WellCare Health Plans spilled out into the open with the noisy resignation of board member Regina Herzlinger, a well-known health-care accounting and management guru at the Harvard Business School . Herzlinger warned in her resignation letter about the company's accounting systems, lagging financial and stock performance, and 'conspiring directors' who sought 'not to re-nominate me to the Board simply because of my vigorous and uncompromising pursuit of the interests of our shareholders and members.'  WellCare, unsurprisingly, said the board ... would have been left off the nomination slate 'to achieve a better balance between technical accounting and operational experience,' not because of her outspoken views. ... Herzlinger said the effort of some board members to oust her only failed because they couldn't recruit a replacement quickly enough....  Ultimately, Herzlinger said, she decided to resign and make her concerns public because she worried that retiring quietly would mean the company never faced up to the risks she saw. The decision cost her over $100,000 in equity grants, by her estimate. ... 'I have not a second of regret about that,' Herzlinger told us. 'I hoped that this letter would be salubrious.'" (, 5/3/10, "WellCare's boardroom spat isn't over…")


                3.    Current SEC Rules Rule-Out Effective Proxy Campaigns By Individual Investors 


        It is practically impossible for a Director-candidate, NOT selected by Management and/or incumbent Directors, to conduct an effective proxy fight to replace incompetent and/or corrupt Directors.  Even though Company Articles of Incorporation or bylaws permit any Shareholder of record to nominate a Director-candidate, Companies will NOT place the names of Shareholder-nominated Director-candidates on the ballots that the Companies distribute to their respective Shareholders!  Those outsider Director-candidates must go through the entire complex and expensive proxy solicitation procedure for themselves.  See, e.g., "Shareholders Unite!" in Kiplinger’s Personal Finance Magazine (May 2002).  Management sometimes tries to exhaust a Shareholder-nominated Director-candidate's funds and energy by filing frivolous legal actions.  Further, even if a Shareholder-nominated Director-candidate is elected, present rules do NOT provide for reimbursement of his/her campaign expenses.  Companies can pay all expenses, without limit, of Director-candidates selected by Management.  Those funds come from Shareholders' assets!


                4.    Shareholders Cannot Rely Upon Institutional Shareholders


        Shareholders, who seek Director accountability, canNOT rely upon Institutional Shareholders or persons of wealth to act as watchdogs of Management.  "Investors may think they live in the United States of America, but when it comes to electing corporate directors --- shareholders' intended watchdogs in the boardrooms --- they are definitely back in the U.S.S.R.  Even sadder to say, some of the nation's biggest mutual funds are helping to keep them there." (NYT, 10/2/05, "Who's Afraid Of Shareholder Democracy?")  Unlike, pension funds, mutual funds dare not offend corporations for fear of loosing lucrative 401(k) pension management business or an opportunity to acquire such business.

        "When it comes to voting their proxies in elections for corporate directors, mutual fund companies prefer not to stand out from the crowd.  ... 'If only one fund votes against management, and others vote with management, management may retaliate against the objecting fund,' according to a study released earlier this month, of which Mr. (Michael) Ostrovsky (an assistant professor of economics at the Stanford (Calif.) Graduate School of Business ) was a co-author.  ...  How can management retaliate? 'It can do so by limiting its interaction with the fund to the minimal level required by the law,' the study found. ... The voting trends uncovered by the study are an indication that funds aren't necessarily making their proxy voting decision based on their fiduciary duty to shareholders, he said. (InvestmentNews, 6/4/07, "Mutual funds herdlike in director voting, study says ")


        "To the millions of Americans wondering how Wall Street's compensation culture got so brazen, one part of the answer may come as a surprise: It's your mutual fund. ... Over the past 30 years, as retirement plans such as 401(k)s replaced pension funds as the retirement engine for millions of Americans, mutual funds became the largest shareholders at most big U.S. corporations. ... 'Directors are asleep at the switch because mutual funds are asleep,' says Jack Bogle, retired founder of Vanguard Group, one of the largest mutual-fund groups, and a frequent critic of Wall Street. 'If mutual funds got together and said, 'We're not going to stand for it anymore,' the world would change.' ... For its part, the Investment Company Institute, the mutual-fund industry's trade group, says the notion that mutual funds reflexively bow to management in proxy contests is false. ... Some observers say that although mutual funds are the largest shareholders of most big corporations, individual funds rarely amass large enough stakes to make it worth their while to lead expensive proxy battles over directors or give them power to dictate business strategy from the background. ... Size isn't the only thing that makes it difficult for fund firms to challenge company managers. SEC rules designed to guard against insider trading prevent funds from using tactics often employed by activist investors, such as demanding board seats. Either sitting on a company's board or amassing a stake of more than 10% triggers strict limits on when an investor can trade shares. Such limits would pose huge risks for mutual funds, which need constant flexibility to unload shares because their own investors can cash out on a single day's notice.... Challenging company management also doesn't mesh well with many funds' investment philosophies.  Index funds, for example, buy stocks based simply on market values. Employing platoons of analysts to research and possibly challenge management arguments—much less wage costly proxy campaigns—would undermine their main mission, which is keeping investing and trading costs as low as possible.  Indexers such as Vanguard, BlackRock and State Street Corp., which rank among the largest holders at many companies, say they work hard to fulfill governance duties despite making these trade-offs. ...  Some analysts say that because retirement plans such as 401(k)s are a key source of investment dollars for mutual funds, some fund firms may be reluctant to anger company managers.... A frequently cited 2007 study by Gerald Davis and Han Kim at the University of Michigan concluded that mutual-fund firms with extensive 401(k) businesses tend to have the most management-friendly voting habits."  (WSJ, 4/5/10, "Critics Say Funds Should Do More to Police Corporate Pay")  The SEC's recently suggested proxy access limit of 5% ownership would allow proxy access to Shareholders who only exist in theory and/or who couldn't care less about holding Directors accountable.  The SEC and Wall Street are both in the same lifeboat while Shareholders go down with the ship.


          Ranger Governance, in substance, accepted $10 million from Computer Associates and then folded its corporate governance based proxy fight.  "The $10 million offer matches what Computer Associates paid two years ago to Sam Wyly, a dissident shareholder, to get him to pipe down.  Mr. Wyly, a Texas investor, accepted the money and dropped a challenge he had made to elect five new members to the Computer Associates board." (NYT, 6/6/04, "The Scandal That Refuses to Go Away")  Further, substantially all Institutional Investors are not pro-active.  "The fact that fund managers were nowhere to be found isn't surprising to anyone.  Because their primary concern is generating fees from managing corporate pension plans, few portfolio managers are willing to rock the boat by complaining about corporate governance issues." (, 10/15/02, "Mad as Hell --- What You Can Do About It: Institutions Asleep at the Wheel")  "Mutual funds also generally refuse to defy management teams because gaining a reputation for siding with dissidents can harm their ability to get business managing the 401(k) plans of employees in companies whose stocks they own." (, 11/7/02, "Proxy Fights, Rarely Successful, Continue to Tempt Shareholders")  On December 12, 2002, John J. Sweeny, President of the AFL-CIO, condemned the lack of business ethics in proxy voting by Mutual Funds by stating: "[A]nother conflict of interest in our financial markets—the conflict that encourages mutual fund companies to use our money to be ‘yes-men’ for corporate management in proxy votes. Using our money, mutual funds have bought up more than one-fifth of U.S. corporate stocks.  Their sheer size makes mutual funds one of the most powerful forces in deciding who sits on corporate boards…..  [W]e suspect that mutual funds vote with management at the expense of our jobs and savings to win profitable deals on retirement accounts and selling other services. … Take Fidelity Investments, for example, the world's largest mutual fund company and one of the most influential investors in the global capital markets. Fidelity earned $2 million in 401(k) management fees in 1999 from Tyco. … [W]ill Fidelity or any other mutual fund company, ever vote against management and risk a contract worth millions?"


        "Academic research also suggests that corporate boards have their own 401(k) shortcomings. Two finance professors at Emory University, Amit Goyal and Sunil Wahal, examined the hiring and firing of investment managers by about 3,700 plan sponsors from 1994 through 2003. (Professor Wahal has since moved to Arizona State University.)  They found that companies tended to choose investment firms to manage plans based on the firms' recent returns, but that those managers tended not to beat their benchmarks after the hiring. And when companies dismissed firms after underperformance, the firm's returns tended to bounce back.  … The growth in managed accounts is another controversial development. By signing up for a managed account, a participant cedes investing decisions to a third-party manager who charges an annual fee - typically 0.5 to 1 percent of assets. That fee is on top of the expenses of the plan's underlying funds, so the combined fees paid by participants can add up to a hefty 2 percent or more a year.  … Fees in general are the next big pressure point for corporate boards, many of which have not done much bargaining with plan providers." (NYT, 11/13/05, "How to Make Employees Take Their 401(k) Medicine")  Could it be that BODs have an incentive to pay greater fees than necessary to retirement fund managers who, should the occasion arise, are assumed will vote their proxies to entrench BODs?


        Most public pension funds are not equipped to pursue Shareholder democracy.  "Specialists say the structure of public pension funds ... (is such that) only the biggest ones can afford professional investment staffs.  Public trustees are often drawn from the ranks of firefighters, teachers and other public employees whose retirements they are protecting. They often have little financial training and are expected to serve as volunteers.  Most public funds therefore rely heavily on consultants, even though the consultants may have business ties with the very money managers they are supposed to help select."  (NYT, 3/21/04, "Concerns Raised Over Consultants to Pension Funds")


        Substantially all Institutional Shareholders, due to perceived legal exposure or trading restrictions, have not nominated Director-candidates. "Nell Minow used to think that large institutional investors, such as pension or mutual funds, would be most likely to take on corporate governance issues.  But the founder of, an online clearinghouse of research and analysis of global corporations, says she realized that rarely works. 'They don't want to be out front. ...'" (edventure, 1/8/03, "Investors of the World, Unite!")


        ''The battle lines have been drawn between Pfizer's owners and managers…. On one side stands Hank McKinnell, Pfizer's chief executive and chairman, recipient of $65 million in pay since he took the top job at the company in January 2001 and beneficiary of an $83 million pension when he retires. On the other are Pfizer shareholders, angry over the 46 percent decline in market value since Mr. McKinnell took the reins. … Adding drama to this battle is the effect that withheld votes may have on Pfizer directors. … Last year, though, Pfizer changed its guidelines so that any director who received more 'withhold' votes than 'for' votes will have to resign. If the board rejects the resignation offer, it will publicly state why. … Institutional shareholders, who vote the stock on behalf of their individual investors, are supposed to act in the best interests of those who own the stock, and the institutions questioned said they were careful to avoid conflicts in proxy votes. But shaking up the status quo may not always be in their own interest. … Many of Pfizer's biggest institutional stockholders also earn considerable fees for providing money management services to the company. These institutions could fear damaging such relationships by voting against the company. Some members of Pfizer's board serve on boards of firms that are among its larger shareholders, raising questions about their allegiances. … Conflicts of interest are not always evident, of course, but the potential for them arises at five investment firms among the top 10 holders of Pfizer shares. These are companies that earn money from Pfizer by managing some part of its pension plan, retirement savings plans or employee 401(k) accounts. And Pfizer directors serve on the boards of three investment firms that hold enough Pfizer stock for their customers to be among the company's top 20 shareholders. Pfizer's top shareholder is Barclays Global Investors, holding 4.54 percent of the stock outstanding. It also manages three funds offered to Pfizer employees in various 401(k) plans and provides investment management services to Pfizer's pension, from which it generated $2.65 million in 2004, the most recent year for which documents are available. Fidelity Management and Research, which holds 1.62 percent of Pfizer's shares for its customers, also manages several funds offered in Pfizer employee 401(k) and savings plans. Dodge & Cox, holder of almost 1.3 percent of Pfizer's shares, manages a stock fund offered to Pfizer employees in various 401(k) plans and provides investment management services to Pfizer's pension, for which it earned $1.06 million in 2004. Northern Trust, holder of 1.35 percent of Pfizer's shares, made approximately $2 million as trustee of the company's pension and savings plan. It also manages an index fund for Pfizer employees in Puerto Rico. J. P. Morgan Chase, holder of 1.26 percent of Pfizer shares, generated $750,000 in fees from the drug company's pension plan.… An analysis of last year's votes shows that most of these large holders supported Pfizer's board in both the election of its directors and in shareholder proposals. …  Other Pfizer directors also serve on boards of financial services firms, such as Goldman Sachs, a holder of 0.82 percent of the company's shares; J. P. Morgan Chase; and trust units of Deutsche Bank, which holds 1.36 percent. Representatives of those firms said their directors have no influence whatsoever over voting decisions made by their asset management units. … Shareholder inertia may be a big factor in keeping the status quo at Pfizer. … Last year, 1.4 billion Pfizer shares, or 20 percent of the stock outstanding, received no instructions from their true owners and were voted with the company's board. Likewise, if the holders of Pfizer stock in the company's 401(k)'s and pension plans do not instruct the trustees how to vote, those shares will be voted in the same ratio that those providing instruction voted.''  (NYT, 4/23/06, ''Investors Vs. Pfizer: Guess Who Has the Guns?'')

        "Shareholders of Pfizer voted to elect all 13 of the company's directors at its annual meeting yesterday, rebuffing recommendations by a shareholder activist group and two proxy advisory services to withhold support from the board to protest its executive pay practices.  But two directors on the board's compensation committee received opposition from more than a fifth of the votes cast in yesterday's election, indicating that executive pay is of concern to a substantial group of Pfizer shareholders.  … None of the seven proposals put forward by shareholders won support from a majority of votes cast at the meeting. But two were backed by almost 40 percent of the vote; one would have required separating the jobs of chief executive and chairman at the company, while another would have allowed cumulative voting of shares by holders. Cumulative voting allows small stockholders to aggregate their stakes and vote in any manner they choose —all for one director or in any combination.  … Before the meeting began, a small plane flew over the hotel meeting site towing a banner that read: 'Give it back, Hank!' A dozen or so labor union protestors stood outside the hotel chanting: 'Hank McKinnell, rich and rude, we don't like your attitude.'" (NYT, 4/28/06, "Pfizer Shareholders Vote to Elect Directors but Show Concern Over Pay")   "As disgruntled investors are turning up in force at company annual meetings this year to demand better corporate governance and, in particular, some restraint in executive pay, the challenge to Pfizer illustrates both signs of progress in their fight, and how much more work remains if they are to get their way. Still, even amid widespread complaints about skyrocketing executive pay and poor disclosure, management at most companies remains well insulated from the annual-meeting demands of shareholders. Companies have long endured protests about particular practices that offend groups ranging from unions to animal-rights activists. Few actual changes have resulted. Many shares are held by big financial institutions that are reluctant to challenge management. Many individual investors fail to cast their votes or indicate their preference to the institutions that hold them. … In the first statement from the floor, Daniel Pedrotty, an analyst in the AFL-CIO's Office of Investment, challenged Mr. McKinnell's expected pension award as 'pay for failure.' … The Pfizer meeting and a series of similar confrontations planned at annual meetings in coming weeks, however, demonstrates a renewed effort to make change through shareholder votes. … Union pension funds in particular 'are leveraging their share ownership to make their points during annual meetings,' she (Carol Bowie, director of the governance research service for ISS, a proxy-advisory firm in Washington) adds. … Noisy activism during annual meetings is on the rise among union members…. Governance watchers expect similar fireworks by unions, retired employees and social activists at several other major concerns this year." (WSJ, 4/28/06, "Pfizer Meeting Gives Dissidents Voice, Not Votes")  Some irate Shareholders are getting closer to manning the barricades, but close only counts in tossing horseshoes not tossing members of the BOD.

        ''But the spotlight on Mr. (Hank) McKinnell's compensation undoubtedly embarrassed the company's directors. It is also likely that they did not enjoy fielding questions from angry shareholders at Pfizer's annual meeting in April. Members of the board's compensation committee had to face the fact that they received far more 'withhold' votes from shareholders at this year's meeting than they did in 2005.  Frederick E. Rowe Jr., chairman of the money manager Greenbrier Partners and head of Investors for Director Accountability, had urged shareholders last spring to withhold their support from four Pfizer directors who helped oversee the company's compensation practices. … Ahead of the annual meeting, Pfizer officials also flew around the country to lobby its largest investors, arguing that … the company's directors deserved their support.  Richard A. Bennett, former president of the State Senate of Maine and a member of Investors for Director Accountability, said a Pfizer executive visited him as part of the push. 'They unleashed all their resources,' Mr. Bennett said. 'The company spares no expense, largely because it's not their money. What they're spending is shareholders' money.' … Pfizer's intense lobbying effort may have minimized the number of votes withheld from directors responsible for Mr. McKinnell's compensation. … Mr. Rowe said his organization planned to focus on institutional shareholders that helped perpetuate problems like those that plagued Pfizer. The big investors he has in his crosshairs are those who support corporate directors who forfeit their fiduciary roles by failing to rein in outsized pay or crack down on lax governance. … To paraphrase Ronald Reagan: If they won't see the light, let them feel the heat.'' (NYT, 8/6/06, ''McKinnell Fumbled Chance to Lead'')  

        "Aug. 31 was the deadline for mutual fund companies to disclose which side they took in shareholder votes at annual meetings this year. … While funds are supposed to protect their shareholders, the sorry fact is that they often have lucrative relationships with companies whose shares they own on behalf of their clients. These cushy ties can be jeopardized if a fund votes against management's proposals or directors. All funds say they vote in their shareholders' interests. But only an examination of mutual funds' proxy votes can determine whose interests -- theirs or their shareholders' -- funds are putting first. Let's take a tour. … [S]ome funds saw the light. Putnam Funds, for example, did the right thing when it withheld its support from directors who had approved excessive pay for executives who destroyed value at companies. It withheld support for all of Pfizer's directors because the funds' trustees were unhappy about the $83 million pension benefit and $65 million in pay that the drug giant awarded to Hank McKinnell, Pfizer's chief executive from 2001 until July. (Shareholders lost almost half the value of their Pfizer stakes on Mr. McKinnell's watch.) … Alas, among big, powerful mutual fund companies, Putnam is in the minority when it comes to acting like owners. Almost all the funds that are ranked among Pfizer's top shareholders voted to support the company's directors this year. Many did so against the recommendations of the proxy advisory firms they claim to rely on for guidance on shareholder votes. …[T]he nation's two largest proxy advisory firms, urged shareholders to withhold support from three Pfizer directors because of questionable pay practices at the company. Mutual funds operated by Barclays Global Investors, Dodge & Cox, Fidelity and Northern Trust are among Pfizer's largest shareholders who supported its board. All receive revenue doing other work for Pfizer. … All say their votes had nothing to do with any revenue generated by Pfizer or other relationships with Pfizer or its directors. Fidelity, for example, manages several funds in Pfizer's employee retirement plans. … Barclays earned $2.65 million in 2004, the most recent year for which figures were available, as an investment manager in a Pfizer pension plan. … Then there is Dodge & Cox, which earned $1.06 million in 2004 as an investment manager to Pfizer retirement plans. … Northern Trust … earned roughly $2 million from Pfizer in 2004 as trustee of its pension plan. … It is thanks to this kind of large-shareholder passivity that we have seen the biggest transfer of wealth from owners to managers in the history of corporate America. And it is this kind of inertia that allows continued corporate wrongdoing. The fact is, too many fund companies have supported practices that betray shareholders but benefit corporate executives as well as the funds themselves. Only fund shareholders can stop this. … Wander through your funds' proxy votes, which are usually on their Web sites. See how many times they voted your shares to support corporate managers and entrenched boards. Examine the issues they backed them on. If you think they are not serving your interests, fire them. Otherwise, you will be enabling the enablers." (NYT, 9/10/06, "How to Find A Fund's True Colors ")


        "Nearly four years ago, the Securities and Exchange Commission started requiring funds to disclose their policies guiding how they vote shares of the companies they invest in. However, a review of dozens of funds' guidelines for so-called proxy voting shows wide differences in how much information the funds divulge. ... More investors seem to be paying attention to proxy voting. ... The SEC requires the guidelines to be published only in a relatively obscure regulatory filing called the Statement of Additional Information. Unlike a prospectus the SAI isn't automatically sent to shareholders. Many funds now have links to their SAIs on their Web sites; otherwise investors have to go to the SEC's database to locate one. However, a few funds provide easier access." (WSJ, 12/22/06, "Voting Records At Mutual Funds: Still a Hard Read")


        After all that time and effort expended, pension funds have yet to learn that the shortest distance between two points is a straight line --- if Shareholders seriously wish to hold corporate Directors accountable for their actions, Shareholders have to offer serious alternate candidates in a proxy contest.  They could start with smaller corporations and work their way up the food chain.  The bigger fish would take serious notice.  Fear is a great motivator.


                        a.    Just Vote "Withhold" Is For Wimps  


        Institutional Shareholders provide a false sense of security to the investing public when they only "withhold" their votes.  They send a "message" of impotence.  Achieving Director accountability through embarrassment is a mythVoting to “withhold” does not work in the real world as unopposed Director candidates only need 1 vote to win the election.  The media is missing a very big point.  The Committee's experience has shown that Institutional Shareholders can run low cost and effective proxy contests even under current SEC proxy rules.  Simply put, they have not had and probably never will have the intestinal fortitude to do it.  They are 800-pound wimps.  Their effects could be more productive if they attempt to removed targeted Directors and replace them with candidates they feel are more qualified.  It is easier for them to complain than to engage in a viable solution.


          A very exhaustive recent academic study confirmed our beliefs.  "[T]hese campaigns ('vote no' campaigns) appear to be ineffective in eliciting pro-shareholder board and governance changes at target firms.  Instead, firms targeted by vote no campaigns are more likely to add management friendly charter provisions and takeover defenses."  "Do Board Members Pay Attention When Institutional Investors 'Just Vote No'?" (August 6, 2004)


        "An influential adviser to institutions (Institutional Shareholder Services) is urging its clients to oppose the re-election of the directors of Texas Instruments, including Thomas J. Engibous, the company's chairman and chief executive.  The adviser ... is angered by the disclosure that the Texas Instruments board adopted a costly stock option plan without obtaining shareholders' approval.  It is recommending that stockholders withhold their votes for the eight directors who can stand for re-election. ... Institutional shareholders own 68.7 percent of Texas Instruments' shares outstanding, while officers and directors own 0.83 percent. ... 'Companies need to get the message that reforms are out there....'" (NYT, 3/29/03, "Texas Instruments Directors Come Under Fire")  "Campaigns to withhold votes from directors cannot oust the directors...." (NYT, 4/4/03, "Will S.E.C. Allow Shareholder Democracy?")  Even if the entire 68.7 percent vote to "withhold," when the 0.83 percent vote to re-elect themselves, the BOD of Texas Instruments will continue "business as usual" at the golden trough.


        "Experts say that high compensation can be a sign of weak corporate governance--a warning sign that CEOs wield too much power without the proper checks to ensure high-quality company performance. … They see a board with a runaway compensation committee. 'We made a recommendation against electing the compensation committee members on Yahoo's board at its shareholder meeting several weeks ago,' said Patrick McGurn, executive vice president at Institutional Shareholder Services, a shareholder proxy advisory firm in Rockville, Md. 'Nearly 20 percent of Yahoo shareholders withheld their vote--basically a vote against the committee members--to protest the compensation practices.'  For such a strong-performing company, that tally was noteworthy because shareholders usually have no complaints when their stock has gone up. The best way for a shareholder to take a stand against executive pay that's overly generous or not correlated to performance is to withhold votes from board members on the compensation committee and hold them directly responsible, McGurn said. So far, that's a symbolic protest--directors usually are re-elected with one vote.…" (Chicago Tribune, 6/19/05, "Richly paid CEOs: Worth a fortune?  High compensation called warning sign of too much power, too little oversight") 


        "Disney now concedes that well over 30% of the votes cast at the meeting could go against Mr. Eisner....  Disney executives are discussing ways they can play down what might be nasty results without appearing to be insensitive to shareholder wishes. One strategy is to sell the idea that next week's vote is not a referendum on Mr. Eisner, because too many different parties have weighed in with so many points of view.  'Different shareholders are using the same vote to send different messages,' say Judith Estrin, a Disney board member."  (WSJ, 2/27/04, "Disney Shareholders' Revolt Widens")  In other words, the message heard by the BOD is that Shareholders are impotent!  "But even with the prospect of such an unusually vociferous no-confidence vote, the board is not likely to react quickly.... In the coming weeks and months, they said, the board will try to assess how much of the investor outcry is from the heart and how much is for publicity. … Some Disney … directors are said to regard last week's investor outbursts as so much media spin.  This theory holds that some elected state officials who oversee pension plans are simply grabbing the spotlight to further their careers.  By the same reckoning, the proxy advisers are trying up drum up new business as well as headlines. … [D]irectors will examine which big shareholders did not vote for Mr. Eisner and try to determine their reasons for doing so." (NYT, 2/29/01, "Disney Board Is Expected to Go Slowly on Eisner")  In other words, Disney’s BOD has to try to read the minds of its largest Shareholders as there is no means to communicate with them.  Further, Disney’s BOD feels anyone who dares to say anything against Eisner only does so due to ulterior motives.  The conclusion is that the BOD, when confronted with criticism, will rationalize what amounts to its unaccountability to Shareholders. “[S]hareholders owning an estimated 43 percent … declined to support the re-election of Michael D. Eisner…. The mounting shareholder dissent prodded the board to strip Mr. Eisner of the chairman's title Wednesday night and give it to George J. Mitchell, Disney's presiding director and a former senator. Disney board members hope the split of the chairman and chief executive titles will pacify investors disgruntled about an underperforming stock price and Mr. Eisner's autocratic management style, according to three people close to the board's deliberations. …  [T]he appointment is sure to be questioned by analysts and investors because the two men are friends and Mr. Mitchell has long been a loyal supporter of Mr. Eisner. … Since shareholders also withheld nearly 24 percent of the votes for Mr. Mitchell, some of the other board members worried that the decision to appoint him chairman would be criticized…."  (NYT, 3/2/04, "Eisner Out as Disney Chairman but Remains as Chief Executive")

        "Mr. Mitchell was named chairman despite his own no-confidence vote and has said the board would be more involved in corporate strategy.  But he has also told friends and colleagues that he does not want to remain chairman for long. Mr. Mitchell, the former United States senator, was reluctant to accept the job." (NYT, 4/5/04, "Forced to Act, Disney's Board Considers Its Next Steps")  "The board also formalized Mr. Mitchell's duties as chairman, which call for him to lead the succession planning process at all levels, communicate with shareholders and coordinate the CEO's performance review.  In a statement, Mr. Mitchell added that Mr. Eisner, 'as CEO and with the full support of the board ... continues to have the same authority to manage the operations of the company as has previously held.'" (WSJ, 4/28/04, "Disney Board Reaffirms Confidence in CEO Eisner")

        "Six of the nation’s largest institutional investors today publicly called for a meeting with The Walt Disney Company Board of Directors to discuss and future of the company. The group of investors --- with combined assets of more than $500 billion, include (sic) fiduciaries and managers of the New York Common Retirement Fund, the Connecticut Retirement and Trust Funds, the California State Teachers’ Retirement System (CalSTRS), the Ohio Employees Retirement System (OPERS), North Carolina Retirement Systems and the California Public Employees’ Retirement System (CalPERS).  In a letter to George Mitchell, Chairman of Disney’s Board of Directors, the funds made it clear they want an immediate meeting with all members of the Disney Board."  (BusinessWire, 3/22/04, "Institutional Investors Call for Meeting with Disney Board of Directors”)  "Despite the joint call for the meeting, not every state pension fund wants the same thing. Some have called for Mr. Eisner to resign while others are concerned that Mr. Mitchell is not independent enough to serve as chairman.  But all of them want Disney's directors to address more openly the company's plans for succession." (NYT, 3/24/04, "Pension Funds of 5 States Seek to Meet Disney Directors")  "Sources said CalPERS, which hold nearly 9 million Disney shares, was the impetus behind Monday's letter.” (LAT, 3/24/04, "Big Pension Funds Ask Disney for a Meeting")  "The funds, which together hold nearly 34 million of Disney's approximately 2.1 billion shares outstanding, requested the unusual session in a letter they sent yesterday to George Mitchell, Disney's new chairman, with copies to his fellow directors. … The biggest Disney holder among the signers is the California Public Employees' Retirement System, which wants Mr. Eisner to leave by year end. … In a reply released last night by Disney, Mr. Mitchell wrote that he previously had told three of the six pension funds about his willingness to meet and discuss the company's performance. … But Mr. Mitchell, a veteran Disney director and former company consultant, refused to create a precedent by committing the entire board to join the session with unhappy shareholders." (WSJ, 3/23/04, "Major Pension Funds Demand To Meet With Board of Disney")  One will see whether they have sufficient power to obtain any positive results for Shareholders.  They hold 1.61% (34 million/2.1 billion) of Disney shares.   (It is far less than the 5% Director-nominator threshold under the current version of proposed SEC Rule 14a-11.)  With $500 billion in assets, one would think that they could afford to run a slate of independent BOD candidates under the current SEC proxy rules.  Doing so would definitely get Disney's attention!  

        "In an unusual meeting today, representatives from six pension funds will pressure Disney directors to provide detailed plans on their company's long-term financial strategy and how they intend to groom a replacement for Eisner. ... Six of Disney's eleven directors will gather for today's meeting.... In addition, the funds hope the board will allow them to nominate one or more independent directors."  (LAT, 5/20/04, "Critics Won't Be Easily Brushed Off")  There is "pressure" and there is "pressure."  Talk is not pressure.  What will the Pension Funds do when Disney does not succumb?  The six Disney Directors can always delay by stating that they cannot make any commitment without discussing the matter with the five absent Directors.  All Shareholders, not just Pension Funds, should have the realistic ability to nominate Director candidates.  "Disney's board members told the fund chiefs they will (sic) consider their suggestions for finding a new independent director, expected to be named by the end of the year.  But the fund chiefs said they would like to see an additional independent director added as well. … Mr. Mitchell vowed yesterday to consider the funds' concerns carefully. But he pointed out that together they hold about two per cent of outstanding Disney shares. 'Their views represent their views. They don't represent all shareholders.'"  (Reuters, 5/21/04, "Disney board 'taking right steps'")  What does "independent" mean?  How could a Director be "independent" when he/she owes his/her position to his/her fellow Directors vis-à-vis the Shareholders?  "Walt Disney Co. made modest concessions to a group of restive investors Friday, saying it would allow them to suggest nominees for a seat on the company’s board this year. … He (Mitchell) said the board would consider any suggestions from the pension funds of people who could serve as an independent director.  Those names --- along with others --- would be culled by the nominating committee, with the board expected to name the director by late December." (LAT, 5/21/04, "Disney Directors Give Nod to Funds --- Disney to Let Pension Funds Suggest Nominees for Board")  Any Shareholder can suggest the name of a potential Director-candidate to the BOD for its consideration.  That's a no-brainer.  The issue is the degree of consideration the BOD will give to the suggestion.

        "The state pension funds are preparing names of potential directors to give to the board for their consideration. … The pension funds are expected to give their lists to Disney's board soon." (NYT, 9/17/04, "After Eisner, the Disney Board Faces Its Own Deluge")  Does anyone really expect that the Disney BOD will do other than "consider" the suggested candidates and, then, reject them?  What do the pension funds have as a backup plan if/after that occurs?  "[T]he board apparently rejected three independent board candidates proposed by a coalition of pension funds." (LAT, 12/4/04, "Disney Critics End Threat to Offer Slate of Directors")  Far be it from us to say, "We told you so."


        "Hewlett-Packard shareholders also reelected all nine members of the ... board of directors, flouting a recommendation by the nation's largest pension fund.  The California Public Employees' Retirement System last week urged shareholders to withhold votes from five board members who approved Ernest & Young as HP's auditor and tax advisor.  CalPERS said the consulting giant should avoid non-auditing relationships with HP."  (LAT, 3/18/04, "HP Stock Option Expensing Backed")

        “In the annals of shareholder democracy, it’s hard to imagine a more compelling case against a company’s directors than those who presided over the serial management calamities that have plagued the computer giant Hewlett-Packard in recent years. ... “You really couldn’t have a stronger case for removing directors,” Michael Garland, executive director for corporate governance in the New York City comptroller’s office, told me this week. “There’s been a long series of boardroom failures that have harmed the reputation of the company and repeatedly destroyed shareholder value over an extended period of time.” Yet all 11 H.P. directors were re-elected on March 20. H.P. is hardly an isolated case. ... “People are calling them zombie directors,” Mr. McGurn said. But that hasn’t stopped them from serving on boards for what is typically lucrative compensation for relatively little work. (H.P.’s directors received a mix of cash and stock payments ranging from $290,000 to $355,000 in 2012, with the exception of its chairman, Raymond Lane, who earned more than $10 million.) ... In its proxy materials, H.P. didn’t address the company’s record under these directors, but nonetheless recommended that shareholders vote for the entire slate, citing the risk of “destabilizing” the company by changing directors in an “abrupt and disorderly manner.” ... Both Institutional Shareholder Services and the other big shareholder advisory service, Glass, Lewis & Company, recommended that shareholders vote against ... the selection of directors. In deference to H.P.’s concerns about stability, the advisory services targeted only the directors they thought most culpable. ... Yet even that modest effort failed. While paying lip service to principles of shareholder democracy, companies have fought for decades to insulate directors from shareholder disapproval. Under the plurality voting systems still prevalent at many companies, the nominees who receive the highest number of affirmative votes cast are elected no matter how few votes they get out of the total cast. Since the board decides the number of nominees, and most nominate only as many as there are open seats, they’ll all be elected, even with a single yes vote (which may be their own). ... H.P. has majority voting, and shareholders approved a proxy access rule similar to the one passed by the S.E.C., and shareholders still couldn’t muster a majority against even a single board candidate. That may be because the largest shareholders have little incentive to defy management recommendations. These days, the largest shareholders are almost always big asset management firms, and in many cases, managers of index funds. Shareholder activists have long complained that mutual fund and asset management companies have an inherent conflict of interest, since they may be managing company retirement plans, or hoping to gain access to them. H.P.’s 401(k) plan holds more than $14 billion, and participants can choose from more than 30 asset managers. H.P. declined to identify them. In theory, asset managers are required to maintain a Chinese wall between their funds and their advisory services. H.P.’s two largest shareholders are Dodge & Cox, a large San Francisco-based mutual fund company, and Vanguard, one of the country’s largest asset managers.... Vanguard wouldn’t say how it voted its H.P. shares, and Dodge & Cox didn’t respond to my inquiries. But a source familiar with the voting, who asked not to be identified because he isn’t authorized to disclose the results, said both Dodge & Cox and Vanguard voted in favor of the full H.P. slate of directors. (Both companies will eventually have to disclose their votes, but not until September.) According to disclosure forms covering the period from January 2009 through June 2012, Dodge & Cox supported management’s recommendations on the directors 100 percent of the time. At Vanguard, it was 97 percent. ... New York City’s comptroller, John Liu, who oversees the city’s pension fund, seized on the results to press for change. “The onus is on the board to install new, independent directors, or it will face an even greater loss of investor confidence,” he said. “We expect the board to quickly overhaul its membership.”  ... But the reality is that H.P. can do whatever it wants, regardless of what the shareholders say. Mr. McGurn said that Insitutional Shareholders Services often follows up with letter-writing campaigns at companies where shareholders have voted their strong disapproval of directors. “Most of the time we don’t even get a response,” he said.  (3/29/13, NYT, “Why Bad Directors Aren’t Thrown Out ”)


        "Fresh from a victory against Michael D. Eisner, the chief executive of the Walt Disney Company, some state pension officials are taking aim at the leadership of Safeway, the supermarket chain.  Officials of more than 10 public pension funds plan to start a campaign today to urge Safeway shareholders to withhold their votes from the chairman and chief executive, Steven A. Burd, and two Safeway directors, Robert I. MacDonnell and William Y. Tauscher, at the company's annual meeting in May.  The pension funds, which collectively hold about 7 million of Safeway's 445 million outstanding shares, are expected to announce their governance initiative at a meeting of institutional investors in Washington. People who have been briefed on their plans said they would identify conflicts of interest in the Safeway boardroom that they think are keeping the directors from representing shareholder interests adequately. …  Safeway issued a statement yesterday saying the initiative by the pension trustees was politically motivated. The statement suggested that the state officials had made common cause with organized labor in the wake of the recent long supermarket strike in California. … Pension officials from California, Connecticut, Illinois, New York and several other states began criticizing Safeway's management several months ago, during the strike."  (NYT, 3/25/04, "State Pension Officials Accuse Safeway Leaders of Conflict")  Let’s do the math.  It took 10 Pension Funds to muster 1.57% of the shares.  "The board voted yesterday to replace board members George Roberts, James Green Jr. and Hector Lopez by the end of the year....  [T]he changes ... came about as a result of meetings in recent weeks between the grocer and private and institutional shareholders holding about half the company's stock. ... Safeway plans to replace Mr. Tauscher as chairman of the board's executive compensation committee and replace Mr. MacDonnell on the audit committee...  The overhaul doesn't change the role of the pension funds' main target, Mr. Burd..." (WSJ, 5/3/04, "Safeway to Replace Three Directors")  If 50% of the shareholders were truly united for substantial change, the "main target" or targets could have been removed via a proxy contest.  One wonders in what manner Messrs. Roberts, Green and Lopez were selected.  Were they sacrificed to save the others?  What input, if any, will the alleged 50%ers have in selecting the persons who supposedly will replace the threesome and assume the committee assignments?  What will the 50%ers do at "the end of the year" when Safeway claims that it cannot find better Director candidates to replace the threesome and will retain them and/or fails to change the committee assignments?  In the interim, have the 50%ers abandoned their "just vote no" campaign against their "main target(s)"?  CalPERS "blasted ... the decision by Safeway Co. to replace three directors but retain Chief Executive Steven Bard as chairman, urging the grocer to dump Bard from the board and the company. ...The pension funds plan to protest the situation by withholding votes.... The non-CalPERS funds stopped short of saying whether Bard should leave the board or company entirely, but said ... 'He must be held accountable.'"  (LAT, 5/4/04, "CalPERS Blasts Safeway Decision to Retain Burd")  It appears that the 50%ers were 50%ers in name only and rather than reaching any agreement between the so-called 50%ers and Safeway, Safeway simply put a few crumbs on the table.  How do they expect to hold Mr. Burd "accountable"?  "The company said preliminary results from a shareholder vote showed 83.3 percent of stockholders were in favor of Burd retaining his position.  Six public pensions challenging Burd's leadership as inept and eroding shareholder value appeared to have managed to deprive Burd of only 16.7 percent of votes. … The funds, backed by the California Public Employees' Retirement System -- the largest U.S. public pension fund commonly known as Calpers -- had aimed at a withholding vote of 43 percent. … Two other directors, accused by the funds of lacking independence, also received majority support for their reelection to the Safeway board…."  (Reuters, 5/20/04, "Safeway CEO, besieged by protesters, survives vote")  Did any of those pension funds read The Prince by Machiavelli --- it does no good to wound a King!  A surviving King will seek revenge.  

        "The Calpers campaign against Safeway galvanized opponents of an SEC proposal to let aggrieved shareholders more easily nominate directors to corporate boards.  The Business Roundtable, which represents CEOs of major corporations, had campaigned against the proposal on the ground that it would spark meddling by among others, labor unions. ... The Safeway campaign 'was a real turning point' in the Business Roundtable's efforts to stall the proposal...." (WSJ, 12/1/04, "Gadfly Activism at Calpers Leads To Possible Ouster of President")  "Business groups … are mounting increasing pressure to get around regulations they don't like.  … Among their tactics: … •Fighting SEC rules. Business groups have managed to delay for months an SEC rule giving shareholders limited rights to name corporate directors if the existing board is unresponsive to their demands.  The move is arguably the agency's single most important corporate-governance measure. …. •Battling pension funds. … Such pressure resulted in the ouster Thursday of Sean Harrigan, president of California's largest pension fund and one of the nations' most vocal and powerful reform advocates."  ( USA Today 12/3/04, "Lessons from Enron fade")  Way to go, CalPERS!


         "This week, shareholders at Coca-Cola easily re-elected Warren E. Buffett to the board…. What was surprising was that shareholder activists urged votes against each man. … The move to increase shareholder power has been a reaction to the perception that boards have often been too cozy with managements, allowing excessive compensation while not preventing fraud.  But it did not reflect a certainty that institutional investors really wanted or would wisely use such power. … Some companies have pointed to this year's fights as evidence that institutions may misuse the power being offered to them. … It is time for backpedaling. 'Warren Buffett is a great director,' said Pat Macht, the head of public affairs at Calpers, the California public employees pension system, which cast 'a symbolic vote' against him to support auditor independence. Calpers may change course next year. … In the future, said one man who has campaigned for greater shareholder power but felt Calpers overstepped this year, 'they will not be making nonsense challenges like this.'  Let's hope he is right. A vote against re-electing a director ought to reflect actual opposition to that candidate."  (NYT, 4/24/04, "Do Institutional Investors Deserve New Authority?") 


          "CalPERS has ... acknowledged that its votes to protest how auditors are managed have been symbolic and meant more to draw attention to the issue than to change the composition of boards."  (LAT, 4/30/04, "Republicans Attack CalPERS on Activism")  What does "draw attention to the issue" mean?  Draw whose attention?  For what purpose?  If Institutional Shareholders are seriously concerned with removing incompetent or corrupt Directors, they should carefully select their targets and conduct proxy contests to replace the Directors as opposed to launching numerous "no vote" campaigns.  Voting "No," and encouraging others to do so, carries minimal risk and, even IF "successful," gains little.  


          Someone may be recognizing that "just vote no" will not cut the mustard.  "The two dissident investors of Walt Disney Co. ... will nominate an alternative slate of directors next year if the current board does not 'face up to the issues,' former director Stanley P. Gold said Monday."  (LAT, 5/4/04, "Roy Disney May Try to Upend Board")  Please note the "if" and "face up to issues" are weasel words.  "Former Disney directors Roy E. Disney and Stanley P. Gold on Friday withdrew their repeated threat to put up a rival slate of directors at the company's annual meeting in spring 2005. ... (Their) letter was released on the last day that they could have nominated a rival slate."  (LAT, 12/4/04, "Disney Critics End Threat to Offer Slate of Directors")  Perhaps, the threat caused the Disney BOD to "face up to the issues." "The Delaware Chancery court filing alleged that directors duped Gold and Disney into not running an alternative slate of directors at Disney's annual meeting the previous month by misleading investors into believing that a good-faith effort was underway to find CEO Michael Eisner's successor."  (LAT, 5/10/05, "2 Ex-Directors Allege Fraud in Disney's Search for CEO")  Disney and Gold deserve the Dopey/Dumbo award for naivety. They accepted representations of "good-faith" from the very same Eisner and Disney BOD members, who they previously lambasted as corporate villains.  Has anyone every heard of the "lack of reasonable reliance" defense to allegations of misrepresentation?  Now, they will waste more money and effort in Delaware than it would have cost to run their initially threatened proxy contest.  Focus, men, focus!

        "Roy E. Disney will nominate an alternative slate of directors for the Walt Disney Company if his lawsuit to vacate the company's recent election is successful, his lawyer told a judge considering the suit Wednesday. … Mr. Disney and Mr. Gold … dropped plans to run a slate at this year's annual meeting in February because they relied on a company statement that the successor to Mr. Eisner would be chosen 'in a thorough, careful and reasoned process.' But in court documents Mr. Gold and Mr. Disney contend that the search was a ‘sham’ and that Disney's president, Robert A. Iger, had been "anointed" by Mr. Eisner to succeed him on Oct. 1." (NYT, 6/2/05, "Roy Disney Outlines His Plans for Board")  Roy and Stan may have some problems of proof.  How could anyone reasonably rely upon any representation of a "thorough, careful and reasoned process"?  The phrase is so subjective that it is appears to be mere puffery.  How would they prove actual reliance to cease their allegedly intended proxy contest?  Had their Director-candidates be selected and committed?  Had their attorneys been paid?  Had their proxy statements been drafted? Had they retained a proxy solicitation firm?  Are they required to prove that the BOD election results would have been any different had they run their allegedly intended proxy contest?  On va voir

        "Messrs. Disney and Gold … said they would drop a Delaware lawsuit they filed earlier this year challenging the selection of Mr. (Robert) Iger as chief executive. Messrs. Gold and Disney also pledged not to run a rival slate of directors or submit shareholder resolutions for the next five years. They expressed confidence in Mr. Iger, just a few months after characterizing his selection as a 'sham.' … The lawsuit challenged the validity of the board's search for a new CEO. … Mr. Disney has yearned to reclaim a role in the Disney empire, according to people close to the situation. He and his family were shut out of attending a big public celebration of Disneyland's 50th anniversary in the spring, for example, and he has missed being able to visit the Disney animation unit he helped revive in the 1980s. He now is expected to seek an office on the company lot.” (WSJ, 7/11/05, "Disney, Dissidents End Spat, Clearing Obstacle for Iger")  They resigned as Directors.  Their initial idea was to replace the Disney BOD through a proxy contest.  They lost their way in a "just-vote-no" campaign and inane legal action.  They, again, threatened a proxy contest.  They spent millions, which could have been more effectively employed in pursuit of their original goal.  Are they corporate warrior heroes or a couple of confused wimps?

          There are more effective approaches to improve corporate governance than a "just vote no" campaign.  "Heritage Commerce Corp. ... announced Brad L. Smith has tendered his resignation as Chief Executive Officer and Director to facilitate the settlement with shareholders who had nominated alternative directors for the upcoming annual meeting."  (Financial Services News, 5/4/04, "Heritage Commerce Corp CEO Brad Smith Resigns to Settle Proxy Contest")  "Shareholders have been critical of San Jose-based Heritage's financial performance strategic planning and corporate governance."  (, 5/4/04, "Heritage Commerce CEO steps down")


          "Ever notice how huge stock option awards are often given to executives just ahead of bullish company news? … Last Tuesday, Analog Devices, a maker of integrated circuits, disclosed that the S.E.C. had requested information about the timing of option grants given to company executives and directors during the last five years. In its disclosure, the company noted that its grants in some years 'occurred shortly before our issuance of favorable annual financial results.' … [C]orporate managers systematically receive options at prices that do not reflect favorable nonpublic information. … Directors on a company's compensation committee typically approve option grants, but chief executives wield significant power among directors in these matters. … Analog Devices is a heavy user of options. … [I]n each of the last five years, the company has handed out options representing about 3.5 percent of the company's shares outstanding. … In any case, because options handed out just before good news are essentially given at a discount, the extra value attached to them should be disclosed to investors as compensation. Sunlight is needed here.  And if the S.E.C. finds that well-timed option grants are deplorably common in corporate America, shareholders should revolt.  They should vote against compensation committee members who approve such awards or sell their shares outright."  (NYT, 12/5/04, "In the Timing of Options, Many, Um, Coincidences")  The naïve request for "sunlight" and advice to "revolt" comes directly from the elementary school playground.  Is a theft that is disclosed any less of a theft?  "Just vote 'No,'" a useless procedure, is as close as a Shareholder can come to “vote against compensation committee members."


                        b.    Majority-Vote Standard Is A Sham


        The concept that a Director must resigned if her/she fails to garner a majority of the "vote"  is nothing but a conglomeration of weasel words used to thwart the will of Shareholders!  One needs to read the small print.  


        "Pfizer Inc announced today that the company's Board of Directors has approved amendments to a majority voting policy regarding the election of directors…  The amendments further clarify how the majority voting policy will be applied in the event that any nominee for director receives more 'withheld' votes for his or her election than 'for' votes.  In such a situation, the director will be required to submit his or her resignation to the board…. * The board will promptly disclose via a press release its decision to accept the resignation offer or, if applicable, the reason(s) for rejecting the offer…" (PRNewswire-FirstCall, 10/28/05, Pfizer) Well-paid attorneys would be able to provide legitimately sounding reasons why the BOD supposedly acted properly to reject a Director's resignation.  However, the ultimate result will be that Directors will enter into unspoken reciprocal defense pacts to defeat the will of the Shareholders, i.e., "I’ll reject your resignation offer if you reject mine."


        ''Proposals that would require directors to win more than half of the shareholders' votes to gain a board seat have appeared at 140 companies this year. … Of course, how companies put the majority-vote concept to work is the next concern. Will the policies have teeth? Some companies -- Pfizer, for example -- have recently instituted policies requiring directors who receive less than half the votes cast in an election to tender their board resignations immediately. But there are nifty loopholes in this policy at Pfizer and at many other companies: The board, in its infinite wisdom, can reject a resignation and retain an unpopular director. … [T]he way companies apply the concept may wind up unintentionally entrenching directors. … Most shareholders already have the ability to remove directors … but they rarely pursue such a course. Under Delaware law, stockholders can propose the removal of a director in an up-or-down vote at an annual meeting. One institutional shareholder has proposed such a vote at CA -- the embattled software company previously known as Computer Associates -- which will hold its annual meeting later this year. LongView Funds, an investment trust that is a unit of Amalgamated Bank, wants shareholders to vote yea or nay on two veteran CA directors: Lewis S. Ranieri, the former vice chairman of Salomon Brothers, and Alfonse M. D'Amato, a former senator from New York. Both men were on the scene during a period of misconduct at the company, LongView said, and CA's shareholders should decide whether they stay. CA … has asked the Securities and Exchange Commission to keep it off the proxy. … The S.E.C. will rule on the CA matter shortly. Given shareholders' justified push for influence in the boardroom, it is hard to believe that the S.E.C. would rule against allowing investors to vote on the proposal.'' (NYT, 6/11/06, ''Finally, Shareholders Start Acting Like Owners'')  Believe it.  The SEC is not going to rock the political boat that supplies it with funding by offending the ship owners' best contributors.


        "Circuit City Stores. Inc. … amended the company's corporate governance guidelines to include, 'Any Director nominee in an uncontested election for whom greater than 50% of the outstanding shares are "withheld" from his or her election shall tender his or her resignation for consideration by the Nominating and Governance Committee.  The Nominating and Governance Committee shall recommend to the Board the action to be taken with respect to such resignation.'" (PRNewswire, 8/18/05, "Circuit City Stores, Inc. Adopts Majority Vote Standard for Director Elections")  Please note that neither the corporate charter nor the bylaws was amended.  The vote required would be more than 50% of the votes cast.  The Nominating and Governance Committee may only consider and recommend.  The full BOD is not bound by the vote nor any recommendation.  "The proxy proposal supporting a majority-vote standard won ... a majority of the votes at 14 companies. … Ed Durkin, director of corporate affairs at the Carpenters Union, one of the unions that sponsored the majority-vote proxy proposals, notes that the measure is winning more votes than last year…"  (July/August 2005, Treasury & Risk Management, "Shareholders Get More Say")  Unions and pension funds will claim another meaningless victory.  Corporations will claim that they are making concessions.  However, Shareholders will remain out in the cold.


        "[S]ome contrarians are questioning whether the new voting standards have any real teeth, especially because many companies are writing the new policy into governance 'guidelines' instead of incorporating it into legally binding corporate documents. … If a board violates a bylaw provision, for example, shareholders can go to court and seek an injunction or claim breach of a duty. But shareholders may not have such ammunition if boards ignore the new voting rules….  The question has further resonance given a controversy that bubbled up at News Corp. earlier this year. At issue was a poison pill the company adopted last fall amid a buildup of shares by Liberty Media Corp. Under a corporate-governance policy hammered out the prior month, the pill was supposed to expire in a year unless shareholders voted to extend it. Instead, this summer, News Corp. had a change of heart and renewed the pill for two years without shareholder input. A shareholder lawsuit against News Corp. is pending." (WSJ, 11/29/05, "Critics Fault Changes to Board Votes ---  Corporate Democracy Move Draws Fire as Smoke Screen; Time for Majority Standard?") 


        "According to Institutional Shareholder Services, a proxy advisory firm, proposals for majority voting garnered more than half of all votes at 34 U.S. companies during the latest proxy season. Yet only a few of these corporations, Home Depot, Boeing Co., Marriott International Inc. and Office Depot Inc. among them, have stepped forward and adopted the measures. What are all those other companies waiting for? … The proposals are nonbinding, so boards are under no pressure to take immediate action. And the companies say they are considering the proposals. Shareholders, however, should insist upon adoption."  Should this be done by putting forth more nonbonding Shareholder Proposals? (WSJ, 9/2/06, Breaking Views: "Majority for the Majority")


        "A record number of corporate directors snatched victory from the jaws of their defeat by shareholders this year.  In a sign of investor discontent, 93 board members at 50 companies have received fewer than 50% of votes cast during annual meetings so far in 2009, according to RiskMetrics Group Inc. ...  But none of those directors lost a board seat. All serve companies with 'plurality' voting, meaning they can win uncontested elections with a single vote. Re-elected directors at two companies offered to resign under those companies' 'plurality plus' policies, but were reappointed. The staying power of these board members raises questions about the limits of shareholder democracy. But snubs of sitting directors can help unhappy shareholders achieve other corporate-governance goals.  Consider home builder Pulte Homes Inc. Its three directors standing for election this year failed to win majorities at its May annual meeting. They submitted their resignations, but fellow directors reappointed them. .... Jim Zeumer, a Pulte vice president, says the board 'felt comfortable in rejecting the resignations' after certain members talked with several major investors. ... A similar scenario played out at Axcelis Technologies Inc., a Beverly , Mass. , producer of semiconductor-manufacturing equipment. Three Axcelis directors didn't receive majority votes in May 2008....  Axcelis reappointed the directors. ... Many big companies recently adopted rules requiring directors to win a majority of votes. But these boards also may reject losers' offers to quit.  ... Some directors stay on boards after failing to win a majority because they believe they're valuable." (WSJ, 9/28,09, "Directors Lose Elections, but Not Seats")  Non-binding voting is an ivory-tower concept designed by pinhead law professors in the service of corporate America .  It is another thinly disguised attempt to stall real progress toward corporate democracy.


                        c.    Institutional Shareholders Might Form Groups, But Companies Can Promptly                   Cause Defections  


        "New York's state pension officials ... withheld support from Eisner.... This, week Democratic State Comptroller Alan Hevesi said he was no longer calling for Eisner's immediate ouster.  ... [H]e was contacted by new Disney Chairman George J. Mitchell.  The two had worked on a Northern Ireland peace initiative.  Mitchell ... had persuaded Hevesi to alter course...." (LAT, 3/24/04, "Running Disney's Word Machine")  What new information, if any, did Hevesi learn from Mitchell that caused him to change course?  In Hollywood, stroking goes a long way. "Former New York State Comptroller Alan Hevesi was sentenced to one to four years in prison for his leading role in influence-peddling at the state's massive pension fund, capping a downfall that made him an emblem of corruption in New York politics. Hevesi, ... forced from office by a separate misconduct scandal in 2006, apologized to New Yorkers as he waited to hear his punishment for giving preferential treatment to a would-be pension fund money manager in exchange for free travel and other plums." (LAT, 4/16/11, "Figure in N.Y. scandal gets jail time") Will he ever apologize to Disney shareholders?


        "Disney officials continued efforts to win back state pension funds....  They met ... with Pennsylvania Gov. Ed Rendell, who issued a personal vote of confidence in the company. ... About 2.75 million shares held in pension funds for Pennsylvania employees and teachers were withheld from Eisner at the annual meeting.  ... Treasurer Barbara Hafer made some especially stinging comments about Eisner's performance. ... Rendell said the pension boards 'should concern themselves earnings and recent performance and, by that measure, Disney has done a good job recently.'"  (LAT, 3/25/04, "Eisner Foes Demand Voter Data")


        “Bank of America amended its bylaws Friday, allowing certain long-term shareholders to nominate board of directors, the latest major public company to join the shareholder-friendly ‘proxy access’ trend. BofA bowed to pressure from public pension funds, including the California Public Employees Retirement System (CalPERS). The banking giant will let shareholders that own at least 3% of BofA shares for at least three years nominate directors. Up to 20 such investors can pool their stakes together to reach 3%. BofA had rejected similar proposals in the prior two year, but proxy access is growing increasingly popular. General Electric, Prudential Financial and Citigroup also have backed proxy access this year, with the same standard of a 3% stake of up to 20 investors holding for at least three years. … Bank of America may now face renewed pressure from pension funds over its decision to give the chairman's role to CEO Brian Moynihan, despite a 2009 shareholder vote to keep the posts separate.” (IBD, 3/19/15, “Bank of America Joins Shareholder 'Proxy Access' Push”) It looks like an improvement—on paper. It is about time that BODs recognize pension-fund power. Now, will the pension funds have the cajones to really do something? 3% of the outstanding stock is still a humongous number. Getting groups together, and holding them together, is no easy task.  


                        d.    Promises, Promises


        The Committee has repeatedly informed the SEC and the news media that it is pure propaganda that Institutional Investors could not mount effective and low cost proxy contests.  In conjunction with serving as a Panelist at the Shareholder Director Nominations Roundtable, we presented our written statement, which stated, in part: "There Are Several Problems With Proposed SEC Rule 14a-11  (1) The drafters of the rule incorrectly assume that the present SEC Rules are too costly for Institutional Shareholders to field Director-candidates.  The cost of filing a bare bones proxy statement is negligible.  If there were Institutional Shareholder support, one could assure a candidate’s election with less than 30 telephone calls. (2) The drafters of the rule assume, without any factual basis, that Institutional Shareholders have the intestinal fortitude to engage in proxy contests. (3) The drafters of the rule incorrectly assume that Institutional Shareholders could unite to reach a 5% ownership level to qualify to use the proposed rule.  However, just agreeing on Director-candidates and entering into indemnity agreements would be a nearly impossible task.  Further, corporate targets can easily disunite such groups by catering to the desires of a few members."  See, Comments.


        "The California Public Employees' Retirement System may be coming to a boardroom near you. … Calpers is considering plunging even further into corporate governance by floating its own director candidates at portfolio companies.  With or without the Securities and Exchange Commission's blessing on a proposed rule that would make it easier for investors to elect directors, the nation's largest public pension fund is "strongly considering" offering up its own board nominations, said William McGrew, an investment officer in Calpers' corporate governance unit.  … Calpers hasn't nominated its own slate of candidates in the past…."   (WSJ, 4/8/04, "Calpers 'Strongly Considering' Running Board Candidates")  The article is most interesting in that CalPERS made no statement about the supposed high costs and other purported burdens that it may face in launching its efforts.  Perhaps, the 800-pound guerrilla is awakening.  Until then, it is just a matter of promises, promises.


                        e.    Glass Houses


        It may be more appealing to corporations to attack corporate governance practices at Institutional Shareholders than to put their own houses in order.  The situations at both corporations and Institutional Shareholders need to improve.  Conflicts of interest and lack of democratic practices are repugnant wherever they exist.


        "[W]hile pension funds are objecting to all kinds of things, ranging from serious to silly, some have their own problems needing attention.  Here's one: The notion, real or perceived, that if you want to do business with funds overseen by politicians, you have to 'pay to play.'   Calpers says it tried to ban corruptive campaign donations but was legally blocked from doing so…  In New York, state Comptroller Alan Hevesi is sole trustee of $118 billion in pension funds.  A career politician who spent 22 years in the state assembly and eight years overseeing New York City pension funds, Hevesi has been taken to task for allegedly rewarding campaign contributors with investment business while New York City's comptroller.  In 1998 he reportedly invested $130 million of city pension funds in FdG Associates, which was run by a member of the Fisher real estate family, whose relatives contributed to Hevesi's campaigns. … Another agitator is North Carolina's state treasurer Richard Moore....  He is also sole trustee of the state's pension funds, with a particularly small in-house staff--just 13 people in the investment shop.  A Moore spokeswoman says there may well be overlap between business associates and campaign donors…." (Forbes, 4/29/04, "No Pay, No Play?")


        "No question, shareholder rabble-rousing is a good thing, and Calpers … is one of a few big pension funds … that are on a rampage of outrage. … That said, if the pension fund itself were held to the same standards it demands of corporate America, the board of Calpers might have to fire itself.  Calpers' 13-member board is a mix of politicians, political appointees and union reps.  State Treasurer Philip Angelides, a contender for the governorship, has long received campaign funds from supermarket billionaire Ronald Burkle, his wife or his companies. Director Willie Brown, former San Francisco mayor, did legal work for a Burkle company, Yucaipa, some years ago. Brown and Angelides, in turn, voted for investing $200 million of Calpers money in a Burkle fund. … In February 2002 Calpers agreed to invest up to $560 million in Burkle's Yucaipa to provide financial services to other pension funds and unions. The Calpers board approved the idea three weeks before Burkle reportedly hosted an Angelides fundraiser.  In 2002 Angelides and then-director Kathleen Connell, state controller at the time, received campaign funds from Richard Wollack, a real estate investor. Calpers committed $100 million for a venture with Wollack's Premier Pacific Vineyard the same year.  Calpers says it tried to ban campaign donations to its directors a few years ago but lost in court… Charles Valdes, an 18-year board veteran elected by Calpers' pension beneficiaries, also chaired a philanthropy in the late 1990s that solicited donations from money managers who work for the public fund; Valdes has since left the charity. …  Board member Kurato Shimada, meanwhile, took two years off through 2001 to work for a marketing firm lobbying Calpers to invest in the CIM California Urban Real Estate Fund.  The Calpers board approved a $125 million investment during that time, despite objections from its own investment staff, which argued that CIM lacked experience. In 2002 Shimada rejoined the Calpers board at what he says was his constituents' insistence.In 1999 the Calpers board put in an incumbent entrenchment act worthy of the old Soviet Union.  It restricted director candidates to reciting only their personal background and qualifications, rather than letting them attack the record of the members already on board."  (Forbes, 5/10/04, "Sanctimonious in Sacramento")

         "CalPERS invested $80 million in companies that have indirectly donated to the candidate for governor, who sits on the agency's board. … Soon after taking office in January 2003, state Controller Steve Westly began helping three venture capital firms land multimillion-dollar investments from California 's giant pension system… Westly, now running for the Democratic gubernatorial nomination, received campaign donations from individuals associated with each of the funds… At any given time, hundreds of fund managers are angling for CalPERS investments. Westly is one of 13 members of the California Public Employees' Retirement System board, and as the state's chief financial officer, one of the most influential.  The funds include: •  Markstone Capital Group LLC,…•  Perseus LLC…•  Healthpoint Ltd…. Representatives of the three funds have donated a combined $213,000 to Westly since he ran for controller in 2002, his first statewide campaign. Healthpoint partners, one of whom has since been indicted in a kickback scheme involving an Illinois pension fund, helped Westly raise tens of thousands more. … CalPERS staffers say board members, including Westly, routinely bring proposals to CalPERS on behalf of political patrons. Business ethics experts warn against such involvement, saying it leaves board members open to charges of using their influence to enrich benefactors.  … Markstone had little track record. It had been founded only months before Westly brought it to CalPERS' attention in 2003. … Perseus' partners have given $18,000 to Westly. … Westly's records … were obtained through the California Public Records Act. CalPERS subsequently put a combined $25 million into two Perseus funds. … Outside advisors were also involved in the Healthpoint decision — they rejected its investment proposal twice. Nevertheless, staff at the pension system put $5 million into Healthpoint. The fund's principals helped organize at least three fundraisers for Westly.  After being questioned by The Times about Healthpoint, Westly's campaign pledged last month to return $15,000 that had been contributed by the fund's partners and relatives."  (LAT, 6/10/06, "Westly Helped Firms