Online Extra: "Sarbanes-Oxley Is Not Bad"

But there's no silver bullet to prevent another Enron or Tyco, says United Technologies Chairman and CEO George David

George David, chairman and CEO of United Technologies (UTX ), has strong views on his role and his company's in a climate of tightened corporate governance. He's the only inside director on his company's board and also sits on the board of Citigroup (C ).

BusinessWeek Senior Writer Diane Brady recently spoke with David about the new climate in the boardroom. Edited excerpts of their conversation follow:

Q: Do you think much has really changed in the past few years?

A:

I think directors are more on notice about their responsibility. They need to [pay] more attention to detail. Independent auditors are also on notice. The landscape is shifting. But there's one misunderstanding. Directors are only able to judge a company at a very high level. The idea that a board will operate 24/7 just isn't realistic. That's not the board's role.

Q: A lot of people rage against the Sarbanes-Oxley regulations. Have they been a help or a hindrance to UTC?

A:

Sarbanes-Oxley is not bad. We redid 30,000 financial processes in the company to meet the regulations. We spent $40 million on it last year, though we'll spend less in 2005. Ultimately, it makes the company better.

But we have also had good processes in place. We put out a statement of principles of corporate governance in 1994. Our code of ethics came out in 1997. The audit committee is composed mostly of financial experts. I don't sit on the compensation or audit committees of UTC. These were practices we already had.

Q: How do you make sure your board is effective?

A:

I put in front of them what they need to do their job. The board report goes to the directors exactly eight days before each meeting. It's a 15-page document that's designed to be read in two to three hours. It's timely and complete. We never vary from that. There are no surprises.

Q: A lot of corporate governance experts say a company should have an independent chairman. At the very least, some want to split the role of chairman and CEO, yet you still have both roles at UTC. Why is that?

A:

I don't agree with having the chairman be independent. It's perfectly O.K. to split the roles. But it takes an immense amount of knowledge to chair a company of the size and complexity of UTC. An independent chairman [wouldn't] have the knowledge to give the board 100% of what it needs to do its job.

Q: Is the board's role to keep you on your toes?

A:

I don't think an adversarial process between management and the board works. You want to have a chief executive with a good amount of power and sensible checks and balances.

Q: You have been in the job for a decade, but the average tenure of CEOs has actually declined. Do you think business leaders are given enough time these days to make their mark?

A:

Maturity of judgment develops over time. Businesses also work on momentum. Most of the good things I've done at UTC have taken about five years between cause and effect. You need time to execute on an initiative. If you want a big-bang effect, you can slash and burn. But that's not necessarily in the long-term interest of the company.

Q: How important are the new rules?

A:

There's no silver bullet here. People think you can write a new regulation, and there will be no WorldCom, Enron, or Tyco. That's not true. How long has the criminal justice system been in place? We can improve regulations, but problems will still come up.

We have a very good system of governance in the [average] American company. We have better governance than in most parts of the world. Everybody is anxious about [getting rid of] problems. It's a hazard that won't go away.

Edited by Patricia O'Connell

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