James Thompson, the former governor of Illinois and current chairman of the Winston & Strawn law firm of Chicago, is at the center of a firestorm over Hollinger International (HLR ), the troubled publisher of the Chicago Sun-Times and other newspapers. Thompson heads the audit committee at Hollinger, where former Chief Executive Officer Conrad Black is being investigated by the U.S. Attorney's Office in Chicago in the wake of claims that he looted the company of millions. Black has denied any wrongdoing.
Thompson and the rest of the Hollinger board -- including former Secretary of State Henry Kissinger, Weirton Steel (WRTLQ ) Chairman Richard Burt, and former Defense Dept. adviser Richard Perle -- were accused last August of being "not alert" to alleged self-dealing by Black. Special counsel Richard Breeden issued a report depicting the company as a "corporate kleptocracy" that managers ran for their own financial benefit. He said the board was deceived, but he also criticized Thompson for trusting Hollinger executives too much and failing to undertake independent analysis. Breeden accused the committee of being "inattentive."
Thompson argues that the Hollinger board responded quickly to shareholder complaints, appointing a special committee that hired Breeden. But critics say the action doesn't excuse the board's inattentiveness beforehand. Thompson sat down with BusinessWeek Chicago Bureau Manager Joseph Weber to talk about how CEOs are facing a lot more questioning nowadays. Edited excerpts of their conversation follow:
Q: First of all, Governor, on whether the watchdogs are barking. Do you think they're barking more often?
A:It's entirely true that those people and agencies who deal with corporate governance and corporate relationships at the CEO level -- even below the CEO level -- are much more proactive in questioning these days. You get the impression that every corporation in American is under assault by somebody, whether it's the SEC or Congress or shareholders or class action suits or you name it.
There is no doubt that boards are far more active today and far more independent than they ever were. There is no doubt that service on an audit committee is entirely different than [it was] even five years ago. The meetings are more frequent. They're much more lengthy. The interaction between the audit committee and the auditors is much more [frequent] and detailed.
Q: As you reflect on the Hollinger situation, what's the most important lesson you've learned about a director's responsibility vis-à-vis the CEO?
A:That's a hard one because you don't give your service on a corporate board by operating under the presumption that the CEO is a crook. And I'm not saying that Conrad [Black] is a crook. But that notion sometimes lies behind critics of Hollinger directors.
If you look at the report of the Special Committee they conclude that...a number of transactions were never shown to the board. A number of other transactions were presented to the board under explanations that turned out not to be true. Now, it would be difficult I think for boards of directors who are part-time stewards of the company to catch changed documents or transactions that were not presented or transactions that were presented with an explanation or a rationale that later proved to be untrue.
Q: So what's the lesson -- that a director shouldn't start with a negative presumption but should at least be skeptical?
A:I suppose you could, as a director, demand independent documentation of each transaction that you're asked to pass on. I haven't seen any evidence that that's going on in Corporate America. There still has to be a presumption at least of trust between the CEO and management and the board members.
Q: Until it's broken?
A:Well, yes, until you see some evidence that it's broken, and presumably the people who are in the position to and customarily would demand the most exquisite documentation of everything -- the auditors -- are now doing that. And if the auditors today had the slightest twinge and suspicion about a corporate transaction, they would go right for the audit committee.
Q: How do you conduct your work on corporate boards differently, in the wake of the Hollinger situation?
A:I suppose maybe read the 10Ks and 10Qs word for word. I doubt there were many board members who did that before. We ask many more questions of the auditors, who I'm sure, judging by the time it takes to get the Ks and the Qs done, ask many more questions of Hollinger management. I stay in far more contact with the current CEO.
We just hired a new CFO. I interviewed him. I didn't interview the prior CFO or the one before that. A board member just wouldn't do that.
Q: It sounds like the thing that went wrong in Hollinger was too high of a level of trust in the CEO. I'm wondering if you have a "trust but verify" attitude now?
A:Only in the sense that the audit committee is much more intimately involved with the transactions of the company and much more involved with the outside auditors, so that together, the audit committee and the outside auditors formed a natural check against anything going wrong. But at the same time, you have to know and understand the character of the leadership of these firms.
Q: One of the things you hear from the critics is that there's far too much chumminess between board members and boards and CEOs. Has that chumminess ended?
A:You would hope that board members are friendly to the CEO, otherwise you're going to have a situation where you may have disruption or chaos.
But I don't serve on a board where the fact that the CEO and some of his board members may have been in the same industry for a long time and therefore have been industry friends would ever lead to any of the board members doing something for the CEO or vice versa. There's so much transparency in corporate governance today that you couldn't get away with that.
Q: Going back to your experience, is there any advice you would offer directors now?
A:Yes, make sure your D&O [directors and officers] insurance is more than adequate. And have it reviewed at every board meeting. That's No. 1.
In the old days, a guy would go on a board and he would be quiet for the first several meetings. You know, hold your tongue and know your place until you're a little more senior. That rule is out the window.
Don't assume anything. Ask questions. Even obvious questions. Because in today's litigious society, somebody else is going to be looking over your shoulder to a much greater extent -- whether it's a regulator or shareholder, class-action lawyer -- than they ever have before.
Q: Do you think all the outsiders who surround a CEO -- directors, auditors, attorneys, bankers, insurers -- have become less beholden to CEOs?
A:I'm not sure how they would become beholden. Let's take them by groups. Let's take auditors. When there were six or seven big audit firms, you might say that audit firms tracked carefully in their dealings with the CEO because they wanted to keep their assignments. Now there are four [firms].
If you have trouble with an auditor today, [it's difficult] to find a new one to take its place unless you're willing to go to a small or regional auditor. And then everybody -- your shareholders -- looks at you and says, "Oh, why did one of the Big Four leave and the Joe Smith firm take over?"
Take the directors. You have to search far and wide to get a good director these days. The liability and scrutiny issues have people throwing up their hands. The search for a great director takes a long time. There isn't any way in the world that a director would feel beholden to a CEO.
A:They have such an obligation to report suspicious transactions or face regulation or discipline on their own that there isn't any way that they're going to soft-pedal this.
Insurers have to beg for a piece of D&O insurance. It's a sellers' market, not a buyers' market.
It's hard to think of a group today that's beholden to a CEO. Even employees. Something has gone wrong and you're a whistle blower, you can recover big sums. Times have really changed there.
Q: In the end, do you believe Hollinger's case was about an inattentive board and an abusive CEO, or was it more about a board that woke up to problems and acted on them?
A:It's about a board that was deceived.
Edited by Patricia O'Connell