Commentary: When Directors Join CEOs at the Trough

By Louis Lavelle

It's a tough time to be a corporate director. With accounting scandals and company meltdowns as common as summer rain, board members are now in the crosshairs of everyone from class-action lawyers to criminal investigators, with a few congressional committees thrown in for good measure. It makes you wonder why directors stick with it.

Until you consider the benefits. In addition to money, perks, and prestige, directors frequently enjoy an array of side deals that may include millions of dollars in consulting and legal fees, leases, and contracts. In recent months, several cases have exploded into view: the $72,000-a-year consulting contract for John Wakeham of Enron's see-no-evil audit committee, Tyco International's (TYC ) $10 million payment to director Frank Walsh for his help on the CIT Group merger, and the rampant self-dealing by Rigas family members who sat on the board at Adelphia Communications.

The fact that such deals make headlines suggests they're uncommon, but they're not. According to Executive Compensation Advisory Services, one out of four U.S. companies are enmeshed in such conflicts, including such paragons of good governance as Pfizer (PFE ), Wal-Mart (WMT ), and General Electric (GE ). At all three companies, two or more directors also are consultants, suppliers, or providers of legal, brokerage, or investment-banking services.

Elsewhere, the problems are more egregious. At WorldCom Group, Chairman Bert C. Roberts Jr. and other WorldCom employees get to fly on private aircraft--and WorldCom pays Roberts' transportation company for providing the service. At American International Group Inc., (AIG ) CEO Maurice R. Greenberg heads a private holding company in which he has a 22% stake and sits on the board along with six other inside AIG directors who also have stakes. Last year, AIG paid the company $77 million for producing insurance business. AIG says shareholders benefit because of the holding company's expertise in certain kinds of insurance. At Freeport-McMoRan Copper & Gold Inc., director J.Stapleton Roy got $200,000 to consult on "world political, economic, strategic, and social developments"--and says he never produced a written report. Roy, a former ambassador to Indonesia, says that a company prohibition barring directors who do work for the company from serving on key committees, along with full disclosure, solves the conflict problem.

At a time when directors are under more scrutiny than ever, boards like these create the perception of a private club where members are free to dip into the corporate coffers at will. When such deals are struck with outside directors, they raise doubts about the directors' independence. The deals also reflect badly on the CEOs who authorize them, raising the possibility that consulting contracts are a tool to silence board watchdogs. "Everybody has concluded that independence is the one thing we must have above all else," says Jay W. Lorsch, a Harvard Business School professor who advises companies on governance. "The message just isn't getting through to some of these people."

That may be about to change. A few companies, including Tyson Foods Inc. (TSN ) and Walt Disney Co. (DIS ), have taken tentative steps on their own. Pending regulations could inspire more to follow. Both the New York Stock Exchange and Nasdaq are proposing new standards. At Nasdaq, related-party transactions would require audit-committee approval, while nonemployee directors who accept more than $60,000 would lose their "independent" status--and with it their ability to serve on key committees.

As laudable as such moves are, though, they don't go far enough. Long-term contracts with directors should be banned altogether. While board members may provide valuable consulting or management help during a crisis, those instances should be the exception and not the rule. Directors, like most people, are not inclined to bite the hand that feeds them. The best insurance against a management fiasco is a boardroom full of pit bulls.

Lavelle covers management from New York.

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