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Board Veteran Sees Closer Corporate Scrutiny as Healthy

Board Veteran Sees Closer Corporate Scrutiny as Healthy

SPECIAL REPORT – Banking & Finance: Boards Under Fire What Do They Know?


Staff Reporter

Alfred E. Osborne Jr. is an economics professor and the director of the Price Center for Entrepreneurial Studies at UCLA. Osborne is sometimes called upon as an expert witness in lawsuits where directors or officers are accused of failing to fulfill their fiduciary duties. He has been a member of many boards over the years, including U.S. Filter and Times Mirror Co., prior to its sale to Tribune Co. in 2000. He’s currently on the board of three publicly held companies and one private company, and he’s a trustee for two fund-management groups. Six years ago, the Price Center formed a Director’s Training Institute where officers of private companies are prepared for the higher level of scrutiny that comes when the company goes public.

Question: Are boards doing a good enough job?

Answer: Most directors of public companies that are experienced do a reasonable job. As a result of well-publicized failures, directors have increasingly been asked to be more careful, attentive and loyal to shareholders. They’re also being asked to be more skeptical in their oversight of management and its advisers and to ask probably more questions than they otherwise might. And all of this is healthy.

Q: What’s the area where most breakdowns are occurring?

A: I’m most concerned about the failure of management to be honest and open in its disclosures. A board fails in its duty in many cases because management didn’t give it the information that it needed, or the reports, or the discussion that might be necessary to come to the right business decision. But if the board is on notice that something is going wrong, that’s different, and often that’s what I’ve observed.

Q: Is it unrealistic to expect boards to act as cops?

A: You can expect boards to be more cognizant of the strategic plan, how the company is executing against that plan, and what that might mean to its short and long run performance. But no board, however diligent, can assume to be the front-line defense against fraud or willful misconduct by management.

Q: In what areas do you find boards most lacking?

A: There’s a tremendous amount of loyalty to incumbency, and because boards are patient, perhaps to a fault, not often quick enough to act. Managing in crises, or difficult economic situations, or confronting management and the chief executive is probably difficult. Should we replace the CEO because performance has been miserable for the last two years? I don’t think boards spend enough time discussing with the leaders of the enterprise how they feel about their performance.

Q: Sometimes, the directors are selling shares in stride with management and they’re taking in consulting fees from the company.

A: If they’re doing it, they’re violating the duty of loyalty (to shareholders). Directors have a lot of power, they need to avoid personal conflicts wherever possible. Now a conflict per se doesn’t mean the transaction shouldn’t go forward; where directors can get into trouble is failure to disclose their involvement in the transaction, or hiding relevant facts that might influence how a disinterested person might look at it.

Q: Where does the line get crossed?

A: If you make consistently bad judgments, and if you are self-serving to the extent that it crosses some yellow line that we all have in our head, these are wrong. If you have clear conflicts of interest, and no procedures are established to deal with them, if a company appears to be a personal cookie jar, I think people know what crosses the line.

Q: Other than loss of reputation, what incentives are there to encourage proper behavior on the part of a board?

A: I think reputation is a powerful motivator. Even in a world where you can have a PR firm, if the damage is done, the damage is done. People remember the misstep, they don’t remember the good works. Think of Enron. Ultimately, it’s in the process of destroying Arthur Andersen.

Q: Should there be more stringent laws against white-collar crime?

A: Probably. It’s amazing that you can have three strikes and you’re out if all you’ve ever had is these little bags of coke, whereas you can rape and pillage a large corporation, and destroy thousands of lives, and maybe you’ll get off with the right representation. I don’t know how to redress all of the iniquities in our legal system, but there are many.

Q: Are executive pay structures contributing to these problems?

A: I think we probably need to fix that. The quarterly earnings numbers are to me a very weak metric on deciding one’s compensation, because it encourages people to do things that may help earnings in the short run because they may not be with the company two years from now. Compensation arrangements need to be more long-term oriented, salary and other bonuses should be tied to results that take two, three, four years to bring about.

Q: Are the right people sitting on corporate boards? Do celebrities, politicians, sports figures belong?

A: It is not the individual so much as the composition of the board that makes it effective. You need diversity in experience, in occupation, things like age and ethnicity, gender, and there’s diversity in style. There’s some people that are easy to get along with and there are others that are cantankerous. In the end you’re trying to create a board culture that encourages informed judgment.

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