The failure of the financial system in 2008 wasn't simply a massive failure of common sense, regulation, and leadership. It was also a failure of corporate governance. In theory, the corporate boards at Lehman Brothers, Bear Stearns, AIG, and General Motors were paid handsome sums to oversee the activity of the executives and protect shareholders' interest. In practice, they slept as the CEOs ran the companies into the ground. In Money for Nothing: How the Failure of Corporate Boards Is Ruining American Business and Costing Us Trillions, coauthors John Gillespie and David Zweig chronicle the role boards played in the recent debacles and propose solutions. NEWSWEEK's Daniel Gross spoke with Gillespie, a former investment banker at both Lehman and Bear. A podcast of their conversation can be heard here.
Gross: Just seven or eight years ago, after the failure of Enron, WorldCom, and Global Crossing, we were having similar conversations about boards of directors. What was different about this round of corporate-governance problems?
Gillespie: This set had to do with excessive risk taking in combination with excessive executive compensation that incentivized that type of risk taking. Our sense of the entire issue was the CEOs have gotten most of the attention as the cause within companies, when they're supposed to be reporting to boards of directors. If we could fix that problem, we could possibly help prevent this the next time around.
What's supposed to be a representative democracy—the board members are supposed to representing shareholders—is in practice more like a private club. Was this clash always present? Or is there something different about this clubbiness, the way [board members are] chosen and the way they interact with CEOs in the contemporary business culture?
Some things have gotten better. Decades ago, the head of Goldman Sachs sat on 31 boards at the same time. There's a bit more independence [today], theoretically. But the reality is things have gotten a lot worse and a lot more dangerous in many ways because of the size and interconnectedness of companies. They're so dependent on financing that can get yanked immediately that bad leadership in the boardroom can blow up not just the company itself but trigger massive defaults and bankruptcies elsewhere, as we've seen in the last set of scandals.
At some of these companies, say, Bear Stearns or even Citigroup, it was clear that the CEO didn't have a handle on some the basics of their business. If the CEO didn't know what was going on, is it fair to expect the board members to have that kind of knowledge?
They're supposed to be there to act almost like a governor on an engine—if it's running out of control to at least slow it down. Ideally they're supposed to monitor, advise, provide contacts to the company, and help it grow. But at the very least, they're supposed to keep it from blowing up. Unfortunately, boards are a narrow group who come from the same backgrounds as the CEOs. They tend to therefore see the world the same way the CEOs do. I happen to have worked at both Bear Sterns and Lehman Brothers, neither of which exist anymore, in part because of bad leadership in the boardroom. They had folks who either weren't paying attention or, in the case of Lehman, who were deliberately selected because they were unqualified. Lehman's risk committee only met twice a year, and five of the directors were in their 70s or 80s. They had a person who was the former head of the Girl Scouts, a television-company executive, an art-auction-company executive, and an actress and a socialite who'd been on the board for 18 years.
It would almost be comical if this weren't a company that managed to amass $600 billion in debt.
And lost a massive amount not just for the shareholders, and triggered a worldwide problem that could have been prevented. Several executives at Lehman Brothers told us the board was a joke and a disgrace, and I couldn't agree more.
Another example of a decline and failure that was much longer in the works was General Motors. Was the board failure there different than the Wall Street board failures?
There they were so invested in their strategy and their selection of the CEO that I think they were blinded. Rick Wagoner, who was CEO and chairman—which is a problem itself, having the CEO in both roles—actually told a reporter a few years ago, "I get good support from the board. 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.' " So even though the company pursued a disastrous strategy of doing trucks and SUVs because it provided the highest profit margin, the board didn't push back. The board should have been there asking tough questions instead of being cheerleaders.
There are cultural, anthropological, and psychological reasons why that happens. When you come on a board, is it implicit that you work for the CEO, rather than the other way around?
That's the way it turns out, I think. We've spoken to a lot of disillusioned board members who are completely captured by the CEO in most companies. CEOs either have selected you, or approved your being on the board. They control your renominations, your perks, your pay, almost all the information that goes to you, your committee assignments, your agendas. Boards aren't really diverse either. The term within the board community is that they're "male, pale, and stale." The average board member is an older, wealthy, white male with business experience or sometimes government or academic experience, and less than one out of seven is a woman. The problem is they don't even see the lack of diversity. And it's not just diversity in demographics that matters—it's diversity in experience and perception.
Based on your research, can you draw a conclusion as to which was the worst board ever?
There are a lot of competitors. The Disney board was selected two years in a row by a group of people as the worst board, and for good reasons. The board included Michael Eisner, who was chairman and CEO; his lawyer; the principal of his kid's elementary school; the architect of his own house; a former U.S. senator who'd done consulting for Disney; and the actor Sidney Poitier. But there were two people on the board who were really unhappy and rocked the boat. The only thing right now that works with boards is public outrage, and disclosure that embarrasses a board into doing the right thing.
Are the boards at high-performing companies like IBM, Google, or Berkshire Hathaway really good? Or are there more obscure companies that have great boards?
We have a whole chapter that looks at good boards and good directors and then gives about two dozen recommendations for reform. Target has established what are considered [by some to be] the best practices for boards. There's another category of what we call "phoenix companies," ones that almost went bankrupt because of bad leadership, but got a new board. Tyco is an excellent example where new leadership came in doing a lot of things they should be doing, and the company has not only recovered but has flourished as a result.
Tyco, of course, was run by Dennis Kozlowski, the hard-charging CEO who ended up going to jail. You actually interviewed him in jail. What did he have to say about Tyco's board? Does he blame them for not stopping him?
He actually does. He said it was a very weak board. When I asked him what the best thing he could say about the board was, he said, "They didn't slow me down." And if you step back from it, that's the crux of the problem. Kozlowski did a great job early on, and things had just gotten out of control, as they often do in companies that don't have an internal monitor.
You close the book with some arguments about how to reform and improve things.
We think the regulatory side of things is important, but it's more important to get the culture of the boards right. We suggest creating a special class of public directors who would be trained and come in and act independently, rotate, and have term limits. We think the CEO/chairman role should be split by legislation. And directors should have to have a certain percentage of their wealth in the company so they can think like investors. One of the most important ideas we have in there is to allow an extraordinary general meeting to be held by shareholders, if 10 percent call for one, that could get rid of board members right on the spot who aren't serving shareholder interests.