Corporate Boards: Bermuda Triangle for the Moral Compass

Sea Change Radio Executive Producer Bill Baue is joined in the studio by John Gillespie, co-author with David Zweig, of Money for Nothing: How the Failure of Corporate Boards is Ruining American Business and Costing Us Trillions.

In mid-March 2010, Jenner & Block released the 2,200-page report prepared by their Chairman, Anton Valukas, that autopsied the Lehman Brothers collapse of 2008.  The report sent shock waves for revealing the bank’s use of Repo 105, an accounting trick to hide Lehman’s increasingly unstable balance sheet.  Of course, we know what happened — Lehman went into bankruptcy, triggering the financial meltdown of Fall 2008.  The question in everybody’s mind is, what went wrong, and can we fix it?

One answer comes from John Gillespie and David Zweig in their book Money for Nothing.  They focus on the role of boards of directors, which are supposed to represent the interests of company shareholders, who are the owners of the company.  That’s the problem, according to Gillespie and Zweig — boards have become captive to CEOs and corporate executives, the very people they are supposed to monitor.

John Gillespie is a veteran of Lehman Brothers, as well as Morgan Stanley and Bear Stearns, three companies intimately involved in the meltdown.  So he has an inside view of the problems embedded in the corporate system.  Gillespie visited the University of Massachusetts, where Sea Change Radio is produced, to give a talk at the Isenberg School of Management.  Isenberg’s Committee on Business in Society and Net Impact Chapter hosted the event, and Committee Chair Jennifer Taub (who’s written a great blog post on Repo 105) arranged for Gillespie to visit the studio to record this interview.

The discussion started with Gillespie tracing the roots of the book’s title to the old Dire Straits song by the same name, and he describes how this serves as a launching pad for discussing how corporate boards in the US are enabling the transfer of wealth from shareowners to CEOs and other executives — abdicating their fiduciary duty to monitor and advise.  Gillespie describes the problem of board interlocks, or the nepotistic interrelationship between corporate boards (and by extension between CEOs and board members) — a problem well documented by The Corporate Library.

The solution?  Gillespie stressed the role of diverse boards, pointing out that only 15.2 percent of large company board members are women, and 25 percent of these companies have no minorities on the boards — a dynamic Gillespie calls “male, stale, and pale”.  The book ends with 24 recommendations, broken down into two categories: regulatory fixes and cultural fixes.

On the regulatory side, he suggests splitting the CEO and board chair roles (currently 61 percent of companies have joint CEO/board chair); creating term limits for board members; allowing shareowners to call extraordinary general meetings to vote out underperforming board members; and so-called “proxy access” so that shareowners can nominate board candidates, a mechanism currently under re-consideration by the SEC (after the Commission proposed a rule, then abandoned it earlier in the 2000s).

On the cultural side, Gillespie recommends transforming the moral and ethical foundation of boards.  He also suggests board training and ongoing education, which is currently not required.  He cites the example of the State of Connecticut, which sponsored a program to train women as board candidates as a means of addressing the dearth of female board members.