Last week we raised the issue of the abysmal performance of Wal-Mart’s board in dealing with a growing number of challenges that face the company — its own structure and practices being high on the list. In his column today, the Wall Street Journal’s Alan Murray asked how long CEO Lee Scott will last in light of the company’s widening problems. He mentions nothing about issues related to Wal-Mart’s board.
As we suggested last April in a widely read and commented upon piece (Does Wal-Mart Have a Board?), mounting scandals and questions about the current CEO’s performance are symptoms of a deeper problem involving inbred thinking, disengaged directors and an antiquated system of corporate governance. Until those issues are addressed, mishap and misadventure will continue to be regular features in Wal-Mart’s aisles.
A funny thing happened at its annual meeting. Nothing really happened. Not that there wasn’t plenty of reason for change. This icon of American —and, increasingly, global— retailing known the world over has experienced a dramatic meltdown in its reputation in the past year and more. Its sales growth is faltering. Two pages of its annual report are devoted to dozens of litigation issues where the company is being sued. That’s two pages of very small print. A new scandal recently surfaced which sees explosive charges being hurled by Julie Roehm, a former Wal-Mart executive, at CEO Lee Scott. A former vice chairman was convicted of embezzlement. A few months ago, another former employee alleged he was tasked with bugging directors at board meetings when management was out of the room. The board’s failure to commence an independent investigation over the charges at that time, combined with its continuing acquiescence in an outmoded and family dominated corporate governance structure prompted us to ask “Does Wal-Mart Have a Board?” By all appearances, the most difficult job Wal-Mart directors do is lifting the rubber stamp that management regularly supplies them.
At the annual meeting, every shareholder proposal to improve governance, transparency and accountability was handily voted down at board urging. Company directors don’t believe shareholders are entitled to fuller information about Wal-Mart’s corporate donations, for instance. Even a very tame proposal to let shareholders express a non-binding sentiment on executive compensation was too much to accept. There is no indication at all of changes in the works to reduce insiders’ influence or to hold more board meetings than the four formally held last year. (Telephone meetings, which the board occasionally also holds, are no substitute for working sessions where directors actually attend in person and can look management in the eye). The company doesn’t even bother to go through the ceremony of appointing a lead independent director in light of the fact that the board’s chair is an insider. Every credible corporate governance study in the past dozen years has recommended that step be taken in situations where the company refuses to have an independent director chair the board. Wal-Mart still clings to the outmoded concept of having an executive committee, dominated by management and insiders. Hollinger International, whose executives are currently standing trial in federal court in Chicago, also had an executive committee and a governance structure that saw power concentrated in a select few hands. It didn’t end very well for that company.
Corporate icons that once dominated their market with a combination of arrogance and bullying and the unthinking expectation of continuing success litter the landscape of business history. It takes a lot more than deciding to reduce the number of new store openings to avoid that same fate in the face of so many challenges, missteps and scandals. It takes a board of independent minds to understand the importance of guarding against complacency and allowing a single vision to dominate to the point of atrophy.
With all its scandals, government confrontations and litigation, Wal-Mart’s boardroom still operates like it is a family run company when, in fact, it has become an institution of millions of investors with enormous financial, environmental and ethical impact upon the communities and societies where it operates. Oblivious to the accountability demands that accompany great power, it remains, like so many before it which have stumbled from the heights of success, an organization unconscious of the mounting discontent of its stakeholders, which makes the failures of Wal-Mart’s still slumbering board to deal adequately with the issues that arose at its annual meeting and elsewhere, the Outrage of the Week.
The company became a world-class symbol of bloated CEO pay and disengaged directors —none even bothered to show up at the 2006 annual meeting. But indignation over ex-Home Depot CEO Bob Nardelli’s $200 million plus retirement package, combined with a profit slump of 30 percent in Q1 of this year, were evidently not enough to prompt a majority of Home Depot’s shareholders to support resolutions that would give them even a consultative say on CEO pay and split the positions of CEO and board chair. In both cases, management and the board opposed the moves, which goes a long way toward explaining why the proxy measures were voted down at this week’s annual meeting. For all the changes in corporate governance and SEC rules in recent years that purport to empower investors, management and directors still maintain a strong grip on the proxy process and on the outcome of any proposals. The resolution regarding CEO compensation was only intended to create an advisory mechanism and would have been non-binding on the board, but even this was viewed as too threatening to entrenched interests by the company’s Atlanta-based Politburo, otherwise known as the Home Depot board of directors.
To his credit, the company’s new CEO, Frank Blake, apologized to shareholders for the excesses and arrogance of the Nardelli era. That was nice. And most directors actually attended the 2007 AGM. But a better demonstration of the importance of investors in the Home Depot equation would have been to actually treat them like (a) adults and (b) the real owners of the company by giving them a say on CEO pay. The fact is, however, any company whose board still does not understand the concept that real accountability means a CEO should report to the board —period— and not head the board he reports to, is unlikely to understand the indispensable role that sound governance plays in improving performance and avoiding the kinds of mishaps that were synonymous with Mr. Nardelli’s leadership.
As we have observed on these pages previously, Home Depot has many problems. Undervaluing investors, employees and customers has been consistently among them. We think that needs to change if the company’s financial performance and reputation are to avoid further setback, which is why the actions of Home Depot’s board in launching a campaign to defeat shareholder empowering measures, like say on pay and improved corporate governance, are the Outrage of the Week.
A special board committee found that he broke the Bank’s ethics rules to advance the financial well-being of his girlfriend —not an admirable position to be in when you head the institution involved and claim to be a champion of higher standards of ethics and governance around the world. An avalanche of powerful stakeholder nations and groups demanded his resignation. Former executives of the body wrote a joint letter to the Financial Times which called upon him to step aside for the good of the organization. Yet when it came to dealing with World Bank chairman Paul D. Wolfowitz, the Bank’s board adopted a demeanor more resembling a fledgling new regime negotiating the terms of abdication for a dethroned monarch than a governing body that supervises the CEO. It was, to say the least, unbecoming. A board is supposed to hire and monitor the conduct of a CEO. When that conduct is wanting, because of ethical shortcomings or misjudgment, it is the duty of the board to act with strength and conviction. This is a fundamental principle of sound governance without which no public institution can long function.
Faced with pressure from Mr. Wolfowitz’s lawyer, Robert S. Bennett, the World Bank’s board decided to rewrite history and back away from its findings that Mr. Wolfowitz violated the Bank’s ethics rules. In doing so, it not only demeaned itself in adopting language that was substantially inconsistent with its previous report, but it also opened the door to its own credibility now being challenged. Can the Bank’s word be trusted? Does it mean what it says? Or can an unpleasant truth be ameliorated by a lawyer’s bombast and clever negotiation? The dictators of the world, for whom the Bank’s push toward principles of transparency, ethics and improved governance is about as welcomed as a visit from Senator Paul Sarbanes in most North American boardrooms, will no doubt be taking cues from how the board approached the problem in dealing with one of its own.
Some will argue the Bank finally got rid of Mr. Wolfowitz, so what’s the problem? One can be glad that the Bank will have new leadership. But an ends-justifies-the-means approach to institutional decision-making by a body with the power and influence of the Work Bank is a slippery slope upon which many a despot and shady actor would like to glide. We will not be joining them. It would have been better for the Bank to have stood by its findings, privately advise Mr. Wolfowitz that his conduct had damaged the institution and his ability to lead it and demand that he step aside —or remove him from office if he did not. Leaders who violate ethical standards and bring discredit to their organizations do not generally get to dictate the terms by which they will relinquish their positions.
We will have further comments about some steps that should be taken to bring the Bank’s own governance practices into line with 21st century realities. For now, it is clear that the board took too long to act, was too indecisive about asserting itself and permitted a passage of time and events that brought needless ill will and a troubling erosion in its moral authority, which makes the World Bank board’s mishandling of Paul Wolfowitz’s departure the Outrage of the Week.
There was an economist, an ex-diplomat and a former governor. The economist didn’t read what she received, the diplomat “missed” what was written and the governor just “skimmed”. And this was the audit committee —the so-called more “active” directors. On the same board there was the director who was a convicted felon; the director who pleaded guilty to mail fraud and faces 29 months in prison; the director who once headed a company that pleaded guilty to price fixing; and the director who never showed up. No, it’s not a board put together by Tony Soprano or Meyer Lansky. It was called Hollinger International.
U.S. Attorney Patrick Fitzgerald brought a long list of criminal charges against Conrad Black in 2005. With its astonishing testimony this past week at his trial, the Hollinger audit committee pretty much indicted itself.
Last month we raised concerns that BCE’s management —rather than its board— appeared to be leading the auction process that the company had embarked upon. Some days after our posting, the board issued its first statement about the process and made it clear that it was in charge. We see from yesterday’s Globe and Mail that Judge Leo Strine of the Delaware Chancery Court has similar views on the role of the board in the kind of events now unfolding at BCE:
Judge Strine says boards today have to take control of negotiations immediately because managers run the risk of being biased in favor of powerful private equity buyers that typically offer rich contracts for the bosses to remain if their bids succeed. Another worry is the reluctance of private equity buyers to compete with each other in takeover auctions, thereby limiting the potential for bidding wars.
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Judge Strine’s observations about boardroom conduct should make directors at BCE Inc. blanch. The communications company’s board waited until last week to form a special committee of directors to oversee takeover talks, months after private equity buyers had come calling and more than a week after New York buyout giant Kohlberg Kravis Roberts & Co. collared three of Canada’s largest pension funds for a syndicate that is studying a potential takeover.
Judge Strine is not advancing new law. For at least two decades, the Delaware court has followed the position that boards, and especially independent directors, must ensure fairness, value and objectivity when a company finds itself, or places itself, in play. It evolved out of the early days when corporate raiders threatened to upset management’s grip on power, prompting management to find more friendly suitors —occasionally at the expense of the best deal for shareholders.
An interesting side note— our comments on the tardy entry of BCE’s board were also made to newspaper reporters before they were even introduced here. Apparently they weren’t seen as an issue by the reporters who had called me and there was no mention of this concern appearing anywhere prior to its being raised at Finlay ON Governance. It’s another example of where blogs often outpace more turgid mainstream media, and where reporters are often less clued in to the concerns of ordinary stakeholders and investors than they profess to be, and the practices of sound corporate governance than they ought to be.
