Kickbacks, slush funds, sex scandals. No, it’s not business as usual in Washington D.C.; it’s business in top European companies. Siemens, Volkswagen and now BP have all been implicated in conduct at the top that has brought shame to those companies and disgrace to senior managers. The latest is the abrupt “resignation” of BP chairman Lord Browne, who acknowledged lying to the court about his involvement with a male companion. This is a man who had every honor showered upon him. Created a knight in 1998 and a peer (member of the House of Lords) in 2001, he was a trusted advisor to British Prime Minister Tony Blair. He was not even 60. Yet with all his wealth, power and privilege, he was still challenged in that one all-important but often undervalued department —ethics. And for his failure there, all his other gains and accomplishments will be seen in a less impressive light.
One is tempted to draw a comparison with Conrad Black who, as a Canadian, was granted the highest honors that country has to give, including membership in the Privy Council, which is a position normally reserved for members of the Canadian cabinet and certain high-level government officials. It allowed him, among other things, to travel with a special status green-covered passport, which I do not believe was recalled or surrendered when he renounced his Canadian citizenship. He was a trusted advisor to Prime Minister Mulroney at the time of his award. Shortly after giving up his Canadian citizenship, he was made a member of the lords and for many years before that was a close advisor to then Prime Minister Thatcher. He now stands trial in Chicago on a long list of criminal charges. Whatever the outcome of the criminal case against him —and the evidence of Hollinger International’s audit committee members may well be regarded by the jury as testimony to the directors’ own incompetency on such a grand scale it could form the basis of a reasonable doubt about some of the charges— Conrad Black is unlikely ever to be seen as the poster boy for ethics in business.
Ethical problems continue to plague Siemens, too, where it was announced last month that CEO Klaus Kleinfeld Heinrich is stepping down. That company is caught up in a huge scandal involving bribery of union officials and a sordid tale of corporate misdeeds. The SEC has commenced a formal investigation. The scandal took another top official earlier in April when the head of Siemens’s supervisory board, Heinrich von Pierer, resigned.
Volkswagen had a bribery and corruption scandal as well. In January, Peter Hartz, pleaded guilty in German court to operating a slush fund that permitted union friends, fellow executives and politicians to spend lavish amounts on luxury trips, gifts for “girlfriends” and visits to brothels in Germany, Spain and South Africa.
During the U. S. business scandals of the early 21st century, there was considerable tut- tutting about American boardroom ethics. It appears that any European sense of moral superiority is unwarranted. Boards there have proven that they can be just as lax about instilling —and enforcing— a culture of ethics in the conduct of business as any American or Canadian company. In the category of unbelievable but true, bribery of foreign officials was actually a deductible expense for German companies until 1999.
These scandals might also make investors think twice about the much touted benefits of investing abroad because of so-called Sarbanes-Oxley restrictions. High standards of ethics, accountability and transparency may well make the U.S. system of corporate governance and securities regulation the most costly of any —except for all the others when those standards are absent.
Last week, we observed that BCE’s board has taken too low a profile in the process to consider going private —so low as to be almost invisible. As we said then:
The fact that management appears to be leading the process, and has selected partners it feels comfortable with, is also troubling.
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It is the board that needs to be carefully and undeniably setting the tone for these discussions. That voice is too faint and its timing has been unimpressive thus far.
Late on Sunday, BCE issued a statement confirming that its board is on the job. Here is part of what was said:
The Board and the Strategic Oversight Committee are committed to conducting a process that all qualified parties can participate in. The Board also indicated that all parties wishing to qualify to participate in the privatization process must be able to establish adequate financial capacity for a transaction of this size and complexity.
Nice to have the directors back online. We were glad to encourage their reappearance and hope they will stay connected.
Larger men give up their posts before bringing disgrace upon themselves or their organizations. Smaller men cling to them like life rafts.
When a CEO shows up at a board meeting with his lawyer and demands “fairness” after bringing embarrassment upon the institution he is supposed to be leading, it is time for somebody to leave the room and not return. Usually, it is not the board.
Embattled World Bank CEO Paul D. Wolfowitz makes the mistake that too many CEOs make. He fails to understand that it’s not about what’s good for him. It’s about what’s good for the institution he heads. Mr. Wolfowitz and his lawyer, Robert S. Bennett, may try to do an elaborate tap dance around the board over the issues that brought them to this impasse. But the central point, as we have noted here previously, is that the credibility and respect essential to the sound functioning of the office of the World Bank’s chief is no longer there.
The greater danger in Mr. Wolfowitz’s staying is that it will almost surely compromise the Bank’s own governance reputation and make it apparent to the world that the board is merely a rubber stamp for the dictates of the U.S. administration. The Bank’s efforts to bring governance reform to developing countries will be terribly undermined if it becomes apparent that its own governance system is a sham.
Making accusations that the board is treating him shabbily, just days after being called upon to resign by dozens of former World Bank officials, only confirms that Mr. Wolfowitz does not grasp the nature of the relationships and the esteem that are necessary to carry on with the job. One by one, important constituencies are withdrawing their support, and with each unheeded demand for his resignation Mr. Wolfowitz appears a lesser and lesser figure. In this he has much in common with another Bush appointee, embattled attorney general Alberto Gonzales. Both these men give the impression of being smaller than life figures occupying the huge offices they hold. Larger men give up their posts before bringing disgrace upon themselves or their organizations. Smaller men cling to them like life rafts.
Great institutions like the World Bank cannot be headed by little men. Nor can they be governed by those who are unable or unwilling to stem the erosion in the stature of the body they are entrusted to protect. The Wolfowitz girlfriend ordeal must be ended. If Mr. Wolfowitz does not step aside —and soon— the board must do the job for him.
Another puzzling sign surfaced at BCE this week, when its board announced that it had established a special committee to handle its friendly going private transaction involving Canada Pension Plan and KKR. Unless BCE has gone into the acrobatics business too, it seems to be making a habit of getting things backwards.
First, there was the blanket denial of March 29th regarding any intention to pursue a private equity deal. That was reiterated on April 10th. Many investors relied upon those statements, and, judging by the calls and email received at The Centre for Corporate & Public Governance, some sold their shares as a result. Then, out of the blue, BCE twisted itself into a pretzel and announced that it was happy to do exactly what it said it had no intention of doing just a few days earlier and named CPP and KKR as friendly suitors to the deal.
One would have expected BCE’s board to have established a special committee prior to the company’s announcing its decision to explore a going private transaction —not after. This gives rise to the impression that the decision announced on April 17th was not entirely thought through. Given the scale of the potential transaction and BCE’s prominence in Canada’s capital market, this is less than encouraging.
The fact that management appears to be leading the process, and has selected partners it feels comfortable with, is also troubling. In these kinds of situations, management typically wants to do what is in the best short-term interests of management and not necessarily what is in the long-term interests of shareholders. BCE’s board has a history of being overly deferential to management, as the costly fiasco involving the company’s purchase of Teleglobe, at former CEO Jean Monty’s insistence, illustrates.
It is the board that needs to be carefully and undeniably setting the tone for these discussions. That voice is too faint and its timing has been unimpressive thus far.
There are too many unanswered questions and inconsistent statements for anything less than a formal investigation by the U.S. regulator. It is another example of how Canada’s OSC has dropped the ball.
There is a lesson for companies conducting internal investigations that are to be reviewed by securities regulators. When writing the report, don’t do it on Swiss cheese. We set out our misgivings about Research In Motion’s board probe some time ago. Now it seems the SEC is having a problem with some of the rather flimsy and self-serving findings of RIM’s directors, who discovered backdating had occurred at the company. Quite a lot of it, actually. The U.S. securities regulator has launced a formal investigation into RIM’s practices. The fact that directors overseeing RIM also received stock options that were backdated, with no explanation as to who approved the move, and RIM co-CEO Jim Balsillie’s assertion that, even though he is a chartered accountant who holds that profession’s highest designation and is both founder and chair of an institute specializing in financial governance, he had no idea that backdating was wrong, may leave too many holes to ignore. The inconsistencies between what RIM’s directors and top officers were saying in their securities filings about the company’s stock options practices —including important certifications by RIM’s CEO and CFO made under U.S. Sarbanes-Oxley legislation, which we talked about here— are matters that need to be taken seriously. Apparently, Canadian regulators have not seen it that way. They need to get another pair of glasses.
Fortunately, the SEC may not entirely be buying what it has been handed by RIM, and as a result, investors seem to be selling. The stock was down substantially overnight. As for the OSC, which we noted here has often been little more than a delayed echo of the SEC, it seems once again to have been outpaced by its American counterpart. The OSC appears quite happy to dine on Swiss cheese, even though, in news The Centre for Corporate & Public Governance broke earlier this week, it has 90 employees who earn more than SEC chairman Christopher Cox. I have a suspicion, based on the volume of emails received at Finlay ON Governance, that a large number of Canadian investors and policy makers are beginning to ask if they are really getting value for their money.
The Wall Street Journal had (another) troubling piece about Wal-Mart the other day. This time a former employee is alleging that, while working for Wal-Mart, he was “tasked with the electronic monitoring of directors’ meetings…” It almost seems implausible that such an impropriety would even be attempted much less committed over a period of time, but then there were those weird things going on in the HP boardroom involving spying on directors. The New York Times Floyd Norris raises the question on his blog “how will the board react?” My thoughts follow.
Does Wal-Mart really have a board? You will know the answer if the directors whose conversations it is alleged were improperly monitored do not resign en masse or at least demand a tough independent investigation of the allegations. I am skeptical they will do either.
With four insiders (an unusually high number among major publicly traded companies, to say the least) and directors having met formally on only 4 occasions in 2006 (another 3 meetings were phoned in), Wal-Mart’s board appears to be little more than a ratifying body for the controlling shareholder. It is hard to imagine that an empowered and independent board would not have taken more decisive and visible action to prevent the self-inflicted stumbles and misadventures that continue to plague this accident prone company. What happens on the Wal-Mart board is what inside directors —i.e., the Walton family— want to happen. It is rather troubling as well that the nomination, governance and compensation functions of the board are folded into one committee. Such consolidation of power and duties makes meaningful review of board performance and practices impossible for all practical purposes. Those who are invited to sit and remain on the board are clearly expected to toe the line —perhaps even in meetings held in the absence of management and inside directors.
Wal-Mart’s problems will persist as long as its thinking is conducted through the narrow and myopic prism its board structure symbolizes and until its corporate governance —and its ethical culture— are dragged into the 21st century.
