It is not just an American icon that has foundered, but an age that has too long emphasized the wrong values, and sometimes no values at all.
And so the unthinkable has finally happened. The company that was once the marvel of the world, its largest industrial corporation and the first stock listed on the NYSE, has become the biggest industrial bankruptcy in history. Its shares, long the most coveted among blue chip portfolios, have seen their value slide into the pennies and are about to be removed from the fabled Dow 30 index. It is a business equivalent both as dramatic and unthinkable as the sacking of ancient Rome (by the Vandal King Geiseric in 455 AD) or the sinking of the Titanic (1912). Perhaps things will someday turn around for the once mighty automaker. But, for now, General Motors is just another company making its way through the court of losing enterprises. Whatever happens, the symbol GM will never mean the same when measured by industrial size, labor force or customer trust. (more…)
The decision of a majority of shareholders at Bank of America to oppose the board and separate the positions of CEO and chair, appointing an independent director to the latter position, is one for the books. This is the biggest institution in the history of business where shareholders have brought about such a dramatic change in corporate governance practices and actually removed a top title from a sitting CEO.
The move from yesterday’s annual general meeting comes in answer to the staggering losses and a shocking stock value decline that have roiled the company in recent months, as well as in response to a number of unresolved questions regarding the Merrill Lynch acquisition and who in the B of A boardroom knew what and when. It is the investors’ version of Newton’s third law of physics, (as modified by Finlay ON Governance) which holds that when shareholders are pushed too far, there can sometimes be an equal and opposite reaction.
Whether the replacement of Ken Lewis by new board chair Dr. Walter Massey will make a difference in a way that empowers independent thinking in the bank’s boardroom, and improves management performance through enhanced accountability, is yet to be seen. Some might think a physicist to be an unlikely candidate for such a key position in a bank. But given recent events on Wall Street and in the credit markets where there seemed to be little grasp of the laws of gravity, but rather, a misplaced view that debt and risk could expand into infinity -taking earnings and share prices along for the ride- perhaps Dr. Massey could give his board colleagues some useful lectures on Sir Isaac’s other discoveries a few centuries ago. So far, not even the biggest names in banking have managed to escape their universal application.
It is hard to imagine how the bank could have done any worse if Bernie Madoff had been on its board.
There was sound and fury, but in the end it appeared to signify nothing. At Citigroup’s annual meeting last week, not a single shareholder proposal for reform was adopted. Every board/management nominee was returned. Over the past year, the company’s losses soared to $28 billion and its market capitalization has dwindled from $260 billion at the beginning of 2007 to $16 billion now. With its shares having fallen below the one-dollar range and still languishing around $3.00, many see Citigroup as basically a penny stock. Since the last AGM, the bank has become a ward of the state and could not have survived without the $45 billion it received in public funds. This is the shape of once-mighty Citigroup today. It is hard to imagine how the bank could have done any worse if Bernie Madoff had been on its board all this time.
Yet all of this was not enough to galvanize Citigroup’s institutional investors into making any changes whatever -or seeing that a new approach to corporate governance is desperately needed at this institution, beginning with the ouster of Richard Parsons, the long-serving director who became board chairman earlier this year.
If a company’s management and board can preside over the obliteration of shareholder value while losing billions, and the outcome at the annual meeting is the same as if it had the best year ever, you have to wonder about the health of shareholder democracy in America. Let’s hope that Citigroup’s investor flu does not spread.
Shareholders everywhere, dawn your masks!
The agency that bills itself as “the investor’s advocate” needs to go well beyond asking boards to chime in on what’s behind their structure. It needs to focus on the bigger picture of the role of the board in the worst financial crisis since the 1930s and the persistent folly of directors who do not direct. That, in our view, is the real definition of systemic risk.
There is a common factor in nearly every major corporate governance failure and virtually all of the enforcement actions taken by the Securities and Exchange Commission since the 1960s. In almost every instance, including the bankruptcy of Penn Central Railroad, the bribery scandals of the 1970s involving Gulf Oil, Lockheed and many others, the criminal misconduct at Enron, WorldCom, Tyco, Qwest, Livent, and Hollinger, and, more recently, the stock options backdating scandal at Research In Motion, these companies preferred to vest the powers of the board chair in the hands of the CEO. In all these situations, there was a troubling degree of boardroom deference to the CEO while improprieties were occurring.
So it is that the announcement by the SEC’s new chair, Mary L. Shapiro, that the agency is thinking of requiring listed firms to disclose their reasons for adopting their particular leadership structure, and whether that structure includes an independent chair, struck us as somewhat anticlimactic and underwhelming.
The case for separating the roles of CEO and board head, with the board chair being filled by an outside director, has been supported by a formidable consensus of independent corporate governance experts since the 1940s. It was a prominent part of the groundbreaking research by the late Myles L. Mace of Harvard in the 1970s and has continued to be embraced by leading authorities since that time. The rationale for separating these positions is simple: it defies both human nature and precepts of modern organization for a CEO to be held properly accountable to a board which he or she heads and leads. To instill a true culture of accountability, a CEO needs to see an independent counterpoint to his power sitting at the other end of the boardroom table, and not just a mirror image of himself.
I made that case in 1994 when I was invited to testify before Canada’s Senate banking committee (and in several subsequent appearances), as well as in submissions to committees of the U.S. House and Senate during hearings leading to the passage of the Sarbanes-Oxley Act of 2002. An argument can be made, as I did, that separating these top positions is as important to the effective running of a major publicly traded company as the requirement to have an audit committee composed of independent directors.
Given the undeniable weight of history in tow on this subject, the SEC should be doing more than trying to send up a trial balloon and looking rather feeble in the process. What is required is for the agency to be far more aggressive about fostering a climate of accountability in American boardrooms. That it has taken this long to recognize a reality that has stood the test of time for decades, and that it is only now thinking about asking boards where they stand on the issue, illustrates how far behind the curve the SEC is when it comes to modern corporate governance practices.
The agency that bills itself as “the investor’s advocate” needs to go well beyond asking boards to chime in on what’s behind their structure. It needs to set out principles of sound corporate governance in language as hard as cannonballs, to borrow from Emerson. And it should insist on narrative from boards that is extensive and sets out in clear language in circumstances where a company has departed from those practices, including the appointment of an independent board chair. Naturally, separating the top positions and requiring an independent director as chair of the board is no guarantee of success. Having a ball team of nine players is no winning formula either, as any Mets or Cubs fan will admit. But not having the right number means that you don’t even get to play the game. Boardrooms have also reached the point where some basic structural rules are too important to overlook.
It was as a result of the financial excesses and failures of the 1930s that the SEC was born. There has been nothing even remotely approaching that level of reform coming out of the SEC in what has been the worst financial crisis since that time.
Here’s something else the SEC is missing: What exactly was the role of boards of directors in the credit and financial meltdowns of the past 18 months, and to what extent did a failure of structure or culture among directors contribute to a global crisis affecting hundreds of millions of individuals, costing trillions of dollars and eventually leading to the collapse of banks around the world? We have already pointed out on these pages the colossal shortcomings of the boards of Bear Stearns, Lehman Brothers, Merrill Lynch, Citigroup and Countrywide Financial, to name a few. All of these troubled institutions, by the way, followed the unified CEO/board chair model, although at Bear Stearns, James Cayne gave up the CEO slot and became an executive board chair a few months before the company’s collapse.
What boards did and did not do, and how they were organized, in recent years and months when calamity has been such a frequent guest are lessons that are too important to ignore. We suspect that what will be found is a weak and compliant boardroom culture where the most taxing job for most directors was lifting the rubber stamp marked “yes.” That, in our view, is the real definition of systemic risk.
During a disaster of a much more limited scale -the collapse of Penn Central Railroad- the SEC ordered its staff to conduct a through review of what the directors knew and when they knew it. Staff also examined the structure and culture of the board and its interactions with management. The result was illuminating and became a template for the disengaged board. As the staff report concluded:
Directors of Penn Central were accustomed to a generally inactive role in the affairs of the company. They never changed their view of their role.
The SEC has no trouble spending what seem like endless time and resources looking at the uptick rule and the allegedly detrimental role of short-selling, for instance. A case can be made that it is focusing too much on the individual trees and not on the health of the boardroom forest. Much more has been lost by shareholders, and by society more recently, as a result of boards that simply did not direct, did not hold management sufficiently accountable for its actions and were not adequately engaged with the affairs of the company in order to monitor risk and foresee the disasters that were looming on the horizon. The corporate board, with all the power and responsibility it entails, is an institution that requires considerably more focus on its limitations, its deficiencies and on its need for reform if it is to play its necessary role as a steward of investors’ interests and a guardian of the integrity of capitalism itself.
We will have more discussion about the past and future role of boards, and where they fit into the post-subprime recession era, in the days ahead.
We have received a number of emails from readers who were shocked at the revelation, first brought to light on these pages, that, between them, the boards of Livent and Hollinger had seven directors who became convicted felons. Here’s another gem: three of them were trained as lawyers. The number of felon directors on these boards sets a record for modern publicly traded corporations. For those interested, here’s how the total was calculated:
Livent
A. Alfred Taubman, Director (convicted of price fixing, 2001)
Conrad M. Black, Director (convicted of mail fraud, etc., 2007)
Garth H. Drabinsky, Director (convicted of fraud, etc., 2009)
Myron I. Gottlieb, Director (convicted of fraud, etc., 2009)
Hollinger
A. Alfred Taubman, Director (convicted of price fixing, 2001)
Conrad M. Black, Director (convicted of mail fraud, etc., 2007)
F. David Radler, Director (convicted of mail fraud, 2007)
Peter Y. Atkinson, Director (convicted of mail fraud, 2007)
John A. Boultbee, Director (convicted of mail fraud, 2007)
Black, Drabinsky and Atkinson were trained as lawyers.
Gottlieb and Boultbee were trained as professional accountants.
Both Black and Drabinsky, during the time of the crimes for which they have been convicted, were members in good standing of the Order of Canada, the country’s highest civilian honor. They remain so today. There is no indication if or when they will be stripped of that prized decoration, which, as we have long maintained, is a sad commentary on the distinction, on the men and women or who hold it and, especially, on those who are entrusted with maintaining the integrity of the award.
The descent to criminal status of Livent’s founder, like that of his friend and former board member Conrad Black, was stunning but not entirely surprising, given the contempt both men showed for modern corporate governance practices. Between the boards of these now defunct stock market icons, Livent and Hollinger, there stands a roster of seven directors who became convicted felons.
They shared a taste for the finer things and reveled in the image of being larger-than-life figures. They were also good friends. One served on the other’s board. Both were members of the esteemed Order of Canada and held numerous honorary degrees and other accolades. And when they fell into legal difficulties, they were represented by one of Canada’s most respected criminal lawyers, Edward Greenspan. Now they share another label: convicted felon. Soon Garth Drabinsky will follow his friend Conrad Black, now serving a 78-month sentence in a Florida federal prison, to a new address with a very tall fence and rather drab clothing. Earlier this week, Mr. Drabinsky and his long- time colleague, Myron Gottlieb, were convicted in a Toronto court on all charges of fraud and forgery in connection with their management of Livent, a once- thriving theatrical production company.
Like Mr. Black, Mr. Drabinsky travelled in a rarified circle of the rich and famous, occasionally bumping into more common mortals. There was a rather eerie period a few years ago when Mr. Drabinksy and I frequently found ourselves standing just behind or in front of each other at some pleasant dining establishments in New York and Toronto. At one point, a maître d’ at the Four Seasons asked if we were together. The New York coincidences ended when Mr. Drabinsky was charged with securities fraud by the Manhattan U.S. Attorney and became a fugitive from justice when he failed to surrender himself. For a while, we shared the same tailor. Mr. Drabinksy had an understandable preference for Italian Brioni custom-made suits. His appearances were always considered something of a theatrical production themselves by my tailor, who would boast frequently that the impresario had just picked up four or five new suits. Helping me pick out an on-sale, off-the-rack Brioni must have seemed like a real off-Broadway production to this impressionable fellow.
More than once I have found myself standing in front of the pastry counter at what some think to be a chichi grocery store when Mr. Drabinsky has popped up to inquire about the freshness of a chocolate layer cake.
A couple of summers ago, we wound up on the same road in the middle of nowhere in Ontario’s cottage country. But there was Garth, in his black Porsche Cayenne Turbo, dawdling and weaving on the road in front of me, looking like something of the Phantom of the Highway. I think he may have been looking for property on which to build his new $5 million cottage, which I thought at the time was quite a display of chutzpah, given that a number of friends had just put together a legal defense fund for him after Canadian authorities charged with fraud and forgery.
I gave a short blast of my horn as I moved around him, fearing that he might wander into the passing lane. He managed a pleasant smile and a wave, not realizing once again that it was the fellow who was the first to raise red flags in a major publication about Livent’s corporate governance.
Therein lies another interesting trait Mr. Drabinksy and his corporate empire shared with Conrad Black and Hollinger: a board of directors where management dominates and controls. Mr. Black was CEO, chairman and president, as well as chairman of the executive committee, of Hollinger. Mr. Drabinsky held the same posts at Livent. Perhaps he took his cue from Hollinger’s structure and confirmed it by placing Conrad Black on his board. When Mr. Drabinksy fell into legal difficulty, Mr. Black was part of a group who came to his rescue. Order of Canada members stick together, it seems, inside and outside the law. (There is still no indication that Canadian officials seek to strip Mr. Black of that country’s highest honors or of the membership he holds in Canada’s Queen’s Privy Council).
What boggles the mind is the stellar board of directors that Livent boasted. The names follow below in my original op-ed piece published in the Financial Post in 1998. One name, in addition to Mr. Black’s, stands out in Technicolor: A. Alfred Taubman. Mr. Taubman, who was also a director of Hollinger, served on Livent’s audit committee. In 2002, he served one year in federal prison for criminal violation of antitrust laws.
Thus the following fact is now revealed for the first time in the context of the criminal convictions this week in Toronto. At Livent, five individuals who held the post of director have at one point or other been convicted of criminal conduct. At Hollinger, five directors in the company were also found guilty of white-collar crimes. Two -Black and Taubman- sat on the boards of both Hollinger and Livent. Between the boards of these now defunct stock market icons, Livent and Hollinger, there now stands a roster of seven directors who became convicted felons. Odd, too, is the shared training both Mr. Drabinsky and Mr. Black had as lawyers. Both earned a well-established reputation for their inclination toward litigation. It is in the most serious kind of litigation, the fight for one’s freedom, that both lost their reputations.
When I used to make observations about the risks posed by so many insiders on the boards of Livent and Hollinger, many in the business press and market analysts would often skoff at my concerns and point to the stellar performance of the companies and the trophy names on their boards. Now it seems that this structure was a convenient cover for the perpetration of accounting frauds in two orgnizations where the CEO had little trouble mesmerizing even big name directors, who ultimately showed little knowledge of, or sympathy for, modern corporate governance practices. One wonders if the board thought it was viewing a theatrical event rather than governing a publicly-traded corporation. At Livent, directors gave Mr. Drabinsky and Mr. Gottlieb bonuses even when the company was losing money, and allowed Mr. Gottlieb to sit on the board’s audit committee. Even the recurring statement in Livent’s proxy circular that the board was viewed by management as something of an advisory group did not seem to bother these directors. One phrase especially caught my attention a decade ago when the company claimed that the board preferred to rely on the “specialized expertise” of Drabinsky and Gottlieb. We learned the meaning of “specialized expertise” this week.
How loud the thud when oversized egos come crashing to the earth, which they otherwise rarely touched before. No matter how often the sound is heard -Conrad Black, Bernard Madoff, R. Allen Stanford and, recently, Peter Pocklington, one-time owner of the Edmonton Oilers who gave Wayne Gretzky his first NHL season, come to mind- it is impossible not to wonder what might have been if they had been imbued with a lesser ego and a larger sense of integrity and perspective that might have kept their feet more firmly planted on the ground.
One of my articles on Livent did manage to make its way into the Financial Post some years ago. I have reprised it below. Incidentally, this was my final contribution to the Post, which had been running my Op-Eds since the 1970s and on a number of occasions called on me to help write editorials in the newspaper. Shortly after the article was published, Mr. Black bought the paper. I was told later by editors that he did not appreciate the article about Livent. My by-line did not appear in the Post again. Mr. Black’s successors -who continue to cheerlead for him and run the occasional columns produced from his prison cell, and have expressed the view that his crime was of a minor nature- prefer to keep it that way. The Financial Post ran a retrospective of the key articles it had published about the Livent saga going back to 1998. It did not include the article below, which ran in August of 1998.
Saturday, August 15, 1998
Guest Column
Livent shakeout raises issues about how boards work
By J. RICHARD FINLAY
The Financial Post
The guns of August are booming again. Four summers ago, the blue-chip board of Confederation Life Insurance Co. came under fire for its failure to prevent that company’s collapse. This time, the target is Livent Inc., where assertions of financial irregularities have led to the suspension of company founders Garth Drabinsky and Myron Gottlieb. On their face, the accusations seem implausible. If true, they would mean there had been a systematic juggling of the books under the noses of some of the most prominent figures in Canadian business. Once again, troubling questions would be raised about whether boards really work, or whether they are just relics of the past.
It will likely be some time before all the facts come to light, but the recorded corporate governance practices of Livent give important insights into the nature of board supervision in the company.
For the period in which the irregularities allegedly occurred, Livent had a board that varied between 13 and 14 directors. Toronto Stock Exchange guidelines, as well as best governance practices elsewhere, recognize that there should be no more than two insiders on the board — usually the chief executive and chief operating officer. In Livent’s case, three senior company officers were also directors in addition to Drabinsky and Gottlieb. Five insiders on a board of 14 is a rarity in Canadian business these days, and not an admirable one at that.
Interesting, too, is the fact that Drabinsky held the dual positions of chief executive and board chairman up to June. It is widely believed that having a non-executive director as board chairman provides for better accountability and board oversight of management.
The most notable feature of Livent’s board, however, is the fact that it is composed of such high-profile names. Conrad Black has been a director since 1993. Joseph Rotman has been on the board since 1995. Jim Pattison joined the board in 1997. Indeed, in some ways it would be difficult to find a more distinguished board. Black, Rotman, Pattison and Drabinsky are all members of the Order of Canada.
Could such respected and experienced business leaders have been duped? Did the audit committee of the board, which included Rothschild Canada chief executive Garfield Emerson, Sotheby’s chairman and shopping centre king Alfred Taubman and polling guru Martin Goldfarb, fail in one of the director’s most solemn duties: to, as Harvard board scholar Myles L. Mace observed, “ask the right questions”? Or were they given the wrong answers? Livent also claims outside directors on the board’s audit committee have a procedure for meeting independently with the auditors, if they so choose. It will be interesting to learn in the weeks and months ahead if they ever did.
The company has declined to follow TSE recommendations and form a nominating committee composed of outside directors for the selection of new board members. Instead, company documents as recent as May state it prefers to rely upon the “specialized expertise” of Drabinsky and Gottlieb, who, along with unnamed outside directors, look for board members who will “supplement” management. That concept alone, where directors are viewed as some kind of appendage of management, ought to have set off alarm bells among professional investors.
The same philosophy might explain why the board felt no need to follow TSE guidelines in forming a corporate governance committee to examine ways of ensuring board effectiveness. Perhaps now they might wish they had.
Much is resting on the outcome of what happened here, not the least of which is Canada’s already tarnished reputation in global investment circles over the Bre-X Minerals Ltd. and YBM Magnex International Inc. scandals.
If financial irregularities did occur, it may be hard for the investing public and policy makers to resist concluding high-profile boards are little more than ornaments on management’s Christmas tree, and sweeping change is needed.
It is not just an American icon that has foundered, but an age that has too long emphasized the wrong values, and sometimes no values at all.