The Rogues’ Gallery of the increasingly tarnished modern Gilded Age is getting crowded. The Securities and Exchange Commission today accused Robert Allen Stanford, CEO of the Stanford Financial Group, of running a “massive ongoing fraud.” The SEC said the bank division of the group could not account for $8 billion it was supposed to have on deposit in Antigua. Mr. Stanford apparently could not be reached to offer any clarification. In fact, he seems unreachable altogether. Federal officials have placed the Stanford Financial Group in receivership. Investing clients are already lining up claiming losses.
Sir Allen, as he prefers to be called as a result of his knighthood from that island nation, boasted to investors in December of 2008 that his funds were never invested in Bernie Madaoff’s alleged Ponzi operation. We got a hint why today. The SEC thinks he had his own scheme going. He didn’t need anybody else’s.
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 Wall Street Journal’s Alan Murray suggested a rather novel idea this week. He argued:
Hedge funds — at least the five percent of them who pursue activist investing strategies — look to me like the saviors of capitalism. They are in the best position to hold CEOs accountable – and someone other than regulators, trial lawyers and left-leaning public pension funds needs to play that role.
I like Alan, but I’m glad he isn’t slugging for the Yankees this week. Because, this time, he really struck out.
An important part of the evolution of modern capitalism has been its wide and dynamic base of stakeholder participation —of share owners as well as consumers. That model has given people a stake in supporting key drivers of the economy along with a sense that they are benefiting from them. It is a system that requires public consent as well as efficiency.
The fact is that too little is known about most hedge funds and how they will affect all the stakeholders who have come to depend upon the modern, transparent corporation. Its often secretive practitioners seem to want to keep it that way. We know a great deal about their economic prowess. Much less is understood about their concepts of responsibility, their vision for the future of capitalism and how they plan to govern. And there is that little thing called derivatives that can see huge fortunes wiped out overnight.
Some hedge funds efforts, like those involving Carl Icahn, have proven mixed in terms of results and rather destabilizing to large groups affected. An occasional shake-up can be good for organizations, especially those run by the smug and self-satisfied. A regular series of earthquakes probably is not.
One can debate whether or not capitalism needs a savior. I am fairly certain, however, that hedge funds are an unlikely candidate for that task. Some might argue that the best way to ensure an efficient and accountable market is to have more and better informed shareholders —and a system of governance that allows investors a meaningful role in exercising the privileges and responsibilities that go with ownership. I distinguish here from the Wal-Mart approach, which seems to regard shareholder involvement and proxy initiatives as some kind of subversive activity requiring extensive background checks, and goodness knows what else, of the proponents.
A century or so ago society was promised a new approach to capitalism which was also supposed to make companies and managers more efficient. It was dominated by a handful of actors on a stage where J.P. Morgan had the leading role. It didn’t end so well, as I recall. Concentrations of power, in the long run and very often sooner, generally produce more suspicion, political outrage and public discontent than widespread improvements in progress and prosperity.
I will be the first to admit that there are serious weaknesses with the way most boards work. Management self interest often saps performance and makes companies far less productive, accountable and responsible than they need to be. Think of recent experiences with Home Depot and Hollinger, for instance. But before we throw out the concept of the widely held, shareholder owned, stakeholder dependent corporation, let’s understand better what we are getting with the inheritors of this tough-minded approach that seems to be the defining hallmark of hedge funds.
It would be unwise to adopt a cure —or a savior— that could prove more costly than the illness.
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.
