Archives for posts with tag: Directors

Fraud and SEC Enforcement

December 29, 2017 //
2

The Journal of Accountancy (yes, there really is such a publication) had an article about the Securities and Exchange Commission (SEC) bringing and enforcing fraud cases over the last decade. The largest cases involved either improper financial reporting or violations of the Foreign Corrupt Practice Act which deals with bribes to international officials. Not surprisingly the financial services industry had, by far, the most cases and fines followed by natural resource and energy firms (think mining and oil and gas).

But what was very surprising, and more than a bit disturbing to me, was who the SEC prosecuted and fined.  Corporations themselves were at the top of the list which made sense. But, what did not, was that Chief Financial Officers (CFOs) were second followed by a firm’s Chief Executive Officer (CEOs) as a far distant third. Worst of all was that the Board of Directors were barely fined at all! Now, I know I was a practicing (and never indicted CFO) and I know CFOs certainly play a major role in a fraud of any kind. But, let me tell you this: nine times out of ten when a CFO does something bad, his or her CEO not only knows about it but probably pressured the CFO to cook the books in the first place! I could understand if CFOs were fined a bit more than CEOs, but not ten times as much in this study. CEOs are always responsible and often behind what goes on, period.

And, the Directors in these firms should have know something was going on! I have written on several occasions about the often limited involvement or usefulness of many members of Boards of Directors. But remember the corporate officers from the CEO to the CFO all report to and are responsible to the Board. The buck, and on average, $250,000 per year of bucks for large company directors, stops with the Board.

As many readers know, I hate fraud and especially fraud committed by senior managers who are paid a lot of money. So I am all for prosecuting and fining those who commit fraud. But if the SEC and the U.S. Government focus the bulk of their efforts on CFOs and almost ignore CEOs and their Boards, the occurrence and magnitude of fraud will only continue and probably get worse.

Think of this like a National League Football team. When a team, like my Cleveland Browns go winless, they fire the coach. When the team only wins a few games in several years, you fire the General Manager, the Director of Player Personnel and everyone but the Owners. So, in corporate terms, when major fraud occurs, fire the Board. This is how you send a message and how things might have a chance to improve in the future.

Tags , , , , , , , ,
Categories Uncategorized

Volkswagon’s Board Flawed Culture

December 26, 2015 //
2

The Wall Street Journal recently ran an article about the engine emission crisis at Volkswagon (VW). Senior executives of VW acknowledged that their firm had a “culture of tolerance for rule breaking” that lead to this “chain of mistakes”. Although the article did not name exactly who ordered their engineers to install the software to fool the tests, the article did state that it found no evidence that “VW executive or supervisory Boards were involved in the fraud”.

Yeh. Heard that one before. After British Petroleum (BP) had the disastrous oil spill in the Gulf, a top writer from Fortune magazine stated that BP’s long time focus on cost cutting versus safety goes back directly to the Board of Directors. The Gulf spill was proceeded by several major safety events including a huge explosion in Texas that killed a dozen workers. All organizations look for guidance or direction from the top and a Board is the ultimate top. It appears that maximizing profits through cost cutting was a top priority over safety for BP and its Board.

At my old firm, USG Corporation, every meeting, even the Board meetings, started with a review of safety. This goes back to when USG started as a gypsum mining firm. Major accidents, especially deaths, are reviewed in often grisly details. Senior people, including myself, would attend safety dinners when a plant reached an accident free milestone. Safety was a core value at USG Corporation.

Sadly in most of these disasters like BP and VW often a few, token senior people are fired but with huge severance packages. But a lot of staff or line engineers at these firms lose their job and often their livelihoods because of their presumed role.

At VW, the Board and the senior executives looked the other way or showed a tolerance for rule breaking or it would not have occurred. And  German car companies are known for their excellence in their engineering and engines. That makes this all the more unbelievable to me.

In my view, senior executives and Board members must be held to higher standards than they are and at times, they need to bear the blame and responsibility for not focusing on what is right.  Read the rest of this entry »

Tags , , , , ,
Categories Uncategorized

Boards involvement in hiring CFOs

April 15, 2015 //
1

The Wall Street Journal has a weekly half page devoted to my former professional as a CFO. In a recent edition, they highlighted a new trend of corporate Board of Directors getting actively involved in their firm’s search and hiring of a new Chief Financial Officer. The reasons cited included the increased importance of the CFO role in everything from regulations such as Sarbanes-Oxley reporting, to  strategy and deal-making. A final reason was that former CFO’s are increasing looked upon as candidates to become a firm’s CEO.

My reaction to all this? Well, it’s about time! Time that CFO’s are getting the respect so many deserve, as they are often quiet and low key, yet are often the second most critical person in a public company. But more importantly, it’s about time that Boards of Directors are actually acknowledging this and getting involved in this hiring activity.

Historically, in many old line firms, the path to CFO was internally determined. Often it was a matter of paying your dues and moving up through various financial roles in treasury or controllership. If a business and its industry remained stagnant over the 20 plus year period it took to groom a CFO, that was a fine strategy. But businesses and their industries are not stagnant. Competition changes, mergers occur and technologies leap ahead. So the perfect internally- grown candidate of the past may not be best suited for a new environment.

The second way CFOs, and most other internal Officers were chosen, was solely by the Chairman or CEO. This was usually decided by the CEO alone who then informed the Board of his choice. The Board then dutifully elected the person to be CFO. Perhaps the Board knew a little about the person from HR succession charts but the Board rarely got involved in the selection or even with a token interview. This, in my mind, is wrong.

All public corporate Officers, including CFOs, are legally “elected by and serve at the pleasure of the Board”. Directors need to perform some due diligence on this critical personnel task. To do this properly, Boards need to spent time, not just in Board meetings or group dinners, with the senior officers. In fact, I would suggest that most of the countless, large, quarterly Board dinners I ever attended were worthless. Private one-on-one dinners between the various Directors and members of senior management would be invaluable to both parties. This would also allow the Board to have a much better of idea of who they were electing to be the next CFO or CEO. And if the current CEO objects because he or she is paranoid of what a Board member could learn in private from one of his team, then the Board better look very hard at that CEO!

Directors of large public company Boards are paid over $200,000 a year. Many of the problems Directors encounter when senior officers, like CFOs or CEOs, either abruptly resign or are fired for cause could be eliminated if they spent more time upfront getting to know these key people. So, Directors, get involved in hiring new, CFOs and, in some cases, other corporate officers. But also spend some quality time with the senior officers you have in place; it will be well worth your while.

Tags , , , ,
Categories Uncategorized

Women on Boards of Directors

February 15, 2015 //
3

A recent study of women directors on Standard and Poors 1500 company boards was done for the Wall Street Journal by governance researchers at MSCI Inc. Today, women make up about 16% of all these directors which is a slight improvement from 2009 when women were 12.5% of these directors.  Of the 67 firms that have a female CEO, like IBM, General Motors or PepsiCo, those Boards often have three or more women. Remember that most Boards average 8 to 12 directors. So, some slow progress is being made.

My last two public company Boards each had one female director at the time and currently have three women out of a total of 21 positions. These companies and their competitors in the construction and chemical industries are historically under represented by women versus many of the more consumer related firms.

But enough of the statistics, let’s get to the main point. What was my experience with women directors? In a word or two, they were better than many of their male counterparts. Let me list some reasons why.

1. Women directors view their position on corporate Boards as more of an honor and thus take it more serious. This may be because they have fewer opportunities or because they have to really work hard to land the role versus many of the “old boy” overlapping Board networks which still exist. The women directors are usually younger and are on fewer Boards than many of their male counterparts. We once had a male Director resign because he “accidentally” joined a direct competitor’s Board! I doubt that happens much with female Directors.

2. The women directors came better prepared to Board meetings. All companies send the bulk of their meeting documents ahead. Some of our male directors did not even bother to bring these materials probably because they had not read some or all of it and had made no notes. The women directors brought the materials and you could tell they had read them and had made notes.

3. The women directors stayed focused on the matters at hand. Sometime Board meetings, especially unexpected ones by phone can take a long time and it is hard to manage directors when you can’t see them. On these phone meetings, I have had male directors fall asleep and snore, go to a nearby bathroom without closing a door or have a lengthy discussion with their wife about what sandwich they will make them for lunch. Female directors really behave much better as a group!

So when you consider these examples along the fact that women are smarter than men and are more social than men and live longer, they should be on more Boards of Directors! Seriously, they should-but corporate america, like the rest of the world often takes a lot of time to change. I also believe that some men are aware of all the strengths that women can bring to leadership roles but are Afraid to give them the opportunity. And, as we have mentioned before on this blog, fear is not good in Board rooms or in The Business Zoo!

Tags , ,
Categories Uncategorized

Boards of Directors

April 1, 2013 //
1

My long-time banking guy friend, Jerry, sent me a follow-up to my last post about Executive Compensation. He provided a link to a CNBC article called “Pay for Boards at Banks Soars Amid Cutbacks.” The full story can be seen at http://www.cnbc.com/id/100604933.

The key point is that since the financial crisis (which was not caused by, but certainly exaggerated by, banks), the compensation for the Boards of Directors of the largest U.S. banks keeps rising. This is occurring while the banks are receiving more governmental pressure on their banks’ officers pay and bonuses. The article cites one of my favorite banks, Goldman Sachs, where many of their 13 directors earn over $500,000 a year for a part-time job.

In defense, the article goes on,  some Board experts are saying that banks are trying to recruit directors with more financial expertise to provide better oversight and avoid some of their past problems.

Now, I am all for avoiding problems, especially those that can cripple our whole economy.  I also believe that historically many bank boards, like many general corporate boards, fall into what I call my One Third rule. That is that One Third of directors are not qualified to be on a given board.  One Third of directors may be qualified but do not have the time or interest to be on a given board. And, the final One Third of directors are qualified, spend the time and energy,  and do most all the work, on a given board.

In my book, The Business Zoo, we have a separate chapter that explains this director rule further. We also tell stories of Boards that do a good job and some where Boards do not. We also suggest Management or Advisory Boards for most smaller, private firms and explain their value.

But let’s go back to the article about bank boards and what sounds like their excessive and increasing pay.

Leadership, we are rightly told, starts at the top. The Board of Directors is as top as we get in the world of public companies or many private firms and even nonprofits.

Senior Management, serves at the pleasure of the Board. The company officers work for the Board. The Board each year elects or re-elects the senior officers and approves their pay.

So, Directors and Boards need to set an example and actually lead the firm. This should include being sensitive to the perception of their own pay by their shareholders and the public. Strong Board leadership can also occur by not agreeing to everything management proposes and learning to say No more often and, at times, to say goodbye! Goodbye to CEOs or other officers who do not work out. That is real Board leadership.

Tags ,
Categories Uncategorized