Directors From Failing Boards: A More Nuanced Approach

Gretchen Morgenson’s What Iceberg? Just Glide to the Next Boardroom (12/26/09) tells of directors who were supposedly minding the store as disaster struck at companies like Countrywide Financial, Washington Mutual or Fannie Mae and how many have moved on to other boardrooms. Morgenson’s article implied that shareowners should vote them out at their new companies. In I Read Morgenson; Now What?, I tried to tell readers how to do just that. Paul Hodgson – Senior Research Associate with The Corporate Library offers up another approach. (Directors and Blame. Where does the fault lie?, 12/30/09)

Paul’s is much more nuanced, pointing out that being a member of a failed board shouldn’t necessarily brand one for life. “Fair enough, the two PACCAR directors who served on the Washington Mutual board (for 38 years) and the Countrywide board (for four years) are two among a total of 12 directors, but they must still be having some kind of effect. Is it a good one and was the 38 years at WaMu just a bad dream? Or is their service on a failed company board irrelevant. Or is it an advantage?”

His blog post seems to lead on that such experience could be an advantage if they learned from it, or a disadvantage if they were incriminated in the failure. He notes Peter Cohan’s recommendation from Why American Corporate Governance is a Bust as adding a requirement or best practice that directors be required to “buy significant stakeholdings.” If their wealth is tied to the company, they will be vigilant in protecting shareowners. Paul then asks, “Might they not be driven by the kind of impetus that drives executives with millions of stock options to book revenue that hasn’t been earned yet, to manipulate earnings, to artificially boost stock prices?”

He recognizes there is no single solution that will always apply but then concludes that at least an apology may be due. “It goes a long way when you are asking for forgiveness, and re-election is a form of forgiveness.” In general, I agree with Peter Cohan and would like to see more directors with their wealth ties into the firm. Yes, that can lead to accounting gimmicks, but that why we should require that substantial holdings be long-term, extending even for some time after they have left the board.

I like Paul’s call for apologies but even that is not so straightforward. What if these directors did everything they could to avoid trouble at Washington Mutual and Countrywide? Would they need to apologize for not convincing the rest of the board or for remaining on the board, instead of making a noisy exit?

One of the fundamental problems that shareowners have in monitoring boards is that boards are such a black box. We don’t know who is responsible for what, other than by what committees they sit on.

Instead of an apology, or perhaps accompanied by one, directors should offer up an explanation of what went wrong, their role in it, and what lessons they learned.

The SEC’s new disclosure requirements will mandate proxies include an evaluation of each nominee’s “competence and character,” including the particular experience, qualifications, attributes or skills that led the board to conclude that the person should serve as a director of the company. Such notice is also required to include a list of other directorships held by each director or nominee at any public company during the previous five years, rather than only current directorships. I would love to read, among these disclosures, explanations from candidates about their roles as directors and why we should elect them despite the taint that may come from such service. Will apologies and explanations be forthcoming?

While Weil, Gotshall & Manges put out an excellent briefing today, SEC Disclosure and Corporate Governance (December 30, 2009), that goes over the disclosures and many other new requirements, I don’t see any recommendations for apologies. “As a starting point, the nominating committee chair and company counsel should consider requesting updated CVs from each of the directors (some companies may choose to include additional questions in the D&O questionnaire). Companies should begin drafting this section of the proxy statement early since each director will likely take a keen interest and may have comments.”

Keen interest indeed, as Paul Hodgson notes, “PACCAR coyly omits the WaMu and Countrywide service in its directors’ bios.” Next year they can’t. Will they include apologies or explanations? Maybe Michelle Leder will be the first to let us know at

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