September 22, 2002 The Record — Business Section
"Dodging the board: Being a corporate director isn’t nearly as attractive as it once was"
By Hugh R. Morley

Being a corporate director used to be considered a plum job. With at least one meeting a month, a director could pick up a five-figure salary, feel part of a favored elite, and enjoy stock options, golf outings, and even use of the company jet.

But lately, companies have found it harder to fill their boards.

A recent survey by New York headhunter Christian & Timbers found that 60 percent of qualified board candidates contacted by the company turn down the offer of a board seat, compared with 25 percent a year ago.

With Wall Street awash in scandals, headhunters who are contracted to find board members say candidates fear landing with a company that may later sprout trouble, soiling their reputation and triggering lawsuits from investors who lost money. They add that other sought-after candidates — especially those already sitting on several boards — don’t want the extra workload now that directors are under pressure to more closely scrutinize company activities.

In the past, "people would jump at the opportunity" of a directorship, said Barry Honig, president of Riskon, a Tenafly consulting company that finds prospective board members. "The interview process would be more of the company interviewing the director. Now the prospective director is interviewing the company."

The turnaround is one of the most visible signs of change roiling public company boardrooms as investors demand corporate accountability in the wake of alleged misdeeds at titans such as Enron, WorldCom, and Adelphia.

In New Jersey, Paterson cheese distributor Suprema Specialties Inc. is under investigation by federal authorities in connection with the company’s collapse. The company filed for bankruptcy in March, six months after raising $48 million in a public offering amid company claims that sales rose by 70 percent in the previous quarter. A lawsuit filed by shareholders — the Teachers Retirement System of Louisiana — charges that the sales figures were fraudulent and that company officers and directors filed false information about the company with the Securities and Exchange Commission.

Suresh Govindaraj, a professor in the accounting department of Rutgers Business School who has looked at Suprema’s financial statements, said an attentive, experienced director would have seen clear signs that the company was in financial trouble.

"They should have found this out," Govindaraj said of the directors.

Few directors have yet been directly implicated in the lurid tales of corporate pillage, fraud, and accounting shenanigans; the blame has largely settled on chief executive officers, chief financial officers, and accountants.

But the spotlight has slowly expanded to include those who should have been overseeing the errant officers: the board of directors. And the scrutiny has sent a shiver through many boardrooms.

"The proper reaction to these scandals is going to be to hold board members more accountable," said George Zoffinger, head of the New Jersey Sports and Exposition Authority, who has sat on half a dozen corporate boards. "And if you have somebody like a (Enron CEO) Ken Lay, or (WorldCom CEO) Bernie Ebbers, how can a director really protect themselves against that kind of illegal activity?"

Boards are reevaluating their role, tightening standards of acceptable director behavior, promising to keep a close eye on CEOs and seeking out experts to become directors or advise board members on complex issues, observers say.

The New York Stock Exchange and the Nasdaq exchange have also weighed in, setting new guidelines on board structure and more closely defining which directors can take part in sensitive issues such as the oversight of audits, the selection of new board members and deciding CEO compensation.

"It’s clearly a big walk-up call," said Honig. "I would doubt there is a boardroom in America that isn’t talking about corporate governance," he added, referring to the code of ethics and rules that guide a board’s activities.

Said Dorothy Light, a director for Wall Township power company New Jersey Resources and head of the board’s corporate governance committee: "If a director is not rethinking the responsibilities today, they are either dead or very, very dumb."

Historically, a board’s role is one of checks and balances on management similar to that of the relationship between the U.S. Congress and the president, said David M. Steele, dean of the Silverman College of Business at Fairleigh Dickinson University.

The CEO and his managers run the company day to day. And the board — usually seven or more members who include full-time company managers and directors whose only position in the company is the part-time board seat — sets longer term policy, Steele said.

The heart of the board’s responsibility is to ensure the company is run in the best interests of the shareholders, scrutinizing operations, setting management compensation, and ensuring audits are carried out correctly, Steele said. In addition, the directors also act as advisers to management, he said. But weak of inattentive boards — such as those in some of the scandal-ridden companies — have ceded power to the executives, Steele said.

That is especially true when the top executive and board members have a personal or financial relationship outside the firm, said Gregory Mark, professor of law who specializes in corporate governance at Rutgers Law School.

"Unfortunately, boards have not given the actions of senior managers the kind of scrutiny that one would hope for," Mark said. "Sometimes (it’s because) they are friends. Sometimes there is the ‘There but for the grace of God go I’ phenomenon.

"Almost 80 or 90 percent of the people who comprise boards of directors are themselves senior officers of corporations. That means, sometimes they have sympathy instead of a critical eye."

Perhaps the most closely documented case of failed oversight emerged in a six-month probe of the Enron collapse by the Senate Permanent Subcommittee on Investigations. The Houston-based energy trading giant filed for bankruptcy late last year after reports that it allegedly used off-the-books partnerships to hide some $1 billion in debt.

While Enron directors told the committee they were surprised by the collapse, federal investigators concluded that there were a dozen incidents over three years where the board could have learned of problems.

"The board witnessed numerous indications of questionable practices by Enron management over several years but chose to ignore them," the committee’s report found.

The scandals have prompted efforts to toughen a board’s oversight role and shift the power balance back into its hands.

Some changes were already in the pipeline — fueled by shareholder lawsuits, the growing pressure on companies to improve their share performance, and the recent poor economy, said Raymond Felton, a Woodbridge lawyer for several public companies. But the recent scandals have accelerated the changes, he said.

The NYSE and Nasdaq regulations — if approved by the SEC — would require public company boards to have a majority of "independent" directors, those who are not company managers and have no family, financial, past employment, or other ties to the company management. Advocates of the move say that independent directors are likely to act more in the shareholders’ interest and be less controlled by top executives.

The new rules would mean board changes for at least two New Jersey companies — Bed Bath & Beyond of Union and Vital Signs of Totowa — which do not have a majority of independent directors, according to the Corporate Library, a Washington watchdog group.

Other boards have already taken voluntary steps toward reform.

Headhunter Jeffrey Christian, president of Christian and Timbers, noted that the average director used to spend about 120 hours a year on board matters. Now, he said, "We’re seeing that rise significantly." The workload of audit committee members, especially, has risen to 180 to 240 hours a year, he said.

In some cases, boards are boosting their analytical firepower by sending directors for training, Honig said. Some are hiring personal advisers — legal, technological, or financial experts — who can explain the complexities of corporate structures to directors, he added.

"Boards of directors and the audit committees are asking more questions," Felt said. "Boards are coming to meetings better prepared, having really scrutinized draft financial statements."

And independent board members are increasingly exerting their muscle, said Sarah Stewart, a partner in New York-based Boardroom Consultants which helps boards evaluate their corporate governance practices. They are demanding more executive meetings — without company management present — so that they can have a frank discussion of the company’s position, she said. "There is increased pressure to show that the board is more independent. What’s driving it is that corporate America has realized that they must do whatever they have to, to restore the public’s trust."

But that pressure has also helped to make it more difficult to find good board members to fill vacant seats, said Nancy Hahn, a client partner at headhunter Global Board Services, Korn/Ferry International in New York.

The most sought-out candidates are now chief financial officers and others with strong financial credentials, said Hahn. But the pool of candidates with such specific qualifications is limited, she said. And it is getting smaller, as candidates — particularly CEOs, who in the past may have held half a dozen directorships — cut back on the number of boards they sit on, she said.

"A lot of them are saying, ‘I need to focus on my own company. I need to focus on my own back yard," Hahn said.