Changes must be made to boardrooms to avoid future market failures
In order to avoid a stock market collapse similar to the one in 2008, regulation and change must be applied to companies’ board of directors, said John Gillespie to a full audience in an Isenberg classroom yesterday.
Gillespie is the co-author of the book of “Money for Nothing: How the Failure of Corporate Boards Is Ruining American Business and Costing Us Trillions.” A self-proclaimed “recovering investment banker,” Gillespie examines the situation that led to the market collapse, offers a criticism of boardrooms and provides solutions for change.
“When you step back and think about it … companies have taken the place of governments and religions of being the single most important entity that affects individuals,” he said.
In 2008, “leaders in companies weren’t doing what they were supposed to do,” he said. “If entities aren’t led well, the people who are hurt are all of society.”
Ideally, boards are supposed to represent the shareholders of a company, Gillespie said. They should “oversee management,” providing support and maintaining growth.
But this is not always realized, he said. The shareholder does not get a fair say in who becomes board members. Instead, the “proportion of power is reversed,” allowing the CEO to make decisions about board member appointments, with the shareholder getting a limited and restricted vote.
In “Money for Nothing” Gillespie and David Zweig provide many examples of boards that did not contain representation of qualified members.
For example, the Disney board of directors led by CEO Michael Eisner from 1984 to 2005 contained board members such as Eisner’s child’s school principal, the architect who built his house, the head of the university to which he donated money and actor Sydney Poitier.
O.J. Simpson was on three company boards including a knife company, said Gillespie. Priscilla Presley, ex-wife of Elvis Presley, was on the MGM board despite no business experience.
Boards also feature an “utter lack of diversity,” said Gillespie, who borrowed a common explanation of them as being “male, pale and stale.” As older white men, they work with “blinders on,” he said.
“They aren’t going to notice things have changed,” Gillespie said. He cited General Motors as having this problem in not recognizing that many people were concerned about buying more eco-friendly cars instead of cars that simply looked nice.
Gillespie explained that the vote for board members by shareholders was part of an “unbelievably undemocratic” process. Shareholders have a single vote, usually just “for” or “against.” The system is supposed to be a majority rules vote, but often times even this is ignored by boards and CEOs.
Even those who are qualified for the board position can be ineffective because of the nature of the board and the company.
“It’s impossible for a well-intentioned board member to do well in that circumstance,” he said.
Gillespie cited the example of a Bank of America director who asked for further discussion of a CEO’s increased pay package. The next day she found herself fired from the board without any notification.
He also said that the “culture within boards” has been a major problem for companies.
“[Some] people… are strong in their own jobs but when they get in the board room and close the door… they become like church mice,” he said.
“People are reluctant to ask tough questions. They don’t want to seem ignorant or
jeopardize their role,” he said.
In one case, a CEO had been stealing $21 million from the company. He had successfully been achieving the theft by inventing a warehouse in Canada, said Gillespie. Eventually, the board of directors discovered the theft and arranged an emergency meeting. During the meeting, there was news that the CEO had committed suicide, to which one of the directors said, “Let’s fire him for his sins anyway.”
Boards will “often take action after they’re embarrassed,” said Gillespie. But by then, “it’s too little, too late.”
“Money for Nothing” ends with examples of effective board of directors in companies such as Target. Good practices include having evaluations, allowing the board of directors to nominate members for appointments, allowing poor directors to be fired by fellow members and preventing CEOs from being chairman of the boards.
Gillespie worked for 18 years as an investment banker for Lehman Brothers, Morgan Stanley and Bear Stearns. He was the chief financial officer (CFO) of a nationwide human services company and has an MBA from the Harvard Business School.
Chris Shores can be reached at email@example.com.