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CRISIS IN CORPORATE AMERICA

Directors Taking Prudent Steps

Oversight: As scrutiny grows, boards at Amgen and other companies work to stay scandal-free.

July 22, 2002|DAVID STREITFELD | TIMES STAFF WRITER

The board of directors of Amgen Inc. will convene later this month in the long shadow of WorldCom Inc. as well as a half-dozen other once-admired companies, all of them now under investigation for alleged fraud.

By almost any measure, Amgen is a world apart from WorldCom. Its 13 directors are an accomplished group, including a retired Air Force secretary, a Nobel laureate and a former Hollywood studio chief. The company is a leader in biotechnology, not telecommunications. Its headquarters in Thousand Oaks is 1,800 miles from WorldCom's Mississippi offices. And most important, it hasn't been subject to a whisper of the sort of accounting scandal that is leading to WorldCom's meltdown.

Nevertheless, that $3.9-billion hole in WorldCom's books means this Amgen meeting won't be quite like any previous ones. Already the board is beginning to change the way it does business.

"There will be differences in mood and differences in practice," said board member Donald Rice, a former Air Force secretary turned entrepreneur.

Another director, former McKinsey & Co. and Bechtel Group Inc. executive Frederick W. Gluck, said there would be a wholesale review to "make sure we don't have any situations that might lead to a problem. It's just prudent."

In an era when new corporate scandals surface every week, no board can be too careful. They're under scrutiny and frequently under attack. The stock exchanges are tightening board rules for their listed companies, trying to eliminate cronyism and dabblers. Congress is being swept by reform fever, while business critics see a once-in-a-lifetime chance at real change.

Meanwhile, boards are beset by increased liability worries. Traditionally, it has been very difficult to hold directors personally responsible for corporate meltdowns. Regardless of whether that's changing in reality, it's shifting in perception.

"Your home, your assets, your business reputation" are at risk, wrote Philip Crowley, assistant general counsel at Johnson & Johnson, in the National Assn. of Corporate Directors' monthly newsletter.

All this means it's getting harder to find new directors. Christian & Timbers, the global executive search firm, said that although turnover on boards has doubled, six out of 10 candidates are turning down seats. A year ago, seven out of 10 accepted them.

"A year ago, if you called someone up and asked him if he'd like to be on the board of Enron, he would say yes because it was a great company," said Christian & Timbers Chief Executive Jeffrey Christian. "There were many great companies then."

A Changing Role

As the ranks of those greats rapidly dwindle, the change is bringing up fundamental questions about the role of boards. State incorporation laws mandate their existence and oversight role but give directors wide latitude with regard to performance, composition and size.

The modern corporate board traces its origins to Renaissance England. The Virginia Co. of London and the Virginia Co. of Plymouth, which pioneered the European settlement of the Atlantic Coast, were run by outside councils responsible to the sovereign. Alexander Hamilton and Ben Franklin started companies that had oversight boards.

Originally, boards looked after the interests of the owners. With the rise of the professional manager and the modern corporation, boards began to be more aligned with the new owners: stockholders. But the distance between the directors and the stockholders, particularly in times of prosperity, is vast.

Until recently, many investors probably would have been hard-pressed to name the board members of their stock picks. The chief executive got all the attention. Who cares about oversight when everyone's making money?

Now that the market's falling, measures being discussed by reformers include making boards more independent by barring the typical practice of making a company's chief executive its board chairman as well; limiting the number of outside boards a chief executive can serve on; and issuing regular report cards on board members.

If grades were being issued today, many of them would be of the "failing" variety.

"Absolutely and deservedly, boards are getting a bad press," said Roger Raber, president of the National Assn. of Corporate Directors.

He breaks down public-company board members into three main types: the rubber stampers, who don't let anything delay getting to the golf course; the oversight board members, who make an effort to examine what is really going on but can still be bamboozled by crooked executives; and the activists, who do their job well but number no more than 10% of the total.

"The biggest obstacle to a good board is arrogance," Raber said. "With some directors, there's a sense of entitlement. 'I'm a former chief executive, I'm high profile, I'm here as long as I want to be.' "

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