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How is your hotel company governed or managed?

publication date: Aug 6, 2012
 | 
author/source: Mark Rogers
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Sarbanes-Oxley 10 Years Later: Boards Are Still the Problem

 

This is a guest post by Mark Rogers, the founder and chief executive of BoardProspects, an online professional community launching in August 2012 dedicated to building better boards for private, public, and nonprofit organizations.

There will be no cake, balloons, or formal ceremony on July 30, 2012, but it’s an important anniversary in corporate America. It is the tenth anniversary of the enactment of Sarbanes-Oxley, the landmark legislation intended to improve corporate governance in the wake of the 2001 bankruptcy of Enron. Here we are 10 years later, and not much has changed. Corporate governance scandals are still commonplace, Green Mountain Coffee, Chesapeake Energy, Wal-Mart, and Groupon being among the latest examples. The fact is that Sarbanes-Oxley was well-intentioned but didn’t address the real
problem with corporate governance—boards of directors.

Everyone knows the Enron saga: Ken Lay and Jeff Skilling, Enron’s former chief executive/chairman and president, cooked the books, screwed over a lot of people, and became the poster boys for corporate greed and fraud. Even though the names Lay and Skilling are forever associated with scandal, they did not act alone. The entire Enron board had guilt on its hands, not just the ringleaders.

A Senate  subcommittee agreed with that assessment, as it found that “the Enron Board of Directors failed to safeguard Enron shareholders and contributed to the collapse of the seventh largest public company in the United States, by allowing Enron to engage in high risk accounting, inappropriate conflict of interest transactions, extensive undisclosed off-the-books activities, and excessive executive compensation.” Despite this conclusion, when Congress passed Sarbanes-Oxley, in 2002, it failed to fully account for the critical role a board of directors plays in improving corporate governance.

After Enron, Congress directly addressed corporate fraud in an effort to improve corporate governance through several provisions including:

  • Certification by CEOs and CFOs of company financial reports.
  • Prohibition of any form of personal loans to executives or board members.
  • Enhanced criminal penalties for any executive action to obscure, tamper, hide, or misreport financial statements or corporate tax returns.
  • Required disclosure regarding codes of ethics for CEOs and senior financial officers.
  • Disclosures of transactions involving management and principal stockholders.
  • The establishment of audit committees that must be composed solely of independent directors.

Simply put, Congress failed to set a high enough bar for corporate governance in America. It flat out whiffed when it had public sentiment in its favor and could have dropped the hammer on corporate America to ensure that this type of misuse of power never happened again. The worst part is that it would not have taken a long list of statutes to properly regulate boards of directors. In fact, you would just need to incorporate the following measures:

  • Set term limits. Other than within a corporation’s bylaws, there is no legal requirement determining how long an individual can serve as a corporate director. The result is that many companies have individuals who serve as directors indefinitely, creating a situation where the board can become stale and not open to new ideas and the perspectives of newer members. It is common in many sectors to adopt director term limits of three years, with a requirement of serving no more than two or three consecutive terms. However, that is not mandated by law, and many public companies have not adopted term limits or simply waive them. Term limits add urgency to a board member’s position, as the member is motivated to make the most of his or her time while serving.
  • Limit public company board service. The one thing nearly everyone who holds a board of directors seat wants is another seat. The responsibilities of a public company board member are substantial. As a result, they are well compensated both in cash and in stock options and awards. This has led many public company board members to retire from their day jobs and become professional board members. Directors not uncommonly serve on three, four, or five public company boards at one time. They should be limited to a set number of board positions, to maintain focus on a company’s business.
  • Require continuing education for board members. In almost every major profession there are continuing education requirements set forth by the applicable licensing body. Directors, however, have no such requirement. Many public companies provide such education, or pay to have their directors attend boardroom educational conferences each year, but there is no mandate, and furthermore there is no standard for the level of education they provide. At some companies the education may be as informal as a “governance refresher” during a regularly scheduled board meeting.

Would the above actions have prevented the scandals at Green Mountain, Chesapeake Energy, Groupon and Wal-Mart? One can only wonder what the outcome would have been had Congress given greater attention to the human capital charged with oversight of those companies. Legislative reforms are only as effective as the boards at the companies that incorporate them. Congress missed a critical opportunity to truly improve corporate governance by neglecting to set firm standards and guidelines for the boards of directors of the future.


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