Too many boards are still cavalier

Corporate directors don’t like it when shareholders accuse them of being management cronies, but how else can they be seen when they drop the ball on basic responsibilities like leadership development and executive pay?

Too many boards are being reactive when it comes to important matters of corporate governance. Just consider what happened at Bank of America Corp.

CEO Ken Lewis had been under duress for months, yet the bank’s directors didn’t have a plan in place for who would succeed him. Now they’ve been caught flat-footed since Lewis unexpectedly announced plans to retire by year’s end.

It’s as if not much has changed since the corporate scandals earlier this decade involving Enron, WorldCom and more. The implosion of those companies spurred calls for a drastic overhaul of boardrooms, and new corporate reforms were required under the Sarbanes-Oxley Act in 2002.

But clearly not enough was done to get boards more focused on their role of looking out for shareholder interests and being held accountable for their actions.

Just look at what boards are doing when it comes to developing new leaders, something that directors themselves say is critical to effective governance. An amazingly high 44 percent of directors say their boards have no succession plans in place for when the CEO leaves, according to a new survey of 632 board members at public companies by the National Association of Corporate Directors.

That means directors would be left scrambling to fill the CEO slot if someone suddenly departs or is struck by tragedy. A vacancy in the executive suite can be highly disruptive to employees, investors and customers.

“What kind of public message does that send out? How about chaos, disorganization and lack of preparedness?” said Marshall Goldsmith, who advises executives on leadership and authored the new book “Succession: Are You Ready?”

In the case of BofA, the lack of succession planning could hardly come at a worse time for the bank, one of the nation’s largest and a recipient of $45 billion in government bailout funds. The Charlotte, N.C.-based bank faces an upcoming trial with the Securities and Exchange Commission and is under intense scrutiny from the attorneys general in New York and North Carolina, all relating to BofA’s purchase of Merrill Lynch & Co.

Long before Lewis announced Sept. 30 that he was leaving, the board should have recognized the importance of crafting a succession plan. Shareholders last spring had stripped Lewis of his chairman title as losses mounted. Lewis has also been under attack for the bank’s Merrill acquisition, which was forged at the height of the financial crisis in September 2008 and closed on Jan. 1.

“Banks in recent years became too beholden to a single CEO, and those CEOs convinced their boards they didn’t have to focus on succession planning,” said Jeffrey Sonnenfeld, a professor at the Yale School of Management and expert on CEO leadership and corporate governance issues.

Sonnenfeld points out that succession planning takes time, sometimes years to build a bench of possible CEO candidates. When companies don’t plan, it can cripple them.

Governance experts point to what happened at food company TLC Beatrice International Holdings Corp. as evidence. Its chairman and controlling shareholder Reginald Lewis died at age 50 in 1993, two months after being diagnosed with a brain tumor. TLC Beatrice was first handed over to a three-person committee, and then to Mr. Lewis’ half-brother, an attorney. Within a year, Lewis’ widow, Loida Nicolas Lewis, took over, and soon began selling off parts of the company.

Boards have also been weak in overhauling their executive pay programs, despite the public outcry over what many Americans deem to be excessive executive compensation. Banks, in particular, have come under fire for paying top executives big bonuses, which many see as encouraging excessive risk-taking and a focus on short-term results.

Even though nearly 80 percent of those surveyed by the National Association of Corporate Directors said CEO compensation is too high relative to corporate performance, they aren’t taking the tough steps needed to make changes.

Among those who said pay was too high, more than half said the reason is because of a lack of genuine performance objectives used in setting pay. Many also said that directors who set pay aren’t strong negotiators and allow CEOs to dominate the pay-setting process.

Something has to change to get boards to perform their duty. Even if previous boardroom reforms didn’t take hold, this isn’t the time to give up.

The most important focus has to be on accountability. In the area of compensation, more shareholders are submitting proposals to give investors advisory votes on compensation, otherwise known as “say on pay.” The Obama administration has proposed requiring this at all public companies.

The SEC, which plans to make changes to corporate pay disclosures in the coming months, should consider forcing directors to take more responsibility for their pay-setting decisions.

One way to do that would be to require directors who set pay to legally sign off, or “certify,” the pay information companies detail to shareholders in their annual proxy statements. That would be part of a section in the proxy where board compensation committees are supposed to lay out their thinking and reasoning for the pay it grants to top executives.

Investors also need to keep voting in director elections, even if their “no” votes against board members can be ignored by companies because the votes are nonbinding.

All this could send a powerful message to the nation’s boards. It’s about time they listen.

Copyright 2009 The Associated Press.