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Steven Pearlstein
Steven Pearlstein
The Post
Business Section
Talk: Business News message boards
Archive: Past columns by Pearlstein
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Corporate Directors
Steven Pearlstein
Washington Post business and economy columnist

Wednesday, June 18, 2003; 11:00 a.m. ET

As The Washington Post reported on June 16, even when companies like WorldCom have experienced, professional board members, it "does not necessarily protect investors from fraud or mismanagement."

In his column today, Steven Pearlstein writes: "On paper, at least, the boards of WorldCom, Enron, Citigroup et al. are full of people who are smart, experienced, articulate and ethical. The problem seems to be that even when these people get into a boardroom, they turn into credulous, compliant apparatchiks more focused on maintaining collegiality than maximizing long-term profitability. The trick is finding the tool to prevent this kind of group think from developing." Read the full column.

Washington Post columnist Steven Pearlstein was online earlier today to discuss the role of corporate directors.

A Transcript of the Discussion Follows:

About Pearlstein

Steven Pearlstein writes about business and the economy for The Washington Post. His columns on the economy appear every Wednesday and Friday.

Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.

Reston, VA: What should the relationship be between the Chairman/CEO and the board?

Please describe your view as a statement, followed by a few operating principles to make it happen.

Steven Pearlstein: Boy, this sounds like a final question on a college exam. Well, to begin with, the chief executive shouldn't be the chairman, which he/she is most of the time. The whole thing got started after one guy got the dual title and others started to demand it as a sign of confidence from the board. The rest is history. The chief executive should manage the company. The board should hire the chief executive, give him/her a set of marching orders that they come up with together, and check progress on that. The board should keep an independent eye on the books, keep an independent eye on the operations, make sure the compensation plan reinforces the goal of the strategic plan and make sure a succession plan is in place. They should review, skeptically and independently, big purchases or sales or assets or the taking on of lots of debt or issuance of large blocks of new stock. They should be collegial, supportive, friendly with the chief executive but it should be clear who is working for whom. That is definitely NOT the case right now.


Thomasville, GA: I retired many years ago but when I was in business there were deals that weren't done because they simply didn't pass the smell test. Today I get the impression that this generation of businessmen don't seem able to say no and they are much too much motivated by personal greed. They aren't very good stewards of what my generation left them. Frankly I see the same thing when I look at politicians. Too much selfish, short term thinking. What can be done to change this?

Steven Pearlstein: Write letters like that into web chats. Vote no on everything on your proxy statement. Vote against the bad candidates in politics and send very big checks to the few good ones. Go to town meetings and shame the bad politicians in front of everyone.


McLean, Va: It seems that something must be done to increase the objectivity and power of a board of directors. To make them more objective and responsible they have to have something at risk to balance their gain as directors. My question: What is a suitable element of risk to keep them objective?

Steven Pearlstein: Obviously there has to be a balance of risk and reward, psychic as well as financial. There is nothing that is more of an incentive to stay focused and prevent bad things from happening than the fear of being criticized and ridiculed in newspapers and at the country club and at the faculty club. But, absent fraud or self-dealing or gross negligence, directors shouldn't be sent to the poor house because they screw up. Maybe they should, however, be forced to disgorge any fees and capital gains they got as a director. Five years on a board and that could equal $500,000. On the upside, they should be able to enjoy the respect and prestige that comes with board membership and some upside if the company does well under their stewardship.


Ithaca, NY: The point I keep hearing is "why would anyone be an officer or director of a corporation in today's low-compensation, high-liability environment?"

Does this hold any water in your opinion?

Steven Pearlstein: Not really. I don't know about you, but most people would consider earning $100,000 for eight meetings a year plus some phone calls and doing some homework not bad pay. And so far the liability, financially, has been zero. Also, people sit on boards to learn things, meet people: its intriguing work. This notion that its not worth it and good people won't serve is just idle country club chatter. If some CEO's decide its not worth it to serve on other people's boards, well, frankly, that's a good thing. They make for the worst board members in my opinion because they follow the unwritten code of not challenging the CEO on most things (until things get real, real bad, in which case they usually help lead the move to ouster). There are plenty of good people that are never asked to served that could fill in very nicely.


New York, NY: Steven,

Love your column.

What do you think about governance ratings, and the various governance rating organizations?

FULL DISCLOSURE: I work for one

Dennis A. Ross
Research Director
GovernanceMetrics International

Steven Pearlstein: I LOVE governance ratings. This is just starting and people are perfecting the whole area and it is very exciting. What I'd like to see is the D&O insurers getting into the game and rating directors based on the experiences of the companies on whose boards they have served. They could use this to experience rate a company when it comes time to give it a price for D&O insurance. And if some directors are habitually found on boards of companies that get sued and have to pay to settle, then they should be identified. No reason why all other companies should have to pay higher rates for their inattention.


Alexandria, Va.: Is it likely that WorldCom and Enron board members will be prosecuted?

Steven Pearlstein: Not likely they will be prosecuted (there may be an exception here or there if one or two knew about or participated in fraud). The big problem is that they are guilty of non-feasance, not looking, not paying attention, not asking questions. I would hope the SEC would bar some of them from serving on other boards, though.


Arlington, Va.: Your column today reminds me of your columns on CEO compensation -- corporate officers and execs are all part of the same insider group, and the incentives for rewarding each other are so high that it's impossible to advocate sincere business policies (like realistic pay for CEOs).

Steven Pearlstein: You are a careful reader.


Washington, DC: Pearlstein, c'mon! You conclude a fabulous column with this: "My own preference would be to do a bit of all these things and see what works."

What does that mean? How do we do a 'bit' of these reforms? In order of priority, what are the top three reforms you'd enact today if you could wave your magic wand?

Steven Pearlstein: No. 1) Split job of chairman and ceo. No. 2, make sure boards have regular processes to communicate with and listen to longterm shareholders outside of the hearing of management. No. 3, limit first dollar coverage of D&O insurance after a court finds directors were willfully ignorant of bad things happening on their watch. While I'm not opposed to the competing slate of directors proposal, I'm not sure it will really work.


Washington, DC: Do corporate boards work differently in Europe or east Asia?

Steven Pearlstein: Don't know about Asia but in Europe, boards are made up more of bankers, employees, maybe major shareholders. Not clear one way or the other whether this is superior but it is based on a different financial model so I'm not sure it would travel well. Worth considering, though.


Herndon, Va.: What do you think of the Oracle-PeopleSoft flap? Is this a symptom of the corporate board problem, that Ellison is able to single-handedly lead his company into this merger struggle?

Steven Pearlstein: That's a very good question. Worth exploring. While we're talking here, why don't you go to the Oracle website and let us know who's on the board.


Bethesda, Md.: What powers do corporate boards have to independently investigate a company's situation? Is there a case to be made that the WorldCom board was duped by management?

Steven Pearlstein: I'm sure the board WAS duped, just like the auditors. But the board made it clear by its lack of skeptical questioning and lack of backbone that they were anxious and willing to be duped. I mean, if you let the CEO and CFO always have $15 billion borrowing authorization, what message are you sending. If you allow them to change the terms of a deal after the board has approved it, and put out a press release saying the board had approved the changes when it hadn't, what conclusion do you think Mr. Ebbers would reach about the backbone of the board?


Baltimore: Is there any data to suggest that companies that are not majority controlled by a single person (or holding company) are better run than companies where one owner isn't dominant?

Steven Pearlstein: Actually, I suspect it works the other way. Companies that have a dominant shareholder probably are better run, on average, although there are often problems with abusing the position to the detriment of minority shareholders. But we're talking here mostly about companies that are big public companies where no individual is a controlling shareholder.


Herndon, Va.: per your request, here's the ORacle board:
Dr. Michael J. Boskin: Professor of Economics at Stanford University

Jeffrey Berg: Chairman and Chief Executive Officer of International Creative Management, Inc.

Joseph Grundfest: Professor of Law and Business at Stanford Law School

Donald L. Lucas: Venture capitalist since 1960

Jack F. Kemp: Co-director of Empower America and former member of the US Congress
Hector Garcia-Molina: Professor of computer science/electrical engineering, Stanford University

H. Raymond Bingham

Steven Pearlstein: Thanks. Not likely that board would, on its own, challenge the wisdom of a merger or the price being offered. If they had had time, they might have engaged a truly independent investment bank to do an analysis. But this was one of those rush jobs and while investment bankers were called in, you have to remember that these guys usually never see a deal they think isn't the cat's meow. What I've always wondered is why the market hasn't delivered a couple of investment banks that only give advice to boards and never do the deals themselves. That would be advice worth paying for.


Annapolis, MD : I was once privy to the inner workings of board meetings (and policy based executive mtgs) at a large managed care organization.

The CEO at the time made one blunder after another. But the others always had the money to make corrections.

Eventually the CEO was removed after a state investigation. But what does he care -- he has enough money to live like a king for the rest of his life. It was a shame so many of the people who made the organization work lost their jobs, homes, families, careers.. because the execs weren't connected to the business as an ongoing enterprise. Rather, their goal was to bleed it dry and hope that a future M&A would cover their tracks.

As long as those at the top become millionaires by denying living wages for the workers who make the business operate(trickle down), this lopsided business model will just continue to thrive.

Steven Pearlstein: That comment pretty much speaks for itself. Thanks.


Fairfax, VA: Why are corporate directors and boards loathe to involve themselves with the real world operation of their companies? The typical aloof attitude (I speak from experience, ie WorldCom) does nothing but breed bad blood and anger. Wouldn't it make more sense to be a team? Keep people involved and informed and work together towards the common goal of a successful company. Why is this so hard for people to grok?

Steven Pearlstein: Not sure what you meant at the end there. But you're right: directors should take independent steps to inform themselves about the inner workings of a company, including talking to employees and customers and suppliers and visiting facilities, without much notice to management.


Steven Pearlstein: That's all for today, folks. Keep reading.


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