Revolt
against Directors
Shareholders and investors are up in arms
against their directors. They find their directors have let
them down. Companies worldwide are trying to transfer powers
to a new breed called non executive directors. Non executives
will become an oxymoron. They will be the real executives. Despite
being rank outsiders, with no connection with the company they
are now being asked to perform a superior role than the executive
directors. Unfortunately, directors themselves have to blame
for this fall from grace. As Thomas Newkirk of New York’s
Security and Exchange Committee’s Enforcement Division
stated while indicting founder of Waste Management a Chicago
based recycling firm which held the record of a fraud of 3.5
billion dollars:
“Our complaint describes one of the
most egregious accounting frauds we have seen. For years, these
defendants cooked the books, enriched themselves, preserved
their jobs and duped unsuspecting shareholders.”
This was in 1998, well before Enron, Wordlcom
and Tyco. Directors have been pocketing egregious sums of money
even when their companies are perishing. About the same time
while US Security and Exchange Committee was indicting Waste
Management’s boss another chief – Dennis Kozlowski
of Tyco International bought a new home in Boca Raton, Florida,
a 15000 sq foot, Mediterranean style water front mansion complete
with pool, tennis court and fountain paid with a $19 million
no interest loan from Tyco. Two years after, the loan was waived.
The entire money for the home including £6000 for a shower
curtain all paid by shareholders money while the company was
facing bankruptcy. Even the world’s most celebrated CEO,
Jack Welsh has been caught with his pants down while US’s
Security and Exchange Commission has ordered an enquiry into
his retirement perks as reported in a divorce case filed by
his ex wife.
One can argue why we are getting so uptight
about the dishonesty of directors. Just as, language is often
used not to expose but conceal one’s thoughts, accounting
since South Sea Bubble and even before has been used not to
state earnings but either to inflate them or conceal them. An
accountant when asked during an interview with a potential employer
“How much is 2 + 2”, replied “depends what
you have in mind”. Its not for nothing, we invented the
phrase “lies, dam lies and statistics”. While George
Bush’s sermons (rarely applied to himself) and the Sarbanes-Oxley
Act are very useful, we must be wary of embedding a culture
of compliance. Corporations are in a muddle today not because
of accounting frauds but the management failures. Tighter legislations
can hamper the speed of decision making and make it difficult
from companies to compete in today’s world.
The basic principle of corporate governance
is to maximise creation of wealth for all its shareholders.
There is no way the disclosures and compliance are going to
improve company’s performance. The real reason for recent
market collapse is not accounting frauds. Accounting frauds
were resorted to because of the poor business performance. The
real reason is the gravitational pull of obsolescence. For far
too long businesses have shown utmost lethargy in innovation.
New economy is going to punish companies that lack innovation
in a way that has never happened before.
A contrarian view is that Enron was rated
by Gary Hamel as the world’s most innovative company.
So, what went wrong? Innovation has to be accompanied with transparency.
The problem is that practice of both innovation and transparency
requires a common trait. It calls for a very high degree of
courage which our educational system does not prepare us for.
That is why though we have such highly qualified people among
us, we rarely come across cases of real courage and transparency.
The general principle on which companies operate is, “thou
shalt not be found out”. What we do not realise that in
the new economy when you are designing new models you simply
cannot have a winner all the time. Thousands of failures have
been hidden behind the success of an incandescent lamp. Obsessed
by quarterly results our most important concern is how to show
double digit growth. Our CEOs simply cannot handle the shortfalls.
So, we drew up accounts and resort to innovative and creative
accounting to bolster earnings and profits. Hence, the resistance
to proposals for expensing stock options even from people like
Andy Grove of Intel.
We, therefore, have to start from our schools
and teach our children the power of courage and the strength
that comes from owing failures. As the ignominious fall of America’s
iconic enterprises proves disowning failures is a recipe for
disaster.
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