Monday: June 9, 2003
"June 9 (Bloomberg)
-- A report by WorldCom Inc. faults former Chief Executive Officer
Bernard Ebbers for the $11 billion accounting fraud that led to
the company's collapse, saying he pressured subordinates to meet
unrealistic projections and was aware of 'financial gimmickry'
used to inflate sales.
'The fraud was the consequence
of the way WorldCom's chief executive officer, Bernard Ebbers,
ran the company,' says the report prepared by former U.S. Securities
and Exchange Commission enforcement chief William McLucas and
filed in U.S. bankruptcy court in New York."
I wrote, but never published, the following
article dated almost one year ago. Its time has come.
Written to be published June 26, 2002
FINANCIAL SCANDALS AND BOARDS OF
Boards of Directors of public companies
are supposed to do a multitude of things:
- Supervise the accuracy
of reported revenues, costs and profits/losses.
- Make sure the interests
of the stock holders are accurately and fairly implemented.
- Establish the compensation
of the executive officers of the Company.
- Supervise and manage the
affairs of the company so that all the pertinent laws are obeyed
and abided by without exception.
- Determine the future economic,
financial and competitive direction of the company.
- Eliminate and sterilize
any conflicts of interests at any and all levels.
- Elect the executive officers.
- Supervise and manage the
Board of Directors.
In order to do this they have all kinds of
committees which are supposed to meet regularly and to pass on
the legitimacy of the doings of the Board of Directors and the
executives of the company.
If you want to know the names and functions
of the most common committees email me because I am not about
to burden this article with that stuff now.
In actual fact all the Boards of Directors
I sat on (15 different kinds) were ludicrous and pitiful jokes.
NOT A SINGLE ONE OF THEM
FULFILLED THEIR OBLIGATIONS TO SHAREHOLDERS OR THE EMPLOYEES (THE
HERE ARE SOME EXAMPLES OF THE LUDICROUS
BEHAVIOR OF SOME OF THE BOARDS OF DIRECTORS ON WHICH I SAT AND
ABOUT WHICH I HAVE PERTINENT AND IN DEPTH KNOWLEDGE:
- Jay Lorsch; Professor of Harvard
University, Harvard Advance Management Program, Board of Brunswick
Corporation. He used to complain that I asked far too
many questions and would frequently ask me to limit my questions
so that he could catch an early plane home. The
absolute worst director of any company on which I sat. He
was bored stiff with each and every meeting, disdainful of everybody
and not in the least bit interested in what was going on. He
was put on the board by the CEO, which I always and still do
think, was the payoff for the daughter of the CEO getting into
- Former Governor of California, Pat
Brown, Board of Fund of Funds. One day, at a Fund of Funds
board meeting, he asked if he could make a statement to the Board
of Fund of Funds. The Chairman told him of course. Pat Brown
then carried on for about 15 minutes that he was disturbed and
upset by the obvious self interests of the Board members. About
an hour later C. Henry Buhl as Chairman of the Fund of Funds
reported that we were having enormous legal trouble in Argentina.
Pat Brown then interrupted and said that his law firm was perfectly
suited to represent the Fund of Funds in Argentina!
- David Kennedy; Chairman of the Mallinkrodt
Chemical company, Chairman of the Compensation Committee of Brunswick
corporation. At a regular meeting of the Compensation
committee he moved to approve a resolution regarding the compensation
of the Board of Directors. He made the motion. I told him that
I could not vote for and would vote against the resolution. He
went into a tirade. I then asked him if he had read the resolution.
He admitted that he hadn't. I then pointed out to him that the
company was going to pay me
$250,000 to give up my pension and that I thought the payment
was enormously excessive. He tabled (postponed
for discussion at a later time) the motion!
- Former Lieutenant Governor of Kentucky
and legal counsel, Wilson Wyatt; Pat Brown former Governor of
california, Board members of the Fund of Funds. Robert
Vesco threatened the Board of Directors with criminal action
against them if they did not approve his taking over the Fund
of Funds. I objected to his position and his very presence at
a Board of Directors meeting without advance notice. Wilson Wyatt
and Pat Brown both hushed me up and reprimanded me for objecting
to the presence and threatening stance of Robert Vesco. They
both voted Vesco
into power. He absconded with more than $500,000,000/$600,000,000
and is a fugitive from justice said to be in jail in Cuba (I
don't believe it).
- Bernd Koken, Chairman of Abitibi
Price. At a Directors meeting of Abitibi Price (I was
a director) in Toronto Bernd Koken presented a reorganization
and refinancing plan of Abitibi Price. As part of the presentation
there was a large display board which included the financial
inputs and other vital information on the reorganization plan.
As the presentation was being made I got numerous eye signals
from the chief financial officer to look at a little noticed
and minute print detail. After I got about a a half dozen signals
I realized he was telling me to look at the item in fine print.
I asked Bernd Koken what the fine
print said (it could not be read more than 3 feet away).
He said it was footnote that in the financial reorganization
the Reichman family (who were rapidly going bankrupt and the
major stockholders) would be paid a special dividend of $250,000,000.
I asked about the public stockholders: "would they get a
special dividend?". The answer Koken gave me was "No,
they would not". I moved the rejection of the financial
plan. Several weeks later I was asked to resign from the Board
of Directors of Abitibi- Price since they would not put me up
for renomination anyway. I refused to resign and there were no
more Board meetings until my term expired.
- Edwin O. Reischauer, former American
Ambassador to Japan and Harvard Professor, member of the Board
of directors of Brunswick. I sat next to him for five
years. In that five years he never once asked a question, made
a motion or did anything except vote for every motion put before
the Board. After about two years I asked him why he was always
so quiet.He answered that he thought it
was inappropriate for a Director to ask questions of management.
I asked the CEO what Reischauer contributed to the Board. He
said that he does things that I cannot tell you. I asked for
examples. He couldn't (or wouldn't) give me any!
- The Vice President in charge of
corporate ethics, Genesco corporation. The Chairman of
the Board (Frank Jarman) was concerned that employees were violating
the corporate rules of corporate ethics, as approved by the Board.The
Board appointed a local town person and employee as the Chairman
of the Ethics Committee.It came to the attention of the Board
that the Chairman of the ethics committee and his wife were violating
all the rules of the ethics committee. A
local banker and board member wanted to know what all the fuss
- Robert Mullane was President and
CEO of Bally Manufacturing. He made a presentation to
the board about a refinancing and restructuring. I asked about
a half dozen questions about the plan, in spite of the fact that
his face was getting blacker and blacker. After the board meeting
ended he asked to see me in his office. When I got into his office
he was in a fury. He wanted to know if I was out to embarrass
him by asking questions? Why didn't I just go along?
I could go on for several
more hours and another 100 or so examples but by now you must
get the point. Why, oh Why, is ANYONE surprised by what is going
on right now in American industry.
in American industry is as American as apple pie.
American industry has been fraudulent
for some 250 years and why should it change now?
Find that hard to believe?
Go read :"THE RADICALISM
OF THE AMERICAN REVOLUTION", Gordon S. Wood, Alfred A. Knopf,
New York, 1992; Pages 229ff. Fraud was a landmark of the revolutionary
and post revolutionary era!
It is a land mark of the 20th and 21st centuries as it will
be for centuries to come!
HOW CAN THE EXECUTIVES GET AWAY WITH FRAUD TO THE EXTENT
SIMPLE: Nobody but nobody dares to ask them questions! Most
(but not all) Directors are rubber stamps. If you ask penetrating
or embarrassing questions the management makes sure you get thrown
off the board!
An independent director
is an oxymoron!
Email me about anything that interests
you and I promise an answer and who knows, we both might enjoy