Vision & Revisions
The New Regencies
Daniel Gross
10/01/2004

There is something timeless about Raymond Troubh’s office at 10 Rockefeller Plaza, overlooking the famous Rockefeller Center skating rink. The door bears a simple nameplate. There is no computer, cell phone or BlackBerry on his desk. The wall behind it is covered with black-and-white photographs, including one of the 1953-54 Supreme Court, autographed by each justice. Troubh, a Yale Law School graduate, was a clerk for Justice Harold Burton when the court handed down its landmark Brown v. Board of Education ruling.

(Photograph by Abe Frajndlich.)
There is also something timeless about Troubh, 78, a straight-talking man with a faint Maine accent. For the past 30 years, he has pursued an unusual avocation as a full-time director of public companies. Troubh has served on dozens of boards, including those of Time Warner, Sunbeam, Starwood Hotels and Becton-Dickinson. The trustees of bankrupt energy trader Enron, seeking a steady hand to navigate it back from the brink, chose Troubh as the interim chairman of its board of directors in 2002.

Enron’s downfall has become emblematic of the shortcomings of corporate governance in the late 1990s. Its board, like those of many other tarnished corporations, failed to oversee and restrain its management, which resorted to fraudulent measures to boost its reported earnings. In response to this and similar scandals, the government passed the Sarbanes-Oxley law, which attempts to improve governance, management accountability and transparency. Whether it will succeed, or result only in only additional compliance costs, has yet to be determined.

High-profile corporate failures and scandals have changed boards’ priorities.

If somebody who is quite smart is determined to screw the company, I don’t think anybody is going to uncover it for quite a while.
Corporate governance is now the most important topic, as it should be, in boardrooms. It is not only the fear of not doing the right thing; it is a determination that the numbers served up to shareholders and the media and the public must be real numbers. This is not to say that in the past the numbers were not real. But there is much more crispness in the determination of the balance sheet now.

The Sarbanes-Oxley bill is expensive but important.

Sarbanes-oxley is proving to be extremely costly, more so than anyone in Congress realizes. I am seeing accounting fees—in particular, auditing fees—doubling this year, because the law requires that internal controls be put in, and opined upon. So companies are throwing much more firepower into the breach and ending up with enormous extra time invested. Some companies may find these costs too onerous and go private as a result. But that is too bad. It is just the cost of trying to strengthen the capitalist system.

Board oversight of CEOs has changed.

There has been a sea change in the relationship between the CEO and the board. The balance of power has shifted to the board; the days of the imperial CEO are numbered. To extend the metaphor, a regency has now been established wherein the board is going to be much more involved in advising the CEO, and keeping him on the straight and narrow. And I think it is all for the better.

One of the most important developments has been the creation of the independent nominating committee. In the old days, the CEO monopolized the selection of the board of directors. Typically, they were cronies. They went to the same church or synagogue, or went on vacation together. How could you be truly independent? Given time, these nominating committees, driven by very strong chairmen, are going to result in better people sitting on boards.

Boards’ attitudes toward executive compensation have changed.

Excessive compensation of ceos has been one of the errors that boards have committed. I indict myself among others. Now, I am not saying that we are going to see salaries cascading downward. But I think the acceleration upward is going to be minimized, and from here on out we will see an improvement in performance matching compensation. Boards were embarrassed by the revelations and the perks. It does not mean CEOs are not going to be outrageously overpaid by most standards, but they are not going to control the process.

Shareholder activists play an important role.

I give credit to the activism of people such as Robert Monks and Institutional Shareholder Services (ISS) in Washington. They in turn have awakened the big institutions to their responsibilities. I have always faulted pension funds and mutual funds for not taking their responsibilities seriously. They own American industry, and they never really put enough pressure on companies. It was not until the 1990s that these people banded together and demanded meetings, and made their case that management was taking too much money for inadequate performance. Some of these Washington groups today rate boards now on the questions of how many times they meet, and on compensation and independence. It puts a spotlight on the board performance. But some of the people involved in these groups have not been inside a boardroom and do not understand the questions. The main theme I express today at seminars is that there needs to be a cleaning of boards by the board members themselves.

Think about it: Every board member is paid the same retainer and fees, but when it comes to performance, there are plainly members who are underperforming. It is our job to get rid of the people who do not perform on boards, the trophy directors who do not show up or do not do their homework. You should congeal around the leading board member, then he or she should talk to the board member who is inadequate and say, “Either you have to clean up your act, do better work or quit.”

Board members should devote more time and effort to their responsibilities.

Iss has very mechanistic rules. One is that no person should serve on more than six boards. That impacts me because I am now on seven. But I do not also run a business or a law firm. The only restriction on me is my time, and my family saying, “Don’t work so hard.” My absentee record is as good as anybody’s in the country. On the other hand, if a person has a full-time job, he would not want to be on more than two or three boards.

Corporate boards need to change over a period of time.

Frequently, major companies originate in small towns and grow up to be big companies, but the boards remain small town. Adelphia and HealthSouth are good examples of very successful companies dominated by an individual or family, wherein the board was composed of small-town directors. I am not saying they were bad people; they were just unsophisticated. They had no idea about SEC regulations. Also, frequently, the accounting firm is the small-town office of a large firm, and the future of the company becomes extremely important to the local partner. So it is easier for the accountants to get co-opted.

Boards may take too much power away from management; for example, at Coca-Cola the board really seems to be running the company.

I was on a board 20 years ago where the management was so scared of the board, it was paralyzed. There are too many loudmouths on that Coca-Cola board today. The Coke situation is an example of too many high-powered, self-important directors, who, while successful in their own fields, are not functioning as a board. It is a group of 15 people talking about themselves. My own experience is that you must have cooperation. That is why you do not want too many ex-CEOs on a board, because every one of them wants to run the business the way he ran his own. What is more, once a CEO retires, he should not remain on the board of the company; he should get out. As a new CEO, you do not want interference from your predecessor. And you sure as hell should not bring back an old director and put him in charge of the search.

It is difficult for a director to know if fraud is being committed.

It is difficult for a director to know about fraud if the firm’s accountant is signing off on the numbers. But today you just have to be more skeptical. Maybe once in a while you should go out and get a forensic accountant to make sure that the numbers are reasonably real. One of the rules I insist on, is that if a problem does arise, any investigation must be handled by an independent party. You want someone who has never had anything to do with the company, someone who is beholden to the independent audit committee, to conduct investigations. But if somebody who is quite smart is determined to screw the company, I don’t think anybody is going to uncover it for quite a while.