[Corp. Watch] Corporate governance is an oxymoron - and a sick joke

[Corporation Watch]

Boards are Real Culprits in AIG Mess

By Nell Minow

(CNN, March 21) -- The stories about the outrageous $160 million bonus  
payments at AIG have all omitted the most important names. They are  
the members of AIG's Board of Directors Compensation Committee.

	These people should have been on the hot seat in front of the House  
Financial Services Subcommittee on Capital Markets, Insurance, and  
Government Sponsored Enterprises, alongside CEO Ed Liddy. Although  
there is a lot of blame to go around, ultimately the buck stops -- or,  
I should say, the bucks should have stopped -- with them.

	Why haven't we learned that it is the boards who are responsible for  
the massive failures of strategy and risk management at these  
companies? Regulators, journalists, securities analysts, and investors  
routinely ignore the most obvious indicators of investment risk that  
are presented by bad boards of directors.

	This is particularly obvious in the case of AIG, which has been a  
serial offender in corporate governance, especially in executive  
compensation.

	Those of us who remember former CEO Hank Greenberg's departure from  
AIG in 2005, after a corporate governance melt-down that included  
excessive compensation, appreciate the irony of his comment to ABC  
News that the retention bonuses were "mind-boggling." Mr. Kettle, Mr.  
Pot is on line 1.

	Compensation committees are not responsible for individual pay  
packages below the CEO, but they are responsible for determining their  
overall structure -- and for making sure that the CEO's job includes  
effective management on compensation issues.

	Retention of employees may be a legitimate goal of a compensation  
program, but it can be accomplished in a way that is both effective  
and credible by being tied to performance goals and by delaying  
vesting until after the bail-out funds are returned to taxpayers.

	The Corporate Library released a report in February about the boards  
of the bail-out companies, many of which were outliers in their  
governance and compensation practices. Some of these were clear  
indicators of investment and liability risk.

	In several cases, we found individuals who not only sat on more than  
four corporate boards, but also sat on more than one of these  
particularly troubled boards during this period.

	Erskine Bowles -- who was head of the Small Business Administration  
and later White House chief of staff under President Bill Clinton --  
served on the boards of Morgan Stanley, General Motors, and Wachovia,  
and at various times was also a director at Merck, VF Corporation,  
Krispy Kreme, and Cousins Properties.

	Several other directors from these troubled boards also sat on either  
five or six boards altogether. We call the phenomenon of directors who  
serve on four or more corporate boards "overboarding."

	Overboarding can limit the time and attention a director has for each  
board. It can also be an indicator of -- or a contributor to -- so  
many relationships and connections that it makes it more difficult to  
provide the respectful skepticism necessary for independent oversight.

	In all, 11 of the 27 companies we identified as "troubled" had at  
least one overboarded director. Six had more than one; at Merrill  
Lynch, there were five. By comparison, fewer than 30 percent of S&P  
500 companies have even a single overboarded director, and fewer than  
5 percent have more than one.

	Another key finding from our analysis: Shareholders at these  
companies were well aware of the relative weakness of these boards,  
and had expressed their dissatisfaction by withholding votes from many  
of these individuals the year before these companies collapsed.

	At least 13 individual directors, all of whom sat on at least three  
corporate boards during this period, had received a 13 percent or  
higher negative vote.

	The highest of these was a 38 percent negative vote received by Sir  
Winfried Bischoff at McGraw-Hill, where he sat on the compensation  
committee. Bischoff also served on the boards at Citigroup (as  
chairman and interim CEO), Eli Lilly, and Prudential.

	Although the businesses of these companies do not overlap enough to  
impair Bischoff's designation as an "independent" director or to  
create legal conflict of interest concerns, it is relevant that McGraw- 
Hill owns ratings agency Standard & Poor's, which not only rates the  
other companies for which he was a director, but also issues ratings  
on which the other companies rely in their assessment of risk.

	Because of the extensive involvement that financial services  
companies have in many different aspects of the business of large  
public corporations, directors of those companies in particular should  
be especially cautious about overlaps and conflicts.

	Badly designed compensation is an indicator of poor corporate  
governance, and poor corporate governance is an indicator of  
investment risk. Instead of trying to tax the bonuses at AIG, the  
government and the shareholders should insist on new directors.

	The company's website says the compensation committee has five  
members. The two longest serving ones are James Orr III, who joined  
the committee on May 17, 2006 and Virginia Rometty, who joined it on  
January 17, 2007, according to the company's 2007 proxy statement.

	The committee's charter says its responsibility include making  
recommendations to the full board regarding AIG's compensation  
programs and reviewing and approving any hiring, severance or  
termination payments.

	People say that the definition of insanity is doing the same thing  
over again and expecting a different result. In this case, insanity is  
allowing the same people to continue to serve on the board after  
massive failure and expecting them to produce a different result.

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Nell Minow is editor and chair of the Corporate Library, an  
independent research company