Published Articles:

FORGET LERACH’S ‘KIND WORD AND A GUN’

A MISSING ELEMENT IN EFFECTIVE CORPORATE GOVERNANCE

DUBIOUS DISTINCTIONS IN CORPORATE GOVERNANCE

THE SAN DIEGO DAILY TRANSCRIPT - SEPTEMBER 14, 2001 top

FORGET LERACH’S ‘KIND WORD AND A GUN’

By Douglas Gordon

If you don't do it, Lerach will. If executives such as board members and officers don't manage the company for the benefit of the shareholders, Lerach will put procedures in place to make sure that you do. Or at least that's how Lerach spins it.

William Lerach of San Diego, is perhaps one of the best known of the legions of plaintiffs’ lawyers across our great nation that make their living suing companies and their executives for alleged violations of securities laws. In a speech earlier this year to institutional shareholders, Lerach suggested these lawsuits could result from executives’ failure to operate the company for the benefit of the shareholders.

Corporate Governance At Gunpoint

Lerach's solution, sometimes referred to as “corporate governance at gunpoint,” can best be explained by his quote on the benefit of securities class action cases: “... oftentimes more is obtained with a kind word and a gun, than a kind word alone.” However, there is a better way to make sure you manage the company for the benefit of the shareholders than negotiating with a gun to your head.

Forget Lerach

Simply put, forget Lerach and do two things: learn how to manage for the benefit of the shareholders and then just do it. Do it because it's the right thing to do, not because you're worried about getting “Lerach-ed.” Your company should become more profitable and Lerach should become somebody else's problem.

The following 10 Commandments for the Board and Director Bill of Rights are the rules for managing for the benefit of shareholders. The rules are relatively simple, but as Ross Perot aptly said, “the devil is in the details.”

10 Commandments For The Board Of Directors (as a Group)

1. Maximize the price of the shareholders’ stock. No surprise, but start by maximizing the company’s net profits. If the stock price lags behind, find out why and do something about it.

2. Exercise ultimate authority. Since you have ultimate responsibility for everything that happens or doesn’t happen at the company, use your matching authority. Oversee, but don't manage.

3. Delegate duties and rely on outside experts. You can’t and shouldn’t try to do everything yourself. Assign certain tasks to officers and employees. Hire accountants, attorneys and technical, compensation and I.T. security experts as needed.

4. Act only as a full group at a meeting or by unanimous written consent without a meeting. Individual board members have no authority to act for the corporation.

5. Own the strategic and business plans. Jointly develop these plans with senior management and hold them responsible. More importantly, help them stay on track and make adjustments to the plans as needed.

6. Take “cradle to grave” responsibility for key executive management. Find, hire, compensate, evaluate, plan for successors and if necessary terminate.

7. Set limits on authority of CEO’s. Nature abhors a vacuum, and so do CEO’s. If you don’t set limits, you have no one to blame but yourselves.

8. Oversee by establishing controls, systems and procedures. Ever worry if you have good I.T. security? You better, just as you worry about financial security. Make sure controls, systems and procedures are in place for all areas.

9. Get “unfiltered” information for decision making. Are you getting the whole story or the CEO’s spin? Get the facts, all the facts, and not just from the CEO.

10. Evaluate yourself and the board as a group. You wouldn’t keep slackers on the sales force. Why do it here?

Director Bill Of Rights (for individual board members)

1. Right to participate. Put items on the board meeting agenda. Get information well in advance of meetings to have enough time to prepare. Speak up at meetings.

2. Right to inspect. Corporate documents and corporate property, nothing is sacred. Hard copy, soft copy, electronic copy, plant and equipment, if it exists, you can see it.

3. Right to communicate. Talk to anyone with or without corporate management present. Includes employees, accountants, attorneys or any outside advisers or consultants.

4. Right to request the company to hire an adviser for you at company expense. Use it as a last resort if you don’t think you’re getting accurate information from the company or its current advisors. The board doesn’t have to hire the adviser, but if they don’t, they should have an excellent reason why not.

5. Right to dissent and resign. Dissent in board meetings is good. Tell ’em who you are and what you stand for, but if they won't cooperate, get the heck out of Dodge.

In conclusion, our country's best humorist Will Rogers said it best: “Even if you're on the right track, you'll get run over if you just sit there.” Executives, you're on the right track, but don't just sit there.

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THE SAN DIEGO UNION TRIBUNE - AUGUST 14, 2002 top

A MISSING ELEMENT IN EFFECTIVE CORPORATE GOVERNANCE

By Douglas Gordon

Today is reckoning day for many chief executives, as they must certify their company’s financial statements. The Securities and Exchange Commission’s August 14 deadline has sent a strong message to corporate America: sign off on your numbers or come clean and admit your numbers are off.

But will this order give stockholders the confidence and reassurance we all need? Maybe. However, I believe the SEC missed the mark when it issued its threat that CEOs and chief financial officers, who knowingly certify false company reports, could now be prosecuted and sent to prison.

The president, Congress and the SEC could have required mandatory professional education for all board members.

The new corporate governance laws provide more oversight and punishment, but without mandatory director education, these laws fail to attack the core problem in corporate America today: board members either don’t understand their responsibilities, or perhaps, they don’t take them seriously enough.

A director’s job is to exercise business judgment and act in what he or she reasonably believes to be the best interests of the company and its shareholders. Sounds relatively simple, but a director’s job is incredibly complex and challenging because of the complexity of companies today.

Nevertheless, the board is responsible for everything that happens or doesn’t happen at the company. But with total responsibility, directors have matching total authority. So, if they don’t use their all-encompassing authority, they have no one to blame but themselves. The buck stops in the boardroom.

Some directors know exactly what their jobs are as board members because they take professional education seriously. However, as the recent scandals in corporate America have illustrated, some boards have not been doing their jobs. For each scandal we know about and for those that we have yet to hear about, the first question asked should be, “Where was the board?” What did they do or not do to prevent the scandal from occurring?

Unfortunately, in these scandals, often the board was asleep at the wheel. But how could so many highly intelligent, successful, well-respected and powerful board members fail to do their job?

Simply put, in many cases they probably didn’t know what their job was as a director. There is a myth today throughout corporate America, regardless of the size of the company or whether it’s public or private, that just because a director is elected as a board member that he or she is automatically qualified for the job. Nothing could be farther from the truth. Many directors are successful CEOs, professionals or experienced directors, but these qualifications don’t mean that they’re qualified for the job of a director.

The job of a director is much different that the job of a CEO, CFO, venture capitalist, commercial banker, investment banker, accountant, attorney, college professor or university president, to name a few. Many directors have the skills to be a director, but without proper education and training, these skills will most likely be unused, underused or misused.

Also, experienced directors are not necessarily qualified either, because they may have learned bad habits serving as a director and may have never received professional education. Even directors who are graduates of “the school of hard knocks” don’t necessarily know their rights and duties. They may have survived and prospered as directors on their instincts, but in today’s new corporate world of accountability, instincts, like skills, are not enough. Qualified directors are not born; they’re made with skills, instincts and education.

There are two main reasons why many directors do not receive professional education. First, some CEOs actually don’t want directors to be educated. This way it keeps the directors ignorant of their rights and duties, making it less likely that they will challenge the CEO. Second, many directors think they don’t need any further education because they either know it all or won’t admit otherwise. Unfortunately, the “evil twins” of ignorance and arrogance will ensure that unqualified directors remain unqualified.

While some CEOs scramble to meet today’s certification deadline, board members should take some time to reflect on their qualifications as directors. Have they been formally educated and trained as a director? Could they learn more about their job? Although the certification deadline is aimed at CEOs, directors could use the deadline as a stimulus to seek education and training.

Not only would education and training help to minimize their personal liability as a director, but it just might help turn around the current crisis in corporate America.

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THE SAN DIEGO BUSINESS JOURNAL- OCTOBER 21, 2002 top

DUBIOUS DISTINCTIONS IN CORPORATE GOVERNANCE

By Douglas Gordon

Unfortunately, Enron was just the tip of the iceberg in the train wreck of corporate scandals that have devastated shareholders, employees and communities across America. “Best Practices in Corporate Governance” (the best ways to run a corporation) were apparently ignored, abused or eviscerated in favor of greed, fraud and corruption.

If any board members or officers at Enron, WorldCom, Global Crossing, Tyco, Adelphia Communications, or any other companies are convicted of crimes, I only hope they are not put in jail. Rather, I hope they are put under the jail, because that's where they belong.

But are the vast majority of board members and officers in corporate America (i.e., those who are honest) following the "Best Practices in Corporate Governance?" Some certainly are not, even if these directors and officers are well intentioned and experienced. As proof, I present the “Ostrich Awards for Dubious Distinctions in Corporate Governance” (named after the bird that is known for sticking its head in the ground).

And the winners are:

"You Gotta Have Friends" Ostrich:

Winner: Jeff Rodek, Chairman/CEO of Hyperion

Dubious distinction: Mr. Rodek says that to fill (board) openings previously, he would just "go to my Rolodex and call up my friends." That appeared in the Wall Street Journal Aug. 9.

Best practice: The nominating committee of the board of directors should be finding directors, not the CEO. Friends of the CEO should not be board members since they are less likely to control the CEO.

Domination

“Dominator” Ostrich:

Winner: Board of Coolbrands International of Toronto – $150 million (annual sales) -- maker of Chipwich ice cream bars.

Dubious distinction: “Management’s near total domination of the board is a real issue.” Five of six board members are either management or management’s family. That appeared in the New York Times Sept. 15,2002

Best practice: Majority of board members should be independent -- that is, not management, family, friends, consultants or suppliers.

See No Evil, Hear No Evil ...

‘What Me, Worry?’ Ostrich:

Winner: Chairman/CEO of a local Nasdaq-listed company.

Dubious distinction: Chairman/CEO states: “The board doesn't need to know anything about IT security.”

Best practice: The board must oversee every area of the company. Therefore, it must guarantee that controls, systems and procedures are established for each area, from information technology security to finance, and from sales and marketing to intellectual property, and everything in between.

Above It All

‘Holier Than Thou’ Ostrich:

Winner: Fannie Mae, the nation’s largest source of financing for home mortgages, and the nation’s third-largest corporation (in terms of assets).

Dubious distinction: “Even though its shares are publicly traded on NYSE since 1970, Fannie Mae had for years successfully argued that it did not need to file financial statements and its executives’ insider transactions with the SEC. It finally bowed to pressure from investors who want to be able to fathom the company’s financials and will begin making these filing in 2003,”
-- New York Times, Sept. 29, 2002.

Best practice: A company should make full disclosures and be “transparent” to its shareholders.

But why do even well-intentioned and experienced directors not follow "Best practices in corporate governance?" Simply put, they don't know their jobs, but think they do, which makes matters even worse. The culprit? The “twin evils” of arrogance and ignorance.

In other words, never attribute to malice what can be adequately explained by arrogance or ignorance.
The Myths Of Leadership

The “Qualification Myth” exemplifies the arrogance of directors. There is a prevalent myth historically and today that just because a director is or has been a successful CEO or has prior board experience, that the director is automatically qualified. Nothing could be further from the truth.

Successful CEO’s may be unqualified as directors because they may empathize too much with the CEO, have a jaundiced view of boards, or get too involved in the details of day-to-day operations. Also, prior board experience may mean that directors have learned bad habits that may have to be "un-learned" to be a good director.

The “Mushroom Board” exemplifies the ignorance of directors. Some CEOs want their boards to remain ignorant – that is, left in the dark like a mushroom -- without ever seeing the light of knowledge that could cause the board to exercise their omnipotent power over the company and the CEO.

In short, CEO’s don't want their boards to know how powerful they are because that knowledge will most likely result. in more control of the CEO.

The Need For Continuing Education

Director education should ensure that boards follow the "best practices in corporate governance" in all companies, large or small, public or private. A board member faces an extremely difficult job and risks personal liability as a director.

Any director that thinks he or she “knows it all” or couldn't benefit from continuing education, shouldn’t be a director. It’s that simple. There is no way that any director can keep up with the changes in the law and best practices without continuing education.

For accountants, doctors, and lawyers, continuing education is required to keep practicing their profession. Why should directors be any different? After all, directors must be professionals because the buck stops in the boardroom. The board is the first and best line of defense against corporate mismanagement and fraud. Therefore, directors must blame themselves for failing to follow the “best practices in corporate governance” and quit trying to pass the buck to management, accountants, auditors, plaintiffs’ attorneys, the SEC, stock analysts, media or shareholders.

Not only should director education result in a more effective board, a more profitable company, and less risk of lawsuits from shareholders and employees, but it should also begin to restore the confidence of shareholders, employees and communities in corporate America.

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