FORTUNE magazine says "it's cleanup time in corporate America."
We'll see. New laws are on the books, and more may be coming. But true gains in corporate governance will come not from executives personally vouching for their accounts and other photo ops but from a hundred small things that won't make the headlines or the statute tomes. Directors meeting more often, for example. Audit and compensation committees asking hard questions. CEO pay pegged to long-term performance, not one-year stock pops.
"I see boards being more probing now," says James T. Brady, a former Maryland economic development secretary who is a director for Constellation Energy Group, McCormick & Co., Aether Systems and Allfirst Financial. "Board members want to understand on a deeper level than they might have before. They're less accepting. They want more information, and they want the information in a user-friendly way."
The recently passed Sarbanes-Oxley Act, which made chief executives certify their books, is just a start. Besides instituting the book-blessing sacrament, the act bans personal loans to board directors and executive officers, restricts stock sales by top dogs when stock-funded retirement plans are frozen and requires executives who cook the books to pay back resulting bonuses and stock gains.
Fine, I guess. But these are tummy tucks and ribbons, mainly - cosmetic frills that do more for campaign-speech content than for quality corporate oversight. For example, bosses who fake their accounts are already liable to surrender ill-gotten gains through criminal and civil prosecution and shareholder lawsuits.
Tougher rules by the New York Stock Exchange and the Nasdaq electronic exchange go further. These markets now require listed companies to have a majority of independent directors, to have no corporate officers on the audit and compensation committees and to obtain shareholder approval for stock-option plans.
One director with whom I talked claimed that many companies were instituting these reforms before the new requirements were laid down.
"For a long while, people have been cognizant of this independence issue," says Frank A. Metz Jr., a former director and chief financial officer at IBM and now a director at Solutia and Allegheny Energy. "One thing I've seen over the past five-plus years is, you have fewer and fewer insiders on a board, and every board that I've noticed has at least a substantial majority of outside, independent directors."
That's good. The fact that the NYSE and Nasdaq demanded the practice is better. Measures still being considered - subtracting the value of stock options from earnings, requiring executives to hold stock obtained through options for a defined period, cleaning up conflicts of interest on Wall Street - could bring more improvement.
But even the best laws and regulations will never substitute for human judgment. Even a board composed purely of nonmanagement directors will do no good unless those people apply themselves to their duty.
Whether or not all the talk about corporate governance will make a difference "clearly depends on the independent director, and it depends on what sort of director he or she was pre-Enron or pre-WorldCom," says Malcolm Candlish, who is a director for Black & Decker and AmerUS Group. "Bad directors tend to get to bad companies," and that may not change, says Candlish, former chairman and chief executive of First Alert and of Sealy. While publicity over corporate blowups has put pressure on slacking boards, "I don't think much has changed in what directors ought to be doing," he adds. "I don't think it has made much difference to what I do and what I should do."
Maybe not. But even boards that thought they were minding the store before seem to be paying much closer attention.
On all four corporate boards on which he serves, Brady is chairman of the audit committee, the panel charged with making sure the books are clean. "You're seeing board meetings that are longer - particularly audit committee meetings," Brady says. "I'm finding that audit committee meetings now are lasting three to four hours. They might have lasted a couple hours before."
Audit panels are looking not just at whether the books are accurate, Brady says, but at larger corporate risks - a trend relevant to Allfirst, which discovered $691 million in currency-trading losses this year.
Once, Brady's audit committees would meet as an appendix to a main board meeting, convening at 8 a.m., perhaps, when the full meeting was at 10. Now, Brady says, to ensure undivided attention to the accounts, "I'm insisting that we have these meetings not on the same day as the board meeting."
This is the kind of change that makes a difference. It's the kind of change you can't legislate.