In the wake of Enron and Worldcom many of us assumed corporate reform was complete after the last recession ended. After all, even Yahoo Finance began publishing CGQ (Corporate Governance Quotient) scores as compiled by ISS to their company profile pages.
As I began writing this, I was lucky to find the summary page from Yahoo on Lehman (Ticker: LEH). Since Lehman has filed for bankruptcy and subsequently delisted during the week, you can no longer find it on Yahoo; however with the magic of Google I was able to access the information via a cached page from a few days before Lehman was delisted. In fact at the time the page was cached, the stock was still trading at $4.5599.
Lehman Brothers Holdings Inc.’s Corporate Governance Quotient (CGQ®) as of 1-Sep-08 is better than 41% of S&P 500 companies and 87.6% of Diversified Financials companies.
A company’s CGQ is compiled by scoring each firm across 8 metrics. These include, as noted from an ISS website about the ratings:
Eight core topics comprise the [CGQ] rating: (1) board structure and composition, (2) audit issues, (3) charter and bylaw provisions, (4) laws of the state of incorporation, (5) executive and director compensation, (6) qualitative factors (7) D&O stock ownership, and (8) director education. The score for each core topic reflects a set of key governance variables. The current list comprises 61 of these sub issues. In addition, some variables are analyzed in combination with other provisions. For example, a board with a majority of independent directors and all-independent key board panels (audit, nominating and compensation) receives a higher rating for each of these attributes than it would if it had either one of them in isolation.
How could a company who’s CGQ score outperformed its peers by 87% be the first and only thus far not to find a way out insolvency? Of course, the fact that it scores so high relative to peers does not address why the pack of diversified financials falls into the bottom of the broader comparison to the S&P 500. That is a separate discussion of what we expect and accept as risks to the financial system.
As I posted recently with regard to Freddie and Fannie, at least part of the outcomes we are seeing in the markets and will continue to see are driven by the most human of factors, people. The remaining blame will fall on the system itself as the rules of the game will need to change along with many of the players.
Although, one would assume (and probably did) with a relative ranking of governance as high as Lehman had to its peers, that the board of directors would have had both the information, structure and ability to intervene at one of the half dozen offers Dick Fuld turned down in the weeks leading up to the firm filing for bankruptcy. Whether the aptly named Dick could have sold the entire firm at $40, $33, $27, $17, $12, or even at $6.50–which was recently reported as the final offer Mr. Fuld refused from the Korean Development Bank–is now a moot point. The question now is why didn’t or couldn’t the board intervene to force the brass-balled CEO to take a deal?
I don’t know that I have the real insight on that question, but based on publicly available information, one can look at the board to at least see if it maintained a level of diversity concurrent with a best-in-class among peers ranking.
Below is a list of the directors of Lehman Brothers as reported on their website (for as long as that lasts).
Richard S. Fuld, Jr.
Chairman and Chief Executive Officer
Michael L. Ainslie
Private Investor and Former President and Chief Executive Officer of Sotheby’s Holdings. Mr. Ainslie has been a director of Lehman Brothers Holdings Inc. since 1996, and serves as a member of the Audit Committee.
John F. Akers
Retired Chairman of International Business Machines Corporation. Mr. Akers has been a director of Lehman Brothers Holdings Inc. since 1996. He serves as the chairman of the Compensation and Benefits Committee and as a member of the Finance and Risk Committee.
Roger S. Berlind
Theatrical Producer. Mr. Berlind has been a director of Lehman Brothers Holdings Inc. since 1985. He serves as a member of the Audit Committee and the Finance and Risk Committee.
Thomas H. Cruikshank
Retired Chairman and Chief Executive Officer of Halliburton Company. Mr. Cruikshank has been a director of Lehman Brothers Holdings Inc. since 1996 and serves as the chairman of the Audit Committee and as a member of the Nominating and Corporate Governance Committee.
Marsha Johnson Evans
Rear Admiral, United States Navy (Retired). Ms. Evans has been a director of Lehman Brothers Holdings Inc. since 2004. She serves as the chairman of the Nominating and Corporate Governance Committee and as a member of the Compensation and Benefits Committee and the Finance and Risk Committee.
Sir Christopher Gent
Non-Executive Chairman of GlaxoSmithKline plc. Sir Christopher has been a director of Lehman Brothers Holdings Inc. since 2003. He serves as a member of the Audit Committee and the Compensation and Benefits Committee.
Jerry A. Grundhofer
Chairman Emeritus and Retired Chief Executive Officer of U.S. Bancorp
Roland A. Hernandez
Retired Chairman and Chief Executive Officer of Telemundo Group, Inc.. Mr. Hernandez has been a director of Lehman Brothers Holdings Inc. since 2005. He serves as a member of the Finance and Risk Committee.
President of Henry Kaufman & Company, Inc.. Dr. Kaufman has been a director of Lehman Brothers Holdings Inc. since 1995. Dr. Kaufman serves as the chairman of the Finance and Risk Committee.
John D. Macomber
Principal of JDM Investment Group. Mr. Macomber has been a director of Lehman Brothers Holdings Inc. since 1994. He serves as a member of the Compensation and Benefits Committee, the Executive Committee, and the Nominating and Corporate Governance Committee.
What is striking is how the board passed the diversity screen. While on first glance we see a broad cross section of directors from different industries, note that aside from two, all of them have lead major corporations. Four of the eleven have experience running large financial institutions, seven of eleven have been in a senior leadership post at a major public U.S. corporation, and two truly external board members have little experience in either running a major corporation or with financial markets in general–but both of them made it on the Risk Committee. Furthermore and most importantly, seven of the eleven directors, including Dick have been together for over 12 years.
Now ask yourself how if convened in a room together, how the chemistry of the cast of characters could possibly have lead to a coup to save the firm from Dick’s massive game of chicken between suitors and the fed. I’ve been in enough meeting rooms to know that I certainly would have had a hard time, and I’m sure this was not an intellectual conversation, convincing a majority of them to ask Dick to step down. This board was architected to meet the perception of propriety, not propriety itself.
There were a lot of failures last week in America, many of which were inescapable. Some of them are human errors, some errors of omission, deception and fraud. Some of the mistakes were systemic, created by antiquated legislation and oversight in a modern financial system. Leadership in all its forms have been scarce at all levels. Greed, fear and ignorance abound in a marketplace with so many faults removes the actual ability of self preservation. Just think of the many people whose money market funds broke the buck and the fact that the fed had to step in to guarantee that this would not be allowed to happen again at taxpayer’s expense.
Among the many areas of reform we must reconsider, if our system is to regain both solid footing and long term trust, is going to be how we measure good corporate governance. While we decided five years ago that good governance was important to the safety of the system, this lever like many of the others we had in place, has failed us. I provoke that it is not just the transparency of good governance that matters today, when combined with the perverse incentive systems we have created, it will be how we measure the data we have begun to collect.
The leaders and governing bodies among us will be working to stem the crisis in the weeks ahead. However, in the months and years ahead we are going to need to do a better job of measurement. Measurement of risk (financial and social), and of governance.