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Corporate boards get a little less interlocked ; Tangle of colleagues sitting on one another's boards slowly unravels

Matt Krantz 
July 30, 2004
USA Today
FINAL

Here's some good news for those who fear that Corporate America is a puppet state controlled by a small cadre of the power elite: There are more people pulling the strings.

Maybe it's the flurry of post-Enron regulation, including the nearly 2-year-old Sarbanes-Oxley rules. Or it could be the public outcry over potential conflicts of interest between board members.

Whatever the reason, the club of friends, colleagues and partners who sit on the boards of the nation's companies has become slightly less tangled and concentrated, an analysis of more than 2,000 corporate boards and 22,000 board members by The Corporate Library shows.

That's welcome relief for anyone who saw those cozy relationships as posing huge dangers to investors, who rely on boards to watch for problems with management. Following the rash of corporate scandals, critics have worried that the old boys network dominating corporate boardrooms meant back-patting often took precedence over due diligence.

USA TODAY and The Corporate Library first illuminated the intense interconnectedness of corporate boards nearly two years ago. And in the first re-examination since, the results show that while a web of cronyism might still exist in Corporate America, the situation has improved. Board members are sitting on fewer boards, and that means they have more time to pick over each company's books. Meanwhile, board members of one company are slightly less likely to sit together on the board of another company.

Most encouraging, though, is a reduction in the number of CEOs sitting on each other's boards. This practice has drawn the ire of corporate governance advocates, who say it creates the potential for horse trading and backscratching between top executives.

"Any movement in the direction that we're seeing, given that Corporate America has had a history of being highly interlocked, is good," says Jackie Cook, senior research associate at The Corporate Library. Specifically, USA TODAY and The Corporate Library found:

* Board members are focusing more on fewer boards. Prior to the Enron disaster, there was no shame about scrambling to get on as many boards as possible. For one thing, it was lucrative. Just attending three or four meetings a year would bring payments of $45,000 or more plus other perks for just one board.

But, facing greater requirements and risks of litigation and public scorn if there's a blowup on their watch, directors are limiting the number of boards on which they sit. Within the Standard & Poor's 500, there are only three directors who sit on the boards of six or more companies. That's half the number who did in 2002. In addition, only 82 directors on boards of S&P 500 companies sit on the boards of four or more other companies, a 10% decrease from 2002.

That has chipped away at the old boys network that was so pronounced in 2002. "Directors are accepting fewer invitations, so boards have to cast a broader net to look for people," says James Westphal, professor of management at the University of Texas at Austin.

* Interconnectedness between directors on the same boards is falling. Interconnectedness is the legal but sometimes frowned-upon practice of a board being stacked with directors who sit together on another company's board. The fear is that these directors may have hidden agendas other than monitoring the health of the company.

In 2002, there were 177 companies in the S&P 500 that had at least two directors who also sat together on the board of another company. Such linkages have declined, albeit modestly. Now 171 of S&P 500 companies have such an interlock between board members.

As small as that progress might seem, experts say it's a good start. "Yes, there is some benefit to the knowledgeable person being on multiple boards," says Lawrence White, professor of economics at New York University. But, he adds, the dangers are even greater of an "I'll scratch your back if you scratch mine" type of relationship.

* CEO swapping is down. The most feared type of corporate link is when CEOs sit on each other's boards. While there may be nothing nefarious, corporate governance advocates say the opportunities for conflicts are too high.

That's why there's such relief that there are only 12 pairs of CEOs involving 24 companies that are hooked up in such an interlock. That's down from 18 pairs of CEOs involving 35 companies in 2002.

That issue sparked investor outcry back in 2002 because of concern about the close relationship between Citigroup CEO Sandy Weill and AT&T's former CEO Michael Armstrong. They sat on each other's boards. Regulators became concerned with what role, if any, Weill played in the reports written by Citigroup's Salomon Smith Barney analyst Jack Grubman on AT&T's stock. No wrongdoing was found. But under pressure, Weill left AT&T's board in 2002.

Not all of the improvement has been because Corporate America has cleaned house. Most of the CEO links have been dissolved largely through attrition, not because of any action by the companies. More than half of the CEO interlocks that disappeared since 2002 are gone because one of the CEOs retired.

So that leaves the question of whether companies will simply go back to their old ways once criticism dies down and the scrutiny drops off. Even now, with all the backlash from Enron and other scandals, there are still some interconnections that have survived and that shareholder rights activists find troubling, such as:

* Board members that continue to load up. There are still 23 board members in The Corporate Library's database who sit on the boards of six or more companies. The person who sits on the most boards is Willie Davis, 69, with nine different directorships.

There are no legal limits to the number of boards on which a director may sit. But the National Association of Corporate Directors advises senior executives to sit on three or fewer boards and retirees six or fewer.

There's also no evidence that overworked board members perform any worse than those who sit on fewer boards.

Still, Davis served on 11 boards, including Kmart's in 2001 as the discount retailer was headed into a financial implosion that resulted in its filing for bankruptcy protection. That same year, Davis served on the board of Strong Funds, the mutual fund company whose founder later admitted to improper trading in the company's mutual funds for his own gain and was barred from the securities industry for life. Davis did not return calls for comment.

* CEOs who still sit on each others' boards. While things have improved here, too, there are still those 12 pairs of CEOs sitting on each other's boards. The CEO interlocks range from technology companies such as Juniper Networks and VeriSign to giant industrials such as Georgia-Pacific and Norfolk Southern.

Some companies have even formed new interlocks between their CEOs. For example, furniture maker Furniture Brands last year installed Aubrey Patterson, the 61-year-old CEO of BancorpSouth, on its board. It did that despite the fact that Wilbert Holliman, Furniture Brands' 66-year-old CEO, also sat on the board at BancorpSouth. The company didn't return calls.

* Boards that continue to be closely tangled. There are perfectly legitimate reasons why a company may have a pair of directors who sit on another company's board together. For instance, business executives on one board may recommend someone they know and respect from another board.

But the degree of interlocks at some companies is still eye- opening. There now are 17 companies that have four or more pairs of directors who sit on other companies' boards together.

Among the most interlocked companies in this fashion in The Corporate Library's database is SunTrust Banks, which has board members who sit together on the boards of six other companies.

A SunTrust spokesman says there's nothing untoward about it. "In today's interdependent business world it's tempting to imagine sinister corporate conspiracies where none exist, even if there is not the slightest hint of actual activity that is in any way improper, contrary to the principles of good corporate governance or not in the best interests of shareholders," says Barry Koling.

And in five cases, at least two Anheuser-Busch directors sit together on other boards. In fact, five Anheuser-Busch directors also sit on the board at Emerson Electric, including the CEOs of both companies. A company spokesman says Anheuser-Busch's board meets the New York Stock Exchange's requirements for independence and that it has served shareholders well in the past.

Despite these remaining thorns, many applaud the improvements. The greater independence of boards could be one positive to come out of the scandals that rocked Wall Street, says Eliezer Fich, professor of finance at Drexel University.

Says University of Texas professor Westphal: "This is a permanent change."

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