Boards Intensify Efforts to Review Risks and Dodge DisastersThis month's meltdown of several financial giants exposed a serious flaw in corporate governance: Many U.S. boards don't cope well with a crisis. But some directors are now ratcheting up efforts to anticipate, and avert, trouble.
Too many boards are stocked with poorly prepared directors, who fail to ask enough tough questions or adequately scrutinize management, governance specialists say.
In the wake of the financial turmoil, more boards will ask themselves, "Are we well prepared for the unforeseen crisis?" predicts Jerry W. Levin, former chairman of retailer Sharper Image Corp. and a director on four public-company boards.
Few corporate boards are well-equipped to deal with the issues some financial companies faced recently, when storied firms such as Lehman Brothers Holdings Inc. and Merrill Lynch & Co. had only days to seek rescue plans or mergers. But the governance experts say those boards, and others, could have taken steps months ago to spot danger signs.
The issues frequently start with who is sitting in the boardroom. Just three of Lehman's 10 outside directors have direct experience in the financial-services industry. "For an extremely complex financial institution like Lehman, that set of directors probably wasn't the best group to populate its board -- or help prevent its collapse," contends Charles Elson, head of the Weinberg Center for Corporate Governance at the University of Delaware business school. A Lehman spokesman declined to comment.
One common vulnerability is assessing corporate risk. In 2006 and 2007, when Lehman was amassing mortgage-backed securities and questionable real-estate loans, the risk committee of its board met twice each year, regulatory filings show. A person close to the board says risk was discussed at four committee meetings and 25 board meetings in 2008.
Now, more boards may take a bigger role in risk management. During a Sept. 9 roundtable held by the National Association of Corporate Directors, 24 chairmen of audit committees agreed "the whole board needed to be engaged" in monitoring risk, an association official says.
One company where directors actively assess risks is Tyco International Ltd., which survived a scandal earlier in the decade. Soon after former DuPont Co. Chief Executive Jack Krol joined the Tyco board in 2002, the company faced a liquidity crisis following accusations that former CEO L. Dennis Kozlowski and another former top executive had looted the conglomerate of nearly $600 million.
As lead independent director, Mr. Krol created a risk-assessment process for the board. He and one or two fellow directors visited each business unit once a year. They spent a day with a unit's leaders, reviewing a 10-item checklist of risks and proposed remedies. The full board then discussed their findings.
Among other things, initial visits uncovered a handful of payoffs to foreign officials, which could have led to sanctions against the company. "We were able to nip [it] in the bud," Mr. Krol says. "It could have been a big crisis."
But Tyco appears to be an exception. Mr. Krol says he has tried, without success so far, to persuade directors on two other corporate boards where he serves to embrace similar risk-assessment strategies.
A growing number of boards are creating emergency-communications systems, with secure Web sites, document sharing and online board meetings, says Joe Ruck, chief executive of BoardVantage Inc., a Menlo Park, Calif., company that offers such systems.
Other boards conduct scenario planning to prepare for crises. "You imagine the worst things that could happen," and craft a playbook, explains Fred Crawford, chief executive of AlixPartners LLP, a Southfield, Mich., turnaround firm that often advises companies during crises. Mr. Crawford estimates that a minority of U.S. corporate boards pursue extensive scenario planning.
The board of Reynolds American Inc. takes scenario planning to an extreme. During a mock board meeting in July, directors and executives of the tobacco maker simulated the death of Chairman and Chief Executive Susan M. Ivey in a plane crash.
The company's head of human resources made a presentation about possible internal successors for Ms. Ivey. Maura Payne, vice president of communications, says she distributed mock press releases and other materials to alert regulators, investors and employees about Ms. Ivey's "death" and replacement.
The two-hour simulation exposed gaps in Reynolds's emergency-succession plan, recalls Betsy Atkins, a board member and venture capitalist. For example, Ms. Atkins says, the board hadn't previously considered whether it would want Ms. Ivey's successor to be both chairman and CEO. Directors also debated whether they would name one of their own as interim chief executive.
The board found it easier to air such issues "without the intense emotion of facing the [actual] loss of a CEO," Ms. Atkins notes. "We ended up feeling better prepared."
By: Joann Lublin and Cari Tuna
Wall Street Journal; September 22, 2008
