NEWSWEEK: You’ve said recently that there is a “crisis of confidence in the corporate world.” As a former chief executive and a board chairman, how much of the blame for this crisis do you think should fall on the CEO and how much on the board of directors?
William W. George: When you look at some of these companies’ actions that have gone beyond the pale of good judgment and accounting practices or have broken the law, it’s clear that boards have not done their jobs. It is their job to provide the right kind of governance for the corporation and to ensure the proper checks and balances are there vis a vis corporate management. That’s their job. The board governs the corporation and the CEO runs the company. They are two different roles.
If independent directors of boards don’t step up and do their jobs, the alternative will be outside regulators and governments–not just the U.S. government, but governments around the world–trying to run our corporations for us. After all, the directors are the elected representatives of the shareholders and are responsible for governing the corporation. In many cases, like Enron or WorldCom, you have to ask: Where was the board?
What can companies do now to ensure, or to restore, investor confidence?
In the past two months, there has been a sea change in the board rooms of major corporations in terms of their governance practices, audit committees, and the like. These are important steps forward. However, investor and shareholder confidence will not be restored until corporate leaders and boards go public with their changes and commitments.
In order to rebuild investor confidence, it is very important for boards and corporate leaders to acknowledge the inappropriate actions of numerous corporations, but indicate that this is not the norm. Then they should rally publicly behind a set of reasonable reforms that will help prevent such abuses in the future. As long as they resist reform, they give the impression that their practices are not that dissimilar to the companies in the public eye. In my experience, companies have little to fear from many of the proposed reforms–such as 50 percent independent directors, adding a governance and nominating committee and more extensive audit committee procedures, and allowing shareholder approval of stock option plans. The best companies are already doing all of these things and more.
Are there other specific reforms you would like to see?
Every board should establish and publish its principles of corporate governance for all its shareholders and any interested persons, including its employees. The board should make an annual report to shareholders about how it adhered to and strengthened these principles. They should include many if not all of the reforms proposed by the NYSE [New York Stock Exchange] committee on corporate governance. Companies should make fuller and clearer disclosures of their financials, including off balance sheet transactions and minority investments. General Electric’s recent expansion of its financials is a good example. Corporate leaders and boards should communicate regularly with shareholders about governance issues and deviations that they encounter, as well as changes they are making. They should be open to listening to recommendations in this regard from shareholders.
What do you think of the SEC proposal that would require chief financial officers and chief executives to certify quarterly and annual reports, making them personally liable for misleading or untrue results?
This is the stuff that has become very controversial. The question is whether to certify or to represent that he or she does not know of anything misleading or untrue to the best of his or her knowledge. It is hard to certify every number of every report yourself. But if it is a representation of the best of your knowledge, that’s a very realistic thing. As CEOs, we have a tremendous amount of power and we have a tremendous amount of responsibility to preserve the company.
How long will it take for investors to regain confidence in corporate America now that companies and regulatory agencies are starting to lay out some reforms?
Restoring investor confidence could take some time. But getting good governance in place shouldn’t take long at all if we do it right. We know what needs to be done. We know what good corporate governing principles are. And we know that you need to follow them in good times and in bad times.
The erosion of investor confidence really worries me though. If you think about it, the whole capitalist system is built upon investor confidence. That’s why I admire [chairman and CEO] Hank Paulson from Goldman Sachs for speaking out. There is more at stake here than how CEOs feel about this. The whole capitalist system is at stake here.
Would corporations make many of these changes voluntarily or should regulatory agencies get involved to ensure the new reforms are enacted?
I think both reforms and voluntary changes are needed. Clearly, the excesses pointed out in the last six months show that some reforms are needed, and need to be put into place soon. But it is also required, since we have a system of independent boards, that independent directors do their jobs. It’s hard to regulate that. You can set penalties, but in the end the directors just have to step and do their job.
Some critics complain that the media has blown this out of proportion. What do you think?
The vast majority of companies are following good governance. But, while I can cite examples of companies that do that, there have been far too many exceptions. This is not a media-created event. These are exceptions that go beyond the pale and that are causing us to question how this can happen.
The tragedy to me is that there are so many well-governed companies out there, but people won’t recognize that. If investors fear that their money is not being managed, they’ll back away. Would we
be having this conversation if we were still enjoying a bull market like that of the late 1990s? No one was complaining when these companies’ stock prices were doubling and tripling.
No. I think you’re absolutely right. There has been too much pressure on corporations to produce short -term results that conform to securities analysts’ expectations. And, let’s be honest, securities analysts do not hold stock. But there has been a tremendous pressure to meet expectations or beat them rather than to produce good long-term results. It’s unrealistic to think that one corporation can do that every quarter forever because there are things that happen to companies. This has pushed financial logic to an extreme.
Will that change now that the market has turned bearish?
I don’t know how you can legislate it. If one looks at the people supposedly doing research and looks at how they are compensated, that might give you some pretty good indications. There used to be a clear wall between the investment and the research departments. Research analysts never knew that a deal was in the works on the investment side. But in some firms those relationships have been compromised. They are selling a stock instead of doing research. You saw the Merrill Lynch settlement [with New York Attorney General Eliot Spitzer, in which the firm agreed to pay $100 million in fines and make changes in the way its analysts are compensated]. That was a genuine acknowledgment of those concerns–it was a two-party settlement, not court-ordered.
What would you tell investors?
To put their money into companies that they are confident are well governed and well run and to look at the long-term results–not just whether the company is meeting analysts’ expectations. This is not necessarily going to appeal to an investor that wants a gain in a one-week or a one-month period, but to someone who is looking at a five to 10-year period. This is a how good companies are run: with leadership principles and good governance.
