March 8, 2004

A New Winner! In the

In the “Shortest 8-K Contest,” Adam Savett of Cohen, Milstein, Hausfeld & Toll informs me that a recent 8-K filed by Charter Communications is only 22 words. I am confident that someone out there can even beat that…keep ’em coming.

Future of the Accounting Profession made me aware of this November report on the future of the accounting profession. This report was the result of a meeting between leaders from the worlds of accounting, finance, law, academia, investment banking, and journalism. Among other topics, the report covers:

– The Value of the Audit
– Regulation and Oversight in Flux
– What Went Wrong?
– Structural Challenges Facing the Accounting Profession
– What Should Financial Reporting Look Like in the Future?
– Improving Auditing and Financial Reporting Standards
– Licensing Issues: More Firms, More Depth

Nell Minow on Disney

After Disney’s meeting last Wednesday, the Chicago Tribune ran this op-ed by Nell Minow:

“When you wish upon a star, it may make no difference who you are, but these days when you are trying to get the support of your shareholders, who you are is of increasing importance. The latest chief executive officer to learn that lesson is Walt Disney Co.’s Michael Eisner. A stunning 43 percent of his shareholders refused to vote “yes” on his re-election to the board. This vote of no confidence led Disney directors Wednesday to replace Eisner as chairman, even though they had refused to do so before.

This comes at a time of great skepticism and concern about the independence and ability of corporate boards. Shareholders are painfully aware that distinguished directors like Henry Kissinger and Richard Perle were unable to prevent the CEO of Hollinger International from moving millions of dollars out of the company and into his own bank account because of a booby-trapped governance structure that gave CEO Conrad Black control of the voting shares. The charges against former executives of Enron Corp., WorldCom Inc., Adelphia Communications Corp., and Tyco International have highlighted the failure of the boards to provide effective oversight.

J.P. Morgan Chase & Co. and Bank One Corp. look very compatible in their pending merger as far as lines of business go, but they are far apart in corporate governance. Our firm gave Bank One’s board the highest grade in its industry, while J.P. Morgan’s was second to last. Shareholders may balk–or sell–unless the combined firm makes a commitment to best-in-class in terms of corporate governance.

The new chairman of Smith & Wesson’s parent company recently resigned because of press reports of his jail term for armed robbery in the 1960s. Even though his record since then has been impeccable, the increased scrutiny of corporate boards made it impossible for him to continue.

In the corporate raider days back in the 1980s, shareholders were quick to grab almost any offer that was higher than that day’s stock price. But today’s shareholders are sadder and wiser. They have seen their value siphoned off to raiders who paid only a fraction of what the companies were worth or to corporate executives granted hundreds of millions of dollars in golden parachutes and stock-option grants while doing little for their stockholders.

Shareholders want more than a couple of dollars a share. They want leadership they can believe in. Shareholders have to be able to rely on the board to represent their interest in building long-term shareholder value and not short-term CEO ego. Since mega-mergers often fail, the ability of the board to provide rigorous and objective analysis to a proposed deal, whether as acquirer or target, is essential.

Disney has been criticized for many years for a board that was overly cozy. In 1997, Disney directors were named Business Week’s “Worst board of the year” for overpaying Eisner and approving a huge guaranteed payment of more than $100 million to Michael Ovitz for his brief tenure as an executive. Many of the directors had direct ties to Eisner, including his lawyer, his architect and his son’s schoolteacher. As a result of shareholder pressure, Disney dramatically improved its corporate governance, adding outstanding new independent directors and adopting state-of-the-art policies to ensure that they provide more active and objective oversight.

The Disney board’s decision to select an independent director as chairman is, ironically, proof that it is stronger than its shareholders think. If Disney had not made a great deal of progress in strengthening its corporate governance over the past year, the board would not have been in a position to act so quickly and decisively. This decision will give shareholders a little more confidence in the board in the short term. But Eisner and the board will need to continue to prove themselves by communicating more effectively with investors on CEO succession and compensation and overall strategy and by continuing to add strong, experienced directors to add additional depth and independence.

Indeed, shareholders will insist on more from all corporate boards. A record number of shareholder proposals on issues like executive compensation and splitting the chairman and CEO positions will get record levels of support this year, and director candidates will get a record level of scrutiny. And that will lead to stronger, more effective and more responsive boards, essential for the credibility of public companies.

The vote at Disney reflects a new understanding in the investor community that corporate governance is an element of risk assessment of any investment and that vigilance in pursuit of improved governance is not just the price of shareholder democracy–it is a very good investment.”