Corporate Governance

The collapse of Lehman Brothers, with its massive losses for shareholders and employees and near-catastrophic market consequences, obviously reflects an abject failure of management in risk oversight.

But who allowed the management to take these risks? Where was the Lehman board of directors in all this?

For too long in this country, managements have been given free rein to do as they please by timid boards who don?t make waves or hold managements accountable. In many cases, these boards are appointed by the very managements that they oversee.

Shareholders deserve better, which is why I urge everyone to join my new initiative, United Shareholders of America. Only with numbers will shareholders be able to compete with the Business Roundtable and get legislation passed in Washinton to finally make boards accountable.

Evidence of the Lehman board failures was blatantly apparent in hearings last week before the House Oversight Committee.

The Lehman Finance & Risk Management Committee, for instance, met only twice a year in 2006 and 2007 - years when Lehman?s crisis was brewing, according to testimony by the Corporate Library research group.

"A company in this sector should have a risk management committee that is vitally involved and has a great depth of expertise," Corporate Library editor Nell Minow testified to lawmakers. "A company that had $7 billion in losses after becoming embroiled in the global credit crisis had a risk management committee that didn?t understand or manage its risk."

"The board was too old, had served too long, was too out of touch with the massive changes in the industry, have too little of their own net worth at risk and was too compromised for rigorous independent oversight," Minow testified.

Incredibly, only a few Lehman board members actually had financial industry experience, Minow testified. "Most of their working lives were tied to a different era - the one before massive securitization, credit-default swaps, derivatives trading and all the risks those products created," he said, citing a Wall Street Journal report.

For too long, boards of directors in America have for the most part simply been sounding boards and rubber stamps for managements with little accountability to shareholders, who are the true owners of America?s corporations. We need boards who exercise a stronger hand and hold managements accountable.

Why, for instance, did the Lehman board allow Richard Fuld to occupy both the chairman and CEO role? The CEO is the chief manager of the company but the chairman?s job is to look after shareholders interests. Clearly these two roles should have been separated a long time ago, as they should in most companies.

And why did the board?s Compensation and Benefits Committee approve $20 million in payouts to two executives who were fired just days before the Lehman?s Sept. 15 bankruptcy filing?

According to Congressional testimony last Monday, one "involuntarily terminated" executive was Andrew Morton, the head of fixed income who got a $2 million payout. Wasn?t it highly leveraged exposure to fixed income securities that got Lehman in trouble to begin with?

And why did the chief operating officer for Europe, Benoit Savoret, get a $16.2 million bonus when he was also fired?

Fuld testified in Congress that this money was owed to Savoret as part of a contractual obligation. But wasn't this contact rejectable in bankruptcy court, which would have made it simply an unsecured claim? Therefore was this simply an excuse to give a gift to a departing executive? In my opinion, this money should be returned to the Lehman bankruptcy estate.

It is completely incomprehensible that the board would allow these payments when other workers had their contractual severance payments simply cancelled, according to reports in the New York Post and Bloomberg. Many Lehman employees, the owners of 30 percent of Lehman?s equity, were wiped out in this debacle.

To make matters worse, the bonus gifts came at the same time that Fuld was imploring Treasury Secretary Paulson to bail out the bank with taxpayer money. This rightfully gives Wall Street critics fodder for their complaints about undue executive compensation.

The Lehman failure arguably was a big cause of the current crisis. The ensuing lockup of the credit markets caused by banks to stop lending to each other for fear their counterparty might end up in bankruptcy court like Lehman.

This sorry episode on Wall Street only does further to highlight the need for better corporate governance controls to reign in reckless CEOs and spur ineffective boards. We need a change in corporate America.

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