NEW YORK – Corporate boards are supposed to act in the best interest of their companies and shareholders. It's now pretty clear that many weren't doing enough of that.
Tyco, Enron, WorldCom and the list goes on. Scandal after scandal this year has painted an ugly picture of corporate boards that weren't critical, weren't tough or weren't watching over the business. Many became nothing more than puppets to top management.
That's why regulators are moving to crack down fast on corporate boards by implementing stringent rules that knock out corporate cronyism and force companies to hire independent outsiders who are held accountable for their actions.
Sitting on a corporate board has become a cushy job over the last decade.
Directors have been paid handsomely. The average board compensation among the 200 largest U.S. corporations jumped 10 percent to $152,626 last year, according to a survey by consultants Pearl Meyer & Partners.
And many board committees meet only a few times a year, often just to rubber stamp what executives put before them.
Boards are supposed to ask tough questions of management and probe for details in the financial statements. They're expected to know the intricacies of how the business is being run, from operations to marketing to finance.
In recent years, though, boards have become increasingly packed with people with strong ties to the company or its officers. Some are big shareholders; others do business with the firm. Regardless, few are inclined to raise critical questions that might hurt their own relationship with the company.
Boards have also ceded too much power to management, a result of the superstar status that many executives took on during the booming 1990s.
Successful CEOs, namely those who could increase shareholder value, were in hot demand, and boards were eager to keep their top talent happy. They didn't want them to leave for a better pay package or more corporate control.
To placate them, the boards indulged their every whim. What CEOs wanted, they got, especially when it came to compensation.
General Electric CEO Jack Welch was perhaps the most coveted executive in the world, having built GE into a $480 billion multinational conglomerate that sold everything from light bulbs to jet engines.
So when Welch was negotiating his retirement package more than four years before it would begin, the GE board agreed to give him everything, even picking up the tab for his dry cleaning.
Now the Securities and Exchange Commission is investigating why most of these retirement perks never were detailed in GE's annual proxy statement to shareholders. Welch agreed this week to give up most of the perks.
At Tyco, then-CEO Dennis Kozlowski and then-CFO Mark Swartz built the company into a mammoth conglomerate that makes everything from coat hangers to medical devices.
But now they've been charged with allegedly stealing $170 million from the company and obtaining $430 million through the fraudulent sales of securities.
What the board knew is still in question, and prosecutors said last week that the directors were misled by corrupt executives. But they also alleged that three of Tyco's 11 directors received payments from management, including one paid to help broker an acquisition.
And that's just the latest examples of questionable board actions.
At Enron, board members waived the company's code of ethics to approve the complicated partnerships set up by former CFO Andrew Fastow that eventually caused the company to bleed to death. WorldCom directors completely missed the accounting shell game the company was playing to make itself appear more profitable.
Holding corporate boards to the same accountability standards applied to executives requires sweeping reforms. It's no simple thing.
Already, both the New York Stock Exchange and the Nasdaq Stock Market have come up with proposals for new requirements that companies must follow to trade stocks.
Among the many changes they both would like to see is the insistence that independent directors hold the majority of board seats. That means no connection whatsoever between the board member and the company.
They also want to require that the independent directors regularly meet without management to foster a more open dialogue.
While the SEC considers the proposals by the NYSE and the Nasdaq, some in corporate America are already implementing changes in an effort to restore investor confidence.
Tyco, for instance, said its board voted not to support the re-election of nine of 11 directors.
Others companies are hard at work looking for independent board members willing to dedicate lots of time to analyzing their business. Gone are the days when directors will be able to sit on more than a few boards.
Sitting on a corporate board is among the most important jobs in business. Directors are supposed to be the protectors of the company and its shareholders.
In this time of corporate turmoil, that role needs to be restored and board members held to a higher standard than ever.