John Gillespie - Money for Nothing: How CEOs and Boards Enrich Themselves While Bankrupting America

How the Failure of Corporate Boards Is Ruining American Business and Costing Us Trillions

JOHN GILLESPIE and
DAVID ZWEIG

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Copyright 2010 by John Gillespie and David Zweig

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Library of Congress Cataloging-in-Publication Data

Gillespie, John.

Money for nothing : how the failure of corporate boards is ruining American
business and costing us trillions / John Gillespie and David Zweig.

p. cm.

1. Corporate governanceUnited States. 2. Chief executive officersUnited States.

3. Boards of directorsUnited States. 4. CorporationsCorrupt practicesUnited States.
I. Zweig, David. II. Title.

HD2741.G534 2010

338.60973dc22 2009032328

ISBN 978-1-4165-5993-1
ISBN 978-1-4165-9776-6 (ebook)

To my wife, Susan Orlean, la migliore fabbra

JWG

To my mother, Jeanne,
and the memory of my father,
Felix, and my son, Ben

DBZ

W E DONT COME to the subject of corporate boards as antagonists; in fact, both of us were trained and employed at the hub of the American business world, starting with the MBA program at Harvard Business School and then, over the next twenty-odd years, at Lehman Brothers, Morgan Stanley, Bear Stearns, Time Inc., and Dow Jones. We believe that well-run, responsible, and responsive corporations can exist and be profitable, and that many already do and are. Weve had the chance to see boards of directors workingor not workingup close, and weve been directly affected by them as employees, shareholders, and citizens. We have also witnessed a number of the companies where weve worked underperform and collapse in large part because of negligent or nonexistent leadership in the boardroom.

Yet even with our experience in the business world and our MBA educations, we couldnt understand how boards came to operate the way they do, and how theyve come apart; we could easily see how remote and impenetrable they would appear to most of the millions of shareholders who depend on themin spite of the fact that boards are elected by shareholders and are legally required to represent their interests.

Certainly, most individual shareholders are passive. They dont read annual reports, they dont vote in board elections, and they dont question or challenge corporate leadership. Why? Because, until recently, they trusted American business and investment. Shareholders were confident that if they put their money into companies, their investments would grow and the directors would make decisions with the shareholders best interests in mind. Not only has the current economic wreck broken peoples bank accounts and retirement funds, it has shattered something even more essential: the trust that executives and boards work openly and responsibly, and that they serve someone beyond themselvesshareholders, taxpayers, employees, customers, suppliers, creditors, or communities.

We wanted to know more about how boards have contributed to this problem and to find out how the relationships among shareholders, directors, and CEOs have gone awry. Our initial inquiry into why so many boards seem to have failed led us quickly to this realization: there is little consensus or comprehension about how boards work, let alone about how to repair their failings. It is as if the American economy has been driving a race car without having the slightest idea of how a steering wheel worksnot to mention the brakes.

We spoke with scores of board members, CEOs, consultants, accountants, lawyers, recruiters, shareholder activists, government officials, investors, and academics. We pored over the history and literature of corporate leadership and traveled the country to see the impact boards have had. To understand what directors think, we read surveys and attended conferences where board members spoke among themselves. We were surprised at how many directors and CEOs were willing to talk with us frankly, both on and off the record, about their experiences. Over time, we came to realize that they, like all of us, want to be understoodespecially now, when they are under attack. To better appreciate the dynamics of what goes on behind boardroom doors, we studied the cultural anthropology, behavioral economics, and neuroscience of corporate leaders and business decision making. To understand the institutional investors that now control 70 percent of the shares in American companies, we explored why they so often seem apathetic and routinely vote with management. We also focused on the sometimes conflicted and always costly governance gatekeepersthe professional services providers who have taken over many of the responsibilities of corporate boards, shielded directors from accountability, and helped forestall or circumvent reforms, almost always with shareholders own money.

We have tried to present examples and commentary that highlight representative issues and portray corporate leadership in all its complexity, instead of a simplistic morality tale of good versus evil. The common themes that emerge from these stories go well beyond the usual bromides about power corrupting, pride preceding a fall, and history repeating itself when its lessons go unheeded. Rather than focusing only on the failures, we have looked as well at companies and boards that have succeeded in representing their shareholders and providing models for others. Finally, we have presented a comprehensive set of measures that we believe could bring lasting reform to our dysfunctional culture of corporate leadership.

Boards have come a long way in the nearly forty years since Harvard Business School professor Myles Mace dismissed them as nothing more or less than ornaments on the corporate Christmas tree. Unfortunately, most boards havent come far enough to make a real difference in guarding and growing our investmentsand far too many remain negligent and ineffective. Most have never reached anywhere near their potential to provide the monitoring, advice, and connections that they, in theory, are paid to provide on behalf of shareholdersor even, at the very least, to be a constraint on the excessive risk and compensation that have recently plagued American businesses. The past efforts to fix corporate governance failures were well intentioned and some have been helpful in relieving specific symptoms of whatever caused the most recent collapse. But they have proven insufficient to prevent the recurring scandals and crises that have cost us trillions of dollars and now threaten our economy and quite possibly our very way of life. Our aim is to expose the seriousness of the situation and to encourage reforms before the next destructive cycle of boom and bust leads to an economic disaster even greater than the one we have recently endured.