FE: What's your sense of how bad things are? Is there a direct relationship between dysfunctional boards and corporate scandals?

 

Ward: I think the relationship is pretty apparent between the two. The problem is to say that this or that particular board at Enron or HealthSouth was asleep at the switch, but that doesn't really represent what's happening with corporate governance. I think that's a bit dishonest. Essentially, if you have a disaster in the works at a handful of companies, that doesn't mean that all of the other companies out there would be able to [avert] a disaster if it were coming. It's one of those thoughts that doesn't make us sleep easily at night, but I think it's closer to the truth.

 

FE: You've noted that directors have a difficult if not impossible job, particularly with the way information is bombarding people these days. What are some of the biggest problems facing individual board members?

 

Ward: Probably the first is that the members, especially outside directors, have no way of saturating themselves to the proper level with financials and general follow-up on the company. One of the things I know our readers complain about is getting bombarded with a huge wad of material for the board meetings, or else it's on a "just ask management and we'll tell you" basis. There's a depth problem, either too deep or too shallow.

 

FE: And not too many people get the mix right…

 

Ward: They don't, and also most boards haven't sat down and looked at it with management and said, "Here are the measures we need to see, here are the medians we want to be tracking - this is the stuff we need to know to get a good blood-pressure reading on the company, to know that the internal controls are working."

 

FE: Magazines like BusinessWeek have developed annual rankings on best and worst corporate boards. Have those had an effect on reforming some of the bad apples?

 

Ward: I think they have embarrassed some of the larger companies, but I don't think they're getting to the point of the issue. The best corporate boards out there are very likely at companies we've never heard of - and conversely, some of the worst are probably at companies we've never heard of. A lot of it is how much media lineage the company has gotten for a particular scandal.

 

In the great wide world of business, [The Walt] Disney [Co.] still has a pretty terrific board of directors; no matter how much value may have been piddled away over the last few years, imagine what it would have been like if [CEO] Michael Eisner hadn't come in. They've done some things they shouldn't have done, but compared to some other hard cases out there…

 

FE: Boards used to be accused of rampant cronyism, but isn't that largely disappearing?

 

Ward: I don't think so, yet. Very little happens fast in the corporate governance world. What's happened over the last year with the Sarbanes-Oxley legislation is shocking, because [things] hardly ever happen that fast in a governance environment. The rest of the time, you're talking about a very slow process. Even at companies that annually elect members of the board, you're not going to have a massive turnover of the board.

 

FE: Most of the boards I'm aware of are smaller than in years past and have fewer insiders. Do these new demographics just make the outside directors' job more difficult?

 

Ward: I don't know. There are fewer board members. One counter-intuitive trend, if you look back over the last four or five years, is that the number of board meetings has been trending downward. Ten or 15 years ago, it was probably bimonthly. Increasingly, it's becoming quarterly. That flies in the face of the fact that these people have to do a lot more work and have a lot more demands on them. A board of directors is simply a lousy tool for everything we're demanding of it nowadays. You elect people who are part-timers, who are amateurs at the corporation, who can give a few hours a month of attention to it - now you essentially want them to act as a new level of auditor, as a cop on the beat for a corporation… You would want them to take a strong personal interest in it, but at the same time they're supposed to be extremely independent of the corporation. If you sit down and describe what you want from a board, you're literally contradicting yourself with every other requirement.

 

FE: You've written that "audit committee is an oxymoron." Certainly that's been true in many corporate scandals recently. But don't you sense some improvement there, even if it's coming at the point of a stick?

 

Ward: There is improvement on the way, but I think it will be a couple of years before we can point to any solid results. One concern I've had with Sarbanes-Oxley and its implementation by the SEC and the stock exchanges is that it's been a lot of "thou shalt not," and none of it has addressed how the board is actually supposed to do this job. All of this applies with double effect to the audit committee, because that's been the main focus of the reform legislation.

 

FE: What about giving additional resources to the audit committee, perhaps from internal audit?

 

Ward: I think audit committees need to have their own budgets and perhaps have someone dedicated to them on staff. Staff support of some kind will be a trend, but whether that would be someone from internal audit, I'm not so sure. Then you have the question, "Who does internal audit really work for?" Probably there will be some way of erecting a wall around someone on the staff who works with the audit committee to make sure they answer to, are paid by and have no other boss than the audit committee itself. But they still would have to be within the company, because otherwise you face the issue of having someone on the outside looking in.

 

FE: The whole issue of having a "financial expert" on the audit committee has gotten a lot of attention. Do you think it's had much impact yet, or is it more evolutionary?

 

Ward: It's sort of a phased-in issue. I know there is still dissatisfaction with defining "financial expertise" in this context. One of the throwaway lines from a few months ago was that Warren Buffett wouldn't be considered a financial expert for a board, and if that's the case, there's something screwy with the definition.

 

I think it's been loosened up a bit. It works on the personal level because if there is some oversight, if there is a strike suit filed against the company because of some chicanery, then someone on the audit committee - probably the chairman - is going to have to give testimony and prove his [her] "financial expertise."

 

FE: In general, do you think it's worthwhile to have an outside CFO or a retired accounting partner on an audit committee to help vet the numbers?

 

Ward: I think it's valuable, especially someone who can serve as the interpreter for the committee and the rest of the board. It's probably a great time to be a retired CFO or auditing firm partner.

 

FE: I've certainly talked to recruiters who claim to be busy trying to find these people.

 

Ward: One of the problems we're having here is the talent search aspect for boards of directors is quite a bit behind executive search. It's still very much a cottage industry. Search firms are just now starting to specialize in it because there had never been any money in it before. It's still a very inefficient market. There are a lot people out there who want to do the job, and a lot of demand to do it, but so far the twain isn't meeting very effectively.

 

FE: You talk about totally rethinking the function of boards and what we want them to do. That sounds like a very high hill to climb, at least in the short term.

 

Ward: It is, and you've raised a good point. It's very difficult to come up with an alternative to a system that's essentially written into law, and has been that way for 200 years. Even people who criticize boards of directors most strenuously don't have a good, clean-slate alternative for meeting what the board's supposed to do.

What I discuss are incremental fixes. There is an increasing drive toward shareholder democracy - an open ballot for electing board members. Currently, the board itself generally puts forward the slate for election at the next meeting. There is a move afoot to get some SEC and stock exchange regulations to allow investors who own a certain percentage of the company to nominate their own members.

 

I think that is going to be the wave of the future, but how well it will address the underlying problems, I'm not sure. Certainly, these people have no interest in nominating a chucklehead to the board, but they also have to meet the expertise and independence requirements for other outside directors.

 

Another thing that is important is sitting down with the board and working out the nuts and bolts of making the board work better on a functional level. Boards really have never addressed things like timing and scheduling - the whole thing has been very catch-as-catch-can. It's often an afterthought.

 

Could a board do a better job, use its time more efficiently and actually do more in fewer meetings? There are a lot of boards that [apparently] are, but no one has collected that body of knowledge. Business management has been developing into a science for half a century - there's nothing like that yet for boards of directors. They've got a lot of catching up to do.

 

FE: If there's one thing you'd like to see happen to the board process in the next year, what would it be?

 

Ward: I'd like to see more attention in the regulation-setting to board practices themselves.

 

FE: So, more written rules?

 

Ward: Not so much written rules as mandated procedures. There have been all kinds of [procedures] around auditing for many years that are required to make it independent and legally defensible. Maybe we need some of the same things for the board and corporate governance to give it legitimacy.

 

One of the things I have been seeing, and I think is a good step, is the idea of charters for the audit committee, the compensation committee. Those need to written, those need to be published. If the committee doesn't have one, it has to at least give a reason why.

 

I'd like to see the board [be required to] give a statement of how it functions, even offer a sample agenda. There's a lot more uniformity about how a finance department operates, how a planning department operates. Boards of directors are going to need that. They need to be [run as] less of an art and more of a science.