Despite exhaustive analysis and debate about corporate governance practices, as well as a dose of federal legislation aimed at improving them, professional risk managers strongly disagree about what constitutes effective corporate governance, according to a survey by Allianz Global Risks.

 

Thirty-nine percent of 115 respondents who recently attended the annual Risk and Insurance Management Society Inc. conference in Chicago believe that the Sarbanes-Oxley Act will significantly reduce corporate malfeasance. But another 33 percent don't think it will, and 28 percent don't know if the legislation will be effective. (The respondents represented a broad range of industries; 87 percent are from North America, and 65 percent work at companies with more than $500 million in annual revenues.)

 

"We don't think legislation is a substitute for good risk management programs. We are looking at a company's overall corporate governance program, and more importantly, if it is ingrained in daily corporate behavior," says Brian Gauen, vice president of underwriting for directors and officers (D&O) liability insurance for Allianz Insurance Co., the U.S. unit of Allianz Global Risks. "Corporate governance practices have a direct impact on the availability and pricing of D&O insurance."

 

Significant divergence in corporate governance programs exists beyond Sarbanes-Oxley. For example, 27 percent of respondents said their companies don't have a formal "whistleblower" process.

 

"Given that whistleblowers proved instrumental in uncovering fraud in recent high-profile cases and that such a policy is one of the easiest elements of a corporate governance program to put in place, it's surprising more companies haven't done so," says Gauen. "It raises questions about whether companies have tackled tougher challenges that would focus on prevention rather than uncovering wrongdoing after the fact."

 

 

Struggling European telecommunications companies need to reinvent themselves and cannot count on an economic upturn to resolve deep-seated structural problems, say consultants at Mercer Management Consulting.

 

Mercer based its study on 25 key firms, including giants like Nokia Corp. and Ericsson, representing about half of the global telecommunications market. The firm found a major paradox: Despite a record number of bankruptcies in recent months, profit warnings and disappointing results, volume demand for key services like Internet access, cell phone acquisitions and subscriptions to multi-channel packages have actually equalled or surpassed forecasts.

 

Mercer telecom consultants in Paris argue that the industry's troubles have been largely the result of "me-too" strategies. "Deregulation, the wildfire growth of some segments (cell pones, Internet data) and overvaluation by analysts combined to pull companies into a breakneck race to be among tomorrow's winners," says Nicholas Teisseyre, a Mercer vice president. "In doing so, they focused primarily on speed, and they all designed easily reproducible strategies without really trying to innovate and differentiate themselves."

 

While the telecom markets worldwide have been in a prolonged slump, potential growth sources include information processing services and DSL voice features, Mercer maintains -- provided companies can create new models and brand extensions. To do that, the company says, telecom firms should look at mature industries like airlines, mass-market retailing, autos and banking to see how successful companies have challenged the status quo.

 

 

It shouldn't exactly come as a revelation that as major airlines like UAL Inc., AMR Corp. and US Airways Inc. struggle with solvency amid a confluence of terrible circumstances, the suppliers to those companies are also hurting. "There is literally a sea of secondary companies that are suffering," says Richard K. Hollowell, director of Corporate Recovery, Capital Advisory & Litigation Support Services at Rachlin, Cohen and Holtz, an accounting and corporate recovery firm in Miami. Hollowell, a 30-year veteran of the turnaround business, ticks off a list of beleaguered companies: parts suppliers, authorized repair stations, companies that fabricate the skins of planes, flight training companies, caterers.

 

While news about the aviation industry is dominated by the giant carriers and their ongoing woes, "the industry actually has a lot of moms and pops," Hollowell says. "Our clients are generally doing $10 million to $75 million in sales" and are finding it difficult, if not impossible, to get bank loans. The biggest banks have largely "redlined" the entire sector, he says, and smaller lenders don't have the expertise to effectively underwrite the necessary debt.

 

In this environment, Hollowell says, his firm has "jumped onto the borrowers' side and negotiated forbearance agreements and discounted payoffs as high as 90 cents on the dollar." Replacement financing "is a killer," he adds, "so we often look for a merger partner."

 

He talks about some aviation clients and their unrealistic hopes. One, he recalls, had "soft offers" at 6.5 times EBITDA, but Hollowell concluded those offers would never fly. He negotiated a "firm" offer for far less, 4.1 times EBITDA, "but the company threw that in the trash. Then six months later, they lost a big client and 36 percent of their business, and suddenly they couldn't sell it for half of what we had gotten for them."

 

Still, Hollowell doesn't blame most suppliers for their predicament. "They're so reliant on the trickle-down business [from the carriers] that it's hard to insulate themselves from the problem. They're caught, no matter how good a job they've done on curbing expenses."

 

Nor does he see any real likelihood of improvement in the near term. "There's no end in sight; the business community won't travel as it once did. And, let's face it, the model for most airlines doesn't work."

 

 

Talk about a corporate board that has heard the message about independence. Directors at Tenet Healthcare Corp. are undergoing a transformation that will by later this year mean its 10-member board will comprise nothing but independent directors -- no management presence whatsoever. That situation became apparent after the troubled hospital company's chairman and CEO, Jeffrey C. Barbakow, agreed to step down as chairman and relinquish his directorship.

 

"When we talk about independence, we really mean it," said Barbakow, who insisted that the idea of stepping down from the board was his idea.

 

That kind of structure "doesn't make sense," counters Roger Kenny, managing partner at Boardroom Consultants in New York. "They've gone too far. Independence doesn't mean separation -- they're forgetting who runs the company. Their job [as a board] is to monitor the process and have picked the right people… The board shouldn't be trying to run the company."

 

Barbakow's decision to resign the chairmanship reflects another governance idea that has been gaining traction, though slowly -- naming a chairman separate from the CEO. The Wall Street Journal reported in April that, based on 2001 data, three-fourths of the companies in the S&P 500 have one person holding both titles.

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