Too Close for Comfort

Directors' cozy ties with the companies they oversee often end up benefiting management more than the stockholders they represent.

By ROBERT TRIGAUX

ere is one item public relations guru Robert Dilenschneider will never list on his long resume: poster child for what directors of public companies should not be.

In the mid-1980s, Dilenschneider served as an outside director on the board of Ideon Corp. in Jacksonville, a job that each year paid a hefty $50,000 fee. At the same time, Ideon paid Dilenschneider's firm $330,000 to handle public and investor relations work.

When Ideon tried to sell Vatican Museum reproductions such as Sistine Chapel "fragments," the company relied on another firm owned in part by Dilenschneider. And when Ideon paid more than $1-million to a software developer in Phoenix, that company turned out to be co-owned by Dilenschneider's nephew.

Dilenschneider, who once ran the giant Hill & Knowlton public relations firm, "will not be available" for comment and the Ideon events are "history," said a spokesman at the Dilenschneider Group in New York.

But Dilenschneider's cozy ties to financially troubled Ideon created striking conflicts of interest for a director who was supposed to make sure corporate managers did the best they could for shareholders -- not themselves.

Responding to the lack of independence by directors, big institutional investors and shareholder advocacy groups are pressing corporate boards to stop padding their own pockets and become tougher, smarter stewards of public corporations. The goal is simple: Better boards will demand that managers of weak companies shape up. That rewards shareholders.

"It's the best of times and the worst of times," said shareholders rights advocate Nell Minow, a principal at the Lens Funds, a Portland, Maine, money manager that invests in underperforming companies. Professional groups such as the National Association of Corporate Directors and big pension investors such as the California Public Employees' Retirement System, or CalPERS, are demanding higher standards for directors.

On the other hand, Minow says, the New York Stock Exchange wants regulators to approve rules that would lessen disclosure about executive compensation and make it harder for shareholders to fight big pay increases for chief executives.

No definition exists for what makes an "independent" director. Shareholder advocates suggest the best independent director is one with no business ties (other than owning shares) in a company, no family ties and at least an arms-length relationship with top executives. A directorship in the 1990s should be a tough job, they say, not a social invitation to join the corporate elite.

A 1996 survey by the St. Petersburg Times found an extensive array of cozy business relationships between directors and many of the public companies in the Tampa Bay area they are supposed to monitor. Among the more common ties: Outside lawyers serving as directors for companies that employ their law firms. Outside directors enjoying lucrative consulting jobs with the company. The deals were disclosed in the annual proxy statements of the companies that are sent to shareholders.

This fall, the Times reviewed more than two dozen proxies of companies in the Tampa Bay area and elsewhere in the United States. While some of the business ties with corporate board members from 1996 were discontinued, many remained.

And other deals were disclosed. At Tampa's Sykes Enterprises, for example, an outside director was paid a six-figure fee for consulting. At Paxson Communications in West Palm Beach, the chief executive served as the sole member of the compensation committee that sets executive pay.

In another case, a Florida thrift that was going public stated in the prospectus that 1 percent of gross income went, and would continue to go, to the thrift's law firm -- which just happened to be owned by the thrift's chief executive.

At Republic Industries in Fort Lauderdale, billionaire Wayne Huizenga's deals between directors and the affiliates and the pro sports teams he controls are so intertwined, it is hard to find an independent member of the board.The good news for those seeking change is that some corporate boards, which once ran as little more than rich-boy fraternities, are trying to become more accountable. Tougher rules are emerging that define what independent directors can and cannot do.

"Boards are becoming more proactive," said John Nash, chairman emeritus of the National Association of Corporate Directors. Between 1992 and 1996, Nash says, 126 chief executives of Fortune 500 companies were forced out by their boards.

Adding momentum are the regulators. The Securities and Exchange Commission is worried that corporate boards are not on top of the rising volume of corporate problems such as accounting fraud and inaccurate earnings reports. SEC officials are warning directors they must take more responsibility for their lack of action.

As proof, the SEC is considering a proposal that would require directors to sign a company's financial statements to certify they have seen them and that there are no misstatements. The SEC also is cracking down on corporate boards that turn their audit committee -- a critical subgroup of directors -- into a dumping ground of the weakest board members. Improvements in director responsibility are most apparent at some of the boards of Fortune 100 companies. Years ago, the nation's largest corporations were among the first targeted for change by big investor groups.

Directors who used to be paid in cash increasingly are paid in company stock to boost their personal stake in the corporation they oversee. In other cases, companies are starting to halt or limit the business dealings between outside directors, or those not employed by the company, and their corporations.

The bad news is that improvements are slow, at best, in coming to the largest corporations. And so far, they are almost undetectable at midsize and smaller public companies such as those that dominate the Tampa Bay market and much of Florida.

Nash predicts the changes at big company boards will trickle down to mid-caps and closely held companies as institutional investors switch their focus and clout to influence smaller corporations.

Boards of directors can respond with some backbone -- even when their adversary is one of the most intimidating chief executives in the country. When "Chainsaw" Al Dunlap, the fearsome turnaround artist and chief of Florida's Sunbeam Corp., could not explain the company's sudden losses and funny accounting, it fell to the board in June to investigate and ultimately oust Dunlap.

One member of the Sunbeam board is Stetson College of Law professor and shareholder activist Charles Elson. Bolstered by his experience at Sunbeam, Elson says boards are becoming more accountable to shareholders.

"We've come a long way," Elson said. "Boards are much more assertive than they were five years ago." He attributes the gains to more outside directors owning stock in the companies they are supposed to govern. Even pro-business groups such as the Business Roundtable, which long-ignored corporate governance issues, are starting to adopt standards for directors.

But many experts remain dissatisfied with the pace of change.

For Minow, described once by Forbes magazine as "bringing sweaty palms to the executive suite," one current target of the Lens Fund is Juno Lighting Inc. of Illinois. Why? Its board is full of company insiders.

Also on the Lens hit list: Reader's Digest. After investor complaints, the New York company recently auctioned off part of its vast art collection to put money to more productive use for shareholders.

CalPERS, the huge pension fund that actively pressures underperforming companies, recently targeted two companies for overhauls. Michaels Stores, a Texas chain of craft stores, was near bankruptcy until CalPERS helped pressure changes in management. California's Sybase Inc., a software company that has lost money for years, changed its practices and is expected to earn a profit in 1999.

Like CalPERS, the International Brotherhood of Teamsters flexes its pension fund muscle at companies whose boards are not up to snuff. But Teamsters activist Bart Naylor admits it is "embarrassing" to name only a few companies out of the Fortune 500 -- such as Walt Disney Co. (Business Week's choice in 1997 as the country's worst corporate board) and Archer Daniels Midland -- that have changed their policies of "nepotism and cronyism" in favor of shareholders.

"I think the criticism against weak boards is growing more common and sharper," Naylor said. "Still, I don't think we are seeing the average board growing more independent or expert or diligent in overseeing management."