Behind Every Failed Firm, A Bad Board?

ByABC News
July 8, 2002, 12:35 PM

N E W   Y O R K, July 9 -- Corporate boards are supposed to be watchdogs in the business world. But they haven't been barking very often lately.

That's why, given the wave of scandals that has swept over the U.S. business world in 2002, the role of those boards is becoming an increasingly central issue for the would-be reformers of corporate America.

To be sure, high-profile former executives like Enron's Kenneth Lay and Jeffrey Skilling or WorldCom's Bernard Ebbers have borne much of the public blame so far for the collapses of their companies. But now, Congress and other regulators are beginning to take aim at boards, which are supposed to monitor executives and look out for the interests of shareholders.

For instance, the U.S. Senate Permanent Subcommittee on Investigations, in a report about the failed energy firm Enron that was released on Sunday, pointed a finger at the company's directors, concluding, "Much that was wrong with Enron was known to the board."

In a New York Times editorial on Monday, Sen. John McCain, R-Ariz., called for boards to be composed of directors who "have no material relationship with the company or personal relationship with its management."

And the New York Stock Exchange's recent proposal for better corporate governance, released in June, calls for at least half of the directors on any corporate board to be from outside the company the better to sound the alarm when they think things are going awry.

The Problems? Too Little Time

While boards may be under fire at the moment, some observers of corporate ethics say the current scandals have merely brought new attention to a longstanding issue.

"The problem of the passive board is an old one," says Charles Elson, director of the Center for Corporate Governance at the University of Delaware.

Still, the accounting and managing problems revealed by Fortune 500 companies have been of historic proportions. Enron filed the biggest bankruptcy claim in U.S. history last November, while WorldCom announced in June it had misrepresented more than $4 billion in expenses.