Money for Nothing: How the Failure of Corporate Boards Is Ruining American Business and Costing Us Trillions
by John Gillespie and David Zweig

–Reviewed by Adam Fleisher

Over the last decade, the business world has suffered from a number of well-known disasters. Companies like Lehman Brothers and Washington Mutual collapsed, wiping out billions in shareholder value. Others like Tyco were essentially looted by CEOs who enriched themselves at the expense of their shareholders. And then there is the lucrative compensation of many chief executives – to say nothing of the rather generous buyouts for those who are asked to leave.

But for all the outrage over these antics, Money for Nothing argues that not enough attention has been paid to corporate boards of directors that didn’t do their jobs. Boards are the shareholders’ advocates and the supervisors of management. They should be “informed, active, and advisory,” and need to have “an open but challenging relationship with the company’s CEO.” As a result, they should have known that financial companies were massively overleveraged, that CEOs were overwhelmed and unaware of the extent of the risk they had taken on. And they should have prevented CEOs from bilking their companies, rather than being complicit in enriching management (and themselves).

Gillespie and Zweig offer a number of explanations for why boards neglected these duties. To begin with, the CEO often controls the board, as opposed to vice versa, by selecting nominating committee members, screening candidates, and even recruiting friends and business associates. Making matters worse, directors generally don’t have any incentive to govern the company; they have no real financial or professional stake. The only thing that can hurt a board member’s career is running afoul of the go-along-to-get-along culture – presiding over a sinking ship doesn’t seem to matter. So it’s not terribly surprising that boards were an afterthought in the post-bubble recriminations. Plus, bad corporate governance is as old as corporations. The authors note that Adam Smith saw the inherent problem when he wrote The Wealth of Nations: boards watch over other people’s money, not their own.

There are, of course, directors who do care, and try to make a difference. But a lot of strong and diligent board members who pressure CEOs tend to be isolated and ostracized. As for the shareholders themselves, it takes a minor miracle to exert any influence over the management of a company. Enraged shareholders with an emotional stake in a company might be willing and able to wage a proxy fight or battle through the courts. But most investors have neither the resources nor the inclination to try to take on with a huge company. It’s a lot easier to sell and walk away.

Though they present plenty of horror stories of companies that have been driven into the ground or basically looted by top management, the authors of Money for Nothing aren’t radical anti-capitalists trying to indict the system but rather two insiders trying to restore and preserve it. Since boards are “the only practical way for shareholders to be represented within companies,” if they don’t provide proper oversight, shareholders cannot continue to trust companies with their money. Gillespie and Zweig worry that without some improvement equity markets will inevitably shrink – why invest in something you cannot control?

Luckily, the situation is not hopeless. The authors offer a lot of suggestions, which generally divide into improving boardroom culture, improving accountability, and both facilitating and encouraging better shareholder participation. But because the problem is primarily social and cultural, regulatory efforts can’t achieve much. Post-Enron accountability reforms, for instance, did not prevent a new bout of governance disasters. Instead, they enabled directors to avoid responsibility by focusing on “legal processes and box-checking exercises” as opposed to actually governing. Reform, according to Gillespie and Zweig, will come “only from improvements in the composition and culture of boards.”

There are signs that this culture change might be happening. In desperate times – with companies that have really been damaged by neglect or a CEO’s pelf – a board that provides responsible oversight, that is informed and actively involved in management decisions of the company, can make a difference. For instance, Tyco’s new CEO decided to get rid of the old board to restore credibility after the company’s scandals. The new board made a difference because they “implemented virtually every recognized best practice for governance,” such as communicating with shareholders and regulators, and real annual evaluations of both the CEO and the directors. In other words, all it took to be successful was to try.

Excerpt: “Chesapeake’s cofounder and CEO, Aubrey McClendon, was pegged at No. 134 on the 2008 Forbes 400 list of America’s richest people…. However, because McClendon had borrowed heavily to bet even more on his stock holdings, he got caught in mid-October’s stock market crash with a margin call that forced him to sell 31.5 million Chesapeake shares over a three day period…. Thanks to the board, which McClendon had handpicked over the years, his bad fortune lasted only eighty-two days. The five-year employment agreement he had signed in 2007 was torn up and a new one drafted. On New Year’s Eve, as investors were counting their losses and taxpayers were bailing out the nation’s largest banks, the Chesapeake board bailed out McClendon with a $75 million bonus and new pay package. As a result, his $112.5 million compensation in 2008 was the highest among large public company CEOs.”

Further Reading: Lords of Finance: The Bankers Who Broke the World by Liaquat Ahamed and The End of Wall Street by Roger Lowenstein

*Photo courtesy zen.