Date: 3.04.2002
Shareholder-rights agitator Nell Minow was early in warning about Enron's board. Now she has devised yet another way to let directors know. . .
Who cares about something as abstract as "corporate governance"? With the sudden collapse of Enron, plenty of big investors do. A fair assumption is that the catastrophe would not have occurred if the directors--in particular, members of the audit committee--had extracted their heads from the sand.
It's a good told-you-so moment for Nell Minow, who, with partner Robert Monks, has made a career of lobbying for more accountability in corporations. In 1986 she joined Monks at his firm called Institutional Shareholder Services, where they advised institutional investors on proxy voting and used their podium to campaign against poison pills and insider directors. Next the pair started a money management business that bought shares of mismanaged companies, on the theory that a proxy battle might shape them up and realize untapped values. They sold both of those businesses. Their third venture is just at the starting stage: the Corporate Library, a Washington, D.C.-based research outfit that will rate boards of directors and individual directors on their diligence in protecting the shareholders who elect them.
Minow can lay no claim to knowing ahead of anyone else about the shenanigans that were going on at Enron, but she can take credit for warning, in general terms, that the board didn't look like a committed one. In an October 2000 speech to the National Association of Corporate Directors, she noted that 4 of Enron's 13 directors at that point owned no stock in the company, an unusual situation. "You can't count on directors paying a lot of attention if they don't have a financial stake," she said.
Minow, 50, and Monks, 67, will publish some of their director ratings freely but aim to make a business out of selling the details to institutional investors and to the insurance companies that sell director- and officer-liability coverage.
Some early grades: Lucent's directors get a resounding F for a multitude of reasons, including authorizing the purchase of a golf course (see next page) as a management perk a few years ago. The Conseco board gets an F for giving Chief Gary Wendt a $45 million cash signing bonus: Corporate Library thinks a rescue artist should deliver results before getting a big payout. Minow and Monks reward Waste Management's board with an A for running the company while its chief executive was ill.
Says Minow: "I am not trying to tell companies what color the widgets should be. I am trying to make sure that the system of checks and balances in corporate governance works." But what gives these self-appointed guardians the right to judge what's in investors' interests? Just this: their success in spotting companies that could benefit from more attention to shareholder value.
Monks and Minow opened Lens Investment Management in 1992, playing a role in a decade of upheaval in the boardroom. This was when directors discovered that they were not, as John Kenneth Galbraith had opined in his 1967 book The New Industrial State, mere pawns of the chief executive; they could fire the chief. They did just that at IBM, Kodak, Westinghouse and 16 other big companies. Lens claims a 26% average annual return for the eight years to September 2000.
The S&P 500 returned just 18%. Monks and Minow sold Lens for $20 million in a deal in which Hermes, a British pension fund, bought the Lens name for use in Europe, and Relational Investors, a San Diego money management firm with a similar philosophy, took over its clients. Minow's 13% stake gave her a take of $2.6 million. They sold their proxy-advising firm, Institutional Shareholders, for $13 million in 1995 to Thomson, the Canadian business-data company, netting Minow $780,000 for her 6% stake.
If Minow is something of a scold, it could be because public service runs in her genes. Her father, Newton Minow, a lawyer who once sat on several boards, including Aon's, was the Democratic chairman of the Federal Communications Commission in the 1960s; her mother, Josephine Minow, headed a child-abuse prevention group. In a famous speech in 1961, her father lambasted the television industry for creating "a vast wasteland."
Nell and her two sisters, each of them now lawyers, were forbidden to watch TV. When she got to Sarah Lawrence, she did a little catching up on the medium. Then the censure gene reasserted itself. Since 1995 Minow has been running a Web site called Moviemom.com on which she rates the suitability of kids' movies. The historical movie 1776 gets five check marks, the highest rating. The recent version of The Nutty Professor gets a pan. Minow and husband David Apatoff, a Washington attorney, have two kids, 15 and 17. Do her kids see movies with low ratings? Minow thinks not.
After getting a University of Chicago law degree in 1977, Minow got interested in corporate governance after meeting Monks, then a Labor Department administrator, in Washington. Corporate Library, their new venture, has a staff of 12 and retains an accounting firm as they gather hard-to-find information like chief executive pay contracts, directors' attendance records and the percentage of outside directors. This part of the service is free on the firm's Web site, www.thecorporatelibrary.com.
So, there are some quantitative components, but the grades are largely subjective. Procter & Gamble directors get demerits for approving accounting in which "nonrecurring" charges are becoming all too recurring (see related story, p. 106). She knocks Hewlett-Packard directors for okaying the merger with Compaq. Credentials won't count for much. Enron filled its board with respectable types, including Robert Jaedicke, the Stanford University accounting guru, and look what happened there.
Indeed, aren't most directors smart, responsible and ethical? "That's the reason I am so interested in this issue," she enthuses. "Every director I've met is capable, honest and accomplished. The fact that they fail as a group is endlessly fascinating to me."
The Minow family tradition is alive and well.
THE GRADING GAME:
Minow hands out a report card.
Waste Management:
A
Most improved board. New board members like Robert Miller and Ralph Whitworth took interim control of company when accounting fraud surfaced and its chief executive got sick.
Johnson & Johnson:
B
This board would get an A, except that Minow wonders whether members are strong enough to properly oversee the company's terrific chief executive, Ralph Larsen.
Schering-Plough:
C
Too many insiders and interlocking directorships with Honeywell and Merrill Lynch. Chief Richard Kogan got a hefty $11 million in realized options in 2000, though the company performance lagged peers.
World Wrestling Federation Entertainment:
D
This board didn't oppose WWF's screwy idea of the year, the XFL, its doomed football league. Another tip-off: The chairman's contract includes $50,000 for cleaning expenses.
Lucent Technologies:
F
Take your pick: multiple repriced options, horrible industry performance, bungled chief executive succession, big accounting questions and, to top it off, the purchase of a golf course.
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