Stanley Gold on Issues of Corporate Governance

On February 17th, Stanley P. Gold addressed the HBS students in the Spangler auditorium. In a continuation of the Leadership and Values Initiative’s Distinguished Speaker Series, Gold remarked on the topic of corporate governance, followed by a spirited Q&A session.

Gold currently serves as the President and CEO of Shamrock Holdings, a private equity firm based in Burbank, California. He brought a wealth of experience and ideas regarding appropriate corporate governance, having served as a director of numerous public and privately held companies. Most notably, he served for nearly 20 years as a director of The Walt Disney Company until he resigned in 2003.

Mr. Gold presented four inherent weaknesses that undermine corporate governance in the United States. Providing context for the debate, Gold began his remarks referring to the Sarbanes Oxley Act of 2002. Although well-intended, the Act fails to address many core problems confronting board rooms in corporate America today, Gold explained. “Sarbanes Oxley is just another Christmas ornament on a Christmas tree with too many rules.” In essence, Gold posits that technical or legal independence

of directors (as required by Sarbanes Oxley) is only part of the solution. The core problem is a lack of qualified directors.

To substantiate this assertion, Gold cited the following four problems:

1. Most directors don’t know how to grade managers based on financial results. Citing a 2003 WSJ study, the majority of today’s directors failed a basic accounting competency exam…even after a 3-day preparation course!

2. Many companies recruit directors not for their industry or company knowledge, but for aesthetic purposes. “Most CEOs collect directors like a child collects pretty pebbles” Gold commented.

3. Directors don’t or can’t spend enough time getting to know the company and industry. Reading a summary packet of information on an airplane a few hours before quarterly board meetings is insufficient preparation to have meaningful impact as a director.

4. Most directors receive company and industry information directly from management, without proactively seeking other sources. This limits directors’ ability to accurately anticipate problems: by the time a legitimate problem becomes apparent, it is likely too late to fix.

Gold proceeded to outline twelve potential solutions to these problems.

The guiding principle of his recommendations is transparency: “good decisions are made when you put a lot of sunshine on the problem.” His recommendations include:

1. Each director needs to pass a proficiency exam. Taxi cab drivers, accountants, lawyers, etc. are each required to pass some type of competency test…why not directors?

2. Each director should be required to participate in continued education and to pass an annual director’s aptitude test. With new laws, challenges, and issues constantly surfacing, it is critical that directors keep abreast of current trends in order to be effective.

3. Each board member should stand individually for election by shareholders. This would take away group mentality and make it difficult for mediocre candidates to become elected.

4. Board member candidates should address shareholders annually and explain why they want to belong on the board. Additionally, they should enumerate what contributions they have made or hope to make.

5. Each board member should be evaluated by his or her fellow directors. Gold envisions publishing these results annually in order to identify the “best and worst directors.”

6. Non-managing directors should meet with the 25 largest shareholders every six months. This meeting will facilitate open and unbiased perspectives (i.e. non-management) regarding problems facing the company.

7. Require public corporations to include two “public officials” on the board. The purpose of these non-traditional directors would be to foster more informed decisions regarding social issues such as the environment.

8. Require that the three largest shareholders or their representatives (i.e. Fidelity) sit on the board. “It’s too easy for large shareholders to sell and run rather than stay and fix” [the problem(s)].

9. Split the roles of Chairman of the Board and CEO. Having a non-executive Chairman provides the other Directors an alternative venue to more openly air their concerns.

10. The non-management Chairman should present the shareholders with a report of the issues the board faced, the board’s recommendations, and the results of the past year. [similar to #3].

11. The CEO should be the only management representative on the Board of Directors. “Non-CEO management directors are useless” on the board because they rarely openly disagree with their boss, the CEO.

12. Require all non-unanimous board votes to be published and made available to shareholders. Shareholders need to know what issues were hotly debated and who voted for what. Directors can’t be allowed to hide.

Following his talk, Gold responded to several questions from students. Because the media spotlight has been focused on Disney in recent months (Gold and Roy Disney resigning from the board in late 2003, the call for the resignation of CEO Michael Eisner, and Comcast’s hostile bid to acquire Disney), many of the students questions centered around Gold’s thoughts on Disney. Gold’s candid remarks resonated with the audience.

Regarding the Comcast offer to acquire Disney, Gold said that he prefers a slimmed down, independent Disney without Eisner over Disney as a subsidiary of Comcast. Additionally, he provided thoughts on appropriate CEO compensation based on performance metrics rather than stock performance.