Getting Schooled on Corporate Governance, Part 3

"Clean up your own mess" and "Say you're sorry when you hurt somebody."

Boards are typically too slow in admitting mistakes and in cleaning up the resulting mess. At Tyco (TYC - commentary - Cramer's Take), for example, it took far too many months to get rid of CEO Dennis Kozlowski and CFO Mark Swartz. As I noted on June 17, 2002, in Columnist Conversation, months before Tyco's board finally ousted Swartz:

It's hard to believe CFO Swartz is still at Tyco. Either (1) He knew about all of the games going on, or (2) He was asleep on the job. There's no in between on this one.

Here's another example of poor corporate governance: The board of Electronic Data Systems (EDS - commentary - Cramer's Take) agreed to pay former CEO Richard Brown a $37 million severance package. This is hardly equitable. Only a year earlier, Brown had cut severance pay for thousands of EDS employees from 26 weeks' pay to four weeks. Instead of apologizing for Brown's severance package, the EDS board was defensive. Director Roger Enrico said, "Brown is leaving the company stronger than it was when he joined it" in 1998.

That's completely false. The company had no net debt when Brown arrived. By the end of his tenure, the company was excessively leveraged, with well over $4 billion in debt. That's an irresponsible amount of debt for a service company with a portfolio of questionably priced contracts.

A Lesson for Investors

I'll end this series on corporate governance with a lesson for investors, though it applies to directors as well. Again, this is from Fulghum's book:

"Remember the Dick-and-Jane books and the first word you learned -- the biggest word of all -- LOOK."

When it comes to corporate governance, most individual investors don't look. At a minimum, investors should read annual reports and annual proxies. In an early 2002 RealMoney column, for example, I urged readers to avoid WorldCom, then trading at $5 per share, and Tyco, then at $31, just because of corporate governance issues.

Institutional investors don't bother looking any more closely than the average individual investor. The big institutions, including many of the leading mutual fund families, often have a conflict of interest: They're voting proxies of companies to which they're also selling services. So the institutions fail to look -- in fact, I'd argue, they look away.

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Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor and portfolio manager of The Turnaround Fund, a no-load mutual fund. At time of publication, neither Alsin nor ACM held a position in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback and invites you to send it to [e-mail]. Click here to receive Arne's latest favorite stock picks from his newsletter, The Turnaround Report.

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