Defining IndependenceUnder NYSE listing requirements, bolstered last year after a string of corporate scandals, independent directors must constitute a majority on a company's board. And to be deemed independent, directors are not allowed to have any business connections with the companies they serve. But whether the Big Board's corporate governance rules address personal business relationships between management and directors is not entirely clear, corporate governance experts say. Still, these experts say that when a chief executive and a member of his board of directors jointly own an asset as potentially lucrative as a champion thoroughbred racehorse, it's hard to envision how the director can remain impartial in his role as a shareholder watchdog.
Additional ConnectionsBut a focus on Biovail's board of directors and its corporate governance policies is not likely to make investors feel any better. Camelback Research Associates, a boutique research firm that provides earnings-quality research to institutional clients, issued a warning to clients last week about the horseracing ties that bind Melnyk and Bristow. The research firm says there are also additional connections between Biovail's CEO and other current outside directors that cast doubt on the independent status of the directors. Here are some of Camelback's findings:
- Sheldon Plener, a Biovail director since 2002, is a senior partner at the law firm of Cassels Brock & Blackwell. But Plener is also Melnyk's personal corporate attorney, leading the negotiations to purchase the Ottawa Senators of the National Hockey League and Corel Centre hockey arena on behalf of Melnyk. Plener serves as a director, secretary and "Alternate Governor" of the Senators and a director and secretary of the Corel Centre. He's also on the board of directors of St. Michael's Majors, a prep-school hockey club owned by Melnyk, according to Plener's biography on the Cassels Brock Web site. Michael Van Every, a partner with PricewaterhouseCoopers, was elected as a Biovail director at its June 25 shareholder meeting and will head the board's audit committee. But Van Every and Melnyk also run in the same horseracing circles. Van Every is a steward of the Ontario Jockey Club; Melnyk is one of 70 members of the same club, according to a 2004 club roster. Van Every also owns a racehorse, Archers Bow, whose sire is Melnyk's Archers Bay.
Ties That BindLucian Bebchuk, a professor at Harvard University School of Law and the director of its corporate governance program, says the NYSE's listing requirements for independent directors do not directly address a situation in which a CEO and a director share substantial personal business interests, such a co-owning a thoroughbred racehorse. Instead, the rules bar an independent director from having a "material relationship" with the company. But at the same time, Bebchuk says the financial ties between Melnyk and Bristow are so intertwined that it would be difficult to see how Bristow would be able to take a tough, independent stance against Melnyk, if it was called for. "This case illustrates the myriad ties that can connect directors to executives," says Bebchuk. "It's likely that the rules the New York Stock Exchange has adopted are under-inclusive in terms of covering the full range of ties that might influence a director." Corporate governance expert Charles Elson takes a more expansive view of the Big Board's rules. "Independence speaks of financial relationships between a director, a company and management. This falls under that category," says Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware's business school. "The idea is that you should avoid business dealings between executives and directors. That's all. Avoid financial involvement. Then these questions wouldn't be asked." Biovail's Howling, in an emailed response to further questions, says the company has taken extensive steps to ensure that its outside directors are independent. "Our outside legal council, Proskauer
|Conflict of Interest? |
Here's a look at connections between Biovail's CEO and current outside directors
|Director||Biography||Ties to Biovail CEO Melnyk|
|Wilfred Bristow||Director since 1993; vice president and senior investment advisor at BMO Nesbitt Burns since 1991; a former member of the Royal Canadian Mounted Police.||Co-owns thoroughbred racehorses with Biovail CEO Eugene Melnyk, including a past winner of Canada's version of the Kentucky Derby.|
|Sheldon Plener||Director since 2002; senior partner at Cassels Brock & Blackwell law firm; serves on the board of governors of the Ontario Hockey League.||Works as Melnyk's personal corporate attorney; led negotiations to purchase Ottawa Senators and the Corel Centre for Melnyk, and serves on boards of both the Senators and Corel Centre.|
|Michael Van Every||Director since 2004; partner at PricewaterhouseCoopers.||Steward of the Ontario Jockey Club, of which Melnyk is a member. Owns a racehorse sired by one of Melnyk's champion horses.|
|Roger Rowan||Director since 1997; president and COO of Watt Carmichael, a private investment firm.||Board member of St. Michael's Majors prep school hockey team, owned by Melnyk.|
|Eugene Melnyk||Chairman, CEO of Biovail.||n/a|
|Rolf Reininghaus||Senior Vice President, Corporate and Strategic Development, Biovail.||n/a|
|Laurence Paul, M.D.||Director since 2002, co-founder of Laurel Crown Ventures, an equity investment and buyout division of the Louis Berkman Co. Previously managing director at Donaldson Lufkin and Jenrette.||No direct ties to Melnyk, but DLJ did underwrite two Biovail public offerings, in 1999 and 2000, during Paul's tenure.|
|Source: Biovail, Camelback Research Alliance, TheStreet.com research|