Claims that Walt Disney’s recently announced boardroom revamp is the result of relentless pressure from governance activists might be a little presumptuous, to say the least. Michael Eisner and his band of cronies have been flouting governance best practice for years and haven’t really given two hoots about all the heckles from the wings. Until now.
The surprise turnaround follows Disney’s annual meeting announcement that it would discontinue the practice of giving audit and consulting work to the same accounting firm. Unfortunately, both decisions seem more closely linked to Enron’s woes and the mainstream focus on bad governance than they are to a genuine acceptance of the logic behind good governance. Disney’s hiring of prominent corporate governance guru Ira Millstein to conduct a review of its changes – and suggest others – adds PR polish.
That’s not to say the changes or Millstein’s appointment are bad things. Far from it. They’re a move in the right direction – just for all the wrong reasons. Whether it signals a real commitment to good governance remains to be seen.
Among the changes are a new standard for director independence and an end to business relationships between board members and the company. These are crucial changes for Disney. The board has been criticized time and again by governance activists for being staffed by Eisner’s friends and former Disney employees. The fact that Disney has underperformed the S&P 500 index by 30 percent over ten years has not helped.
Director independence and the consequent ability of the board to keep a watchful eye on executives has become a crucial tenet of the governance movement, not just in the US but around the globe. The need for some form of ‘independent’ supervision of management at board level is accepted as best practice in most markets. Indeed, a January 2002 European Commission report by – wait for it – Ira Millstein’s law firm, Weil Gotshal & Manges, stresses the importance of this supervision for most corporate governance systems across the EU.
That being the case, it would take a brave soul to point out that, sometimes, just sometimes, complete independence can mean a relative lack of knowledge. Step up to the podium Lord Young, outgoing president of the UK’s Institute of Directors.
The former Conservative government minister put a cat among the pigeons in late April by daring to suggest that non-executive directors – those that perform the independent, supervisory role in the UK system – should be abolished. Why? Because, he asserted, most executive teams can run rings around independent outsiders by simply being ‘not too forthcoming’ in certain areas. The idea that ‘part-time outsiders’ can police full-time executives is nonsense.
Not surprisingly given its membership, the Institute of Directors disowned Lord Young’s comments as being of a ‘personal’ nature. And corporate governance activists have since stuck their oar in to insinuate that Lord Young might have lost the plot a bit in his old age.
But even if the ravages of time have caught up with Lord Young, he makes an interesting point. In many markets, best practice governance relies heavily on independent directors, many of whom hold multiple directorships, to police executives. While there’s a real reason to fear the uncritical cronyism practiced by the likes of Michael Eisner et al, there should be a parallel fear of too much ‘independence’ among those directors charged with overseeing executives. After all, too little inside knowledge of what really makes a particular company tick is just as bad and as dangerous as too much knowledge.
The corporate governance world has its own band of cozy insiders and sometimes it does them good to have to deal with difficult questions of their own.
