For years, companies have obscured conflicts of interests behind the apple-pie image of charity. It took Enron Corp.'s devotion to the causes of several of its directors to focus investors' minds on how such gifts can potentially compromise board independence. One glaring example is John Mendelsohn, president of the M.D. Anderson Cancer Center. Enron, its then-chairman Kenneth Lay, and their foundations collectively gave the center $332,150, after Mendelsohn became an Enron director. Mendelsohn, who wasn't available to comment, is a member of Enron's key audit committee.
Legislation pending in Washington, as well as proposed rules from Nasdaq, may limit--or at least make companies disclose--such ties between management and nominally independent directors. Unfortunately, neither plan goes far enough.
Under the Nasdaq proposal, a board member affiliated with a charity that gets more than $200,000 or 5% of its budget from the company would be deemed an insider--not an independent director. On paper that sounds good, because Nasdaq rules require independent directors in key board positions. In practice, the threshold is too high. For example, Wendy Lee Gramm, another Enron director, is associated with the Mercatus Center, a think tank at George Mason University that got $60,000 from Enron and Lay--$45,000 after she joined the board. A spokeswoman said Gramm wouldn't comment. But a gift that size--half a professor's salary at many institutions--could raise questions about a board member's impartiality.
The House's "Enron bill," which passed in April, skirts that pitfall. If a companion bill passes the Senate and the measure becomes law, companies and "any executive officer" would have to disclose contributions of more than $10,000 over five years to charities affiliated with directors, as well as noncash gifts such as volunteer time. The idea: Let investors judge directors' independence for themselves. "If you compromise the independence of the board, you compromise the single most important safety net a company has," says Sarah B. Teslik, executive director of the Council of Institutional Investors.
Still, the bill doesn't mandate disclosure of all contributions. It should. Shareholders have a right to know what management is doing with the corporation's discretionary cash. Only then can they see if the company is getting a return in public goodwill.
One troubling issue: Charities are the biggest opponents of reform. Both the Council on Foundations and Independent Sector, a lobbying group for about 700 nonprofits, say that the House bill's reporting requirements would drive away donors. "[We have] always been very supportive of disclosure, openness, and accountability, but it has to be reasonable," says
IS President Sara E. Melendez. Reynold Levy, president of New York's Lincoln Center for the Performing Arts, fears the paperwork would be "an administrative nightmare."
They have a point. "Any executive officer" is too vague. Does Congress really want to include private donations of every vice-president? Rules on noncash donations also beg for definition. "How do you value an in-kind contribution, such as going to meetings? If a CEO or top officer is making $2 million, what is his time worth?" asks Samuel L. Hayes III, a Harvard Business School finance professor who's on the boards of Tiffany & Co. and Swarthmore College.
Clearly, charitable ties don't compromise all directors. But appearances matter. The best test for a contribution's propriety is the blush test: If the thought of telling the world about it makes executives or directors red-cheeked, it's probably a bad idea. By Joseph Weber
With Mike McNamee in Washington