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Commentary: Just How Independent Are These "Lead Directors"?


In February, Kohl's Corp. did something many boards are doing these days: It designated a presiding director to convene meetings of the board's outside members. After a wave of corporate scandals, companies are seeking ways to reassure shareholders. The presiding or lead director, who's supposed to be independent of management and able to ferret out information, is one response.

There's just one problem: Some lead directors seem to have as many ties to management as to shareholders. Consider Kohl's choice. For 34 years, William S. Kellogg worked at the Menomonee Falls (Wis.) department store chain, ultimately rising to the position of CEO before relinquishing the title in 1999. For a decade, he worked alongside the man who would replace him as CEO, R. Lawrence Montgomery. As presiding director, Kellogg's job is to advocate for Kohl's independent directors, yet under proposed New York Stock Exchange rules he doesn't qualify as one. Kohl's and Kellogg declined to comment.

In the post-Enron era, companies have rushed to appoint lead directors as part of a bigger effort to shore up governance. Most, including Alcoa, Dow Chemical, and Intel, have chosen directors free of ties to management and with longtime board experience. With the memory of so many spectacular board failures, from Enron to WorldCom, still fresh, there's no doubt that overall, directors have become more proactive. Dozens of boards, for example, trimmed or eliminated bonuses for poorly performing CEOs in 2002. Sidney Taurel at Eli Lilly & Co. volunteered to cut his pay to $1 after Prozac sales fell off following patent expiration, and the board gave him nothing else except for 350,000 (now underwater) options.

Still, at some companies, reform seems to be more about appearance than substance. A strong lead director should help to head off crises and help the company weather those that are inevitable. But that's only possible when he is truly independent of the executives he's charged with governing. When he's not, his presence may actually stifle debate and result in what Eleanor Bloxham, president of the Corporate Governance Alliance, a consulting firm, calls "the unquestioned status quo."

Nobody demonstrates the pitfalls better than Frank E. Walsh, former lead director of Tyco International Ltd. Under disgraced CEO L. Dennis Kozlowski, Walsh chaired the compensation committee and controlled two companies that did substantial business with Tyco. He also received $10 million -- plus $10 million more for a charity -- for orchestrating Tyco's disastrous 2001 merger with CIT Group Inc. For six months, Walsh kept the payments secret. When they were disclosed, the company lost nearly $17 billion in value in a single day. Walsh resigned from the board, pleaded guilty to securities fraud, and agreed to repay the cash plus penalties.

Despite that grim example, other companies have opted for less-than-independent lead directors. At Walt Disney Co., the law firm of former Senator George J. Mitchell (D-Me.) has received $2.5 million in fees from the company since 2000, and Mitchell himself has had a $50,000-a-year consulting contract -- financial ties that were severed in 2002. Disney said the board found Mitchell "independent by any measure," and Mitchell maintains that he "always felt completely free to express [his] views."

At Home Depot, Invemed Associates LLC, an investment bank run by lead director Kenneth G. Langone, underwrote $500 million in company notes in 2001 and until 2002 received $100,000 a year in consulting fees. Home Depot says Langone no longer has "any material relationship" with the company and meets the NYSE's proposed independence rules, while Lagone says his long-standing financial ties to the company haven't compromised his independence.

The predicament for many companies is that the best lead director candidates -- those with lots of experience and a rapport with both management and the board -- are the same directors who, in a less governance-obsessed age, developed financial ties to their companies. They may be capable of acting independently. But for the title to mean anything, they must hold themselves to a higher standard of independence -- and hold management at arm's length.

Corrections and Clarifications

While William S. Kellogg does not meet the New York Stock Exchange's proposed standard for director independence, the NYSE proposal contains a provision allowing current directors who don't meet the standard to be grandfathered in during a transition period.

By Louis Lavelle

With Dean Foust in Atlanta, William C. Symonds in Boston, and Ronald Grover in Los Angeles


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