Frank Savage's record is appalling, even by the standards
of Enron board members. He is a director of the investment firm Alliance Capital
Management (he also chaired one of its divisions), which until recently was
Enron's largest institutional investor. Alliance was nearly the last to get out
of Enron: The firm bought large blocks of stock on August 15, 2001 -- the day
after CEO Jeffrey Skilling resigned -- and continued to buy even after Enron's
October 22 announcement that it was under investigation by the Securities and
Exchange Commission (SEC).
By the time Alliance sold its 43 million shares of Enron stock, it had
lost its investors hundreds of millions of dollars, including $334 million from
the Florida state pension fund. On May 8, 2002, Governor Jeb Bush and state
officials sued Alliance for negligence.
Enron's board of directors long ago secured its place in the annals of poor
business judgment. But Savage deserves special recognition: As a board member of
both companies, he wasn't just asleep at one switch -- he was asleep at two.
The corporate world has a way of dealing with people like Savage.
For the last half century or so it has operated under a kind of gentlemen's code
in which businessmen who suffer public disgrace discreetly step down in order to
avoid further shame for themselves and the companies they serve. This honor
system has historically functioned more or less effectively -- even O.J. Simpson
left his spot on the audit committee of Infinity Broadcasting when public
scrutiny became too intense.
Many of Enron's directors complied with this expectation. Wendy Gramm
resigned from the board of Invesco; Robert Jaedicke left the board of the
California Water Service Group; Herbert Winokur Jr. stepped down from the Harvard
Corporation; and, after some prodding from organized labor, Ronnie Chan
relinquished his place on Motorola's board. "Board members are some of the most
reputationally fragile people on earth," explains Nell Minow, a corporate
watchdog who runs the Web site The Corporate Library.
But amid the overwhelming greed of the 1980s, the gentlemen's code began to
fray. Though the booming economy largely concealed it, the trend continued
throughout the 1990s. As with so much else in the business world, Enron -- and
Frank Savage in particular -- brought the problem to a head. Savage refused to
quit: Not only did he decline to forego his $70,000-a-year spot on Enron's board,
he refused to step down from the boards of QUALCOMM and the Lockheed Martin
Corporation despite a shareholder campaign (led by the AFL-CIO) to remove him.
All of which makes for a vexing dilemma: What do you do when a system governed by
shame encounters a businessman who's shameless?
The first to pose that question was the community of
institutional investors -- specifically, union and public pension-fund managers.
Institutional investors collectively hold about $6 trillion in stock and own
between 60 percent and 70 percent of all American companies. Pension-fund
shareholders, who account for about one-third of institutional investors, have
organized over the past decade and become a growing force in the corporate world.
Nevertheless, coming around on Enron took some time. (Savage was re-elected to
QUALCOMM's board in February, before an opposition could be organized.) "I called
around [to the community of institutional investors] and said, 'Are you going to
try to keep Enron directors off other boards?'" recalls Minow. "The AFL-CIO was
the only one that said yes." Other organizations, such as the shareholder
advisory firm Institutional Shareholder Services (ISS), soon came aboard.
In January the AFL-CIO contacted the nominating committees at 21
companies where Enron directors serve in an effort to get the directors to
resign. (To date, four of the 13 directors have complied.) One, Lockheed Martin,
proved particularly recalcitrant, refusing to meet with shareholders or even to
discuss its plans regarding Savage. "We talked to a couple of executives," says
Patrick McGurn, vice president of ISS. "They declined to pierce the veil of
confidentiality." The AFL-CIO responded by launching a "vote withholding
campaign" among Lockheed Martin shareholders against Savage's April 25
re-election to the board -- essentially a vote of no confidence in the company
and in Savage.
The campaign drew the support of six public-pension funds and many money
managers, as well as outside companies like the investment firm Barclays, all of
which opposed Lockheed Martin's decision. While the group didn't try to block
Savage's election by running an opposing candidate -- a complex and expensive
process that's difficult to organize on short notice -- it persuaded shareholders
to withhold 28 percent of the votes, the single biggest withholding vote that's
ever been mustered against an individual director at a publicly traded company.
"It was a shot across the bow," says Charles Elson, who runs the Center for
Corporate Governance at the University of Delaware. "It sent a signal to [Savage]
and to the company that there's a serious problem."
Even so, forcing Lockheed Martin to drop Savage was a long shot that depended
wholly on the company's compliance. Corporate rank-closing on issues of
directorship is unfortunately the norm. And because corporate law tilts so
steeply toward the status quo, shareholders have few viable options. SEC rules
prevent them from organizing en masse to sell their shares -- in effect, making
the stock tank -- by requiring all sorts of onerous filings. ("You'd rather have
your fingernails pulled out," Minow attests.) Removing a director through a proxy
fight can cost at least $100,000 and up to $1 million or more. Last year
billionaire investor Sam Wyly spent $10 million trying to replace four directors
at Computer Associates -- and lost. Even sensible laws have unintended
consequences: Worker-protection statutes that prevent overzealous CEOs from
firing uncooperative board members actually make it more difficult to remove
authentic bad apples like Savage.
If nothing else, Enron highlights the need for corporate reform.
"There is not a boardroom in America that hasn't been affected by this scandal,"
says Roger Raber, president and CEO of the National Association of Corporate
Directors. "And they're beginning to act." One hopeful sign, Raber says, is that
many are proactively seeking to evaluate their members in an effort to avoid
disaster. Another promising development capitalizes on that fetish of the
business community: status. Both Minow's organization and the ISS are developing
ratings systems for board members based on factors such as attendance and prior
performance. A recent sign of improvement is that the board of the Walt Disney
Company, routinely considered to be among the country's worst, has hired
legendary reformer Ira Millstein.
But the true impetus for reform -- is this a surprise? -- may be
money. The irony is that the corporate community's assertion that Enron was
evidence of the market's efficiency may soon come back to haunt it. One of the
parties most eager for director rankings is the insurance industry, which winds
up footing the bill when boards like Enron's fail. In the future, companies with
lousy boards will pay hefty premiums for "directors and officers insurance."
Until then, Frank Savage will have to serve as a reminder of the need for