Quelle: CIO USA

The last year and a half will probably go down as one of the mosttumultuous periods in the history of corporate America. Enron'saccounting improprieties led to its thunderous collapse 18 months ago.Soon thereafter, problems surfaced at a host of publiccompanies - Adelphia, Global Crossing, Tyco and WorldCom among them.Dubious accounting practices led to bankruptcy or company foundersbeing led off in handcuffs, as was the case with Adelphia's former CEOJohn Rigas. Myriad accounting firms and investment banks joined thefray, becoming embroiled in lawsuits and investigations over conflictsof interest. And don't forget the allegations of insider tradingencircling Martha Stewart and ImClone CEO Sam Waksal.

This epidemic of corporate chicanery inspired an uncharacteristicallyrapid response from the government. To assure the public that theWhite House was taking seriously the call for corporate reform,President George W. Bush signed the Sarbanes-Oxley Act into law onJuly 30, 2002, just seven months after Congress passed it.

While this stormy corporate climate makes joining a board of directorsa seemingly risky proposition, it's also rife with opportunities forcurrent and former CIOs to shape business history. At a time when bigbusiness needs to make big changes to restore investors' confidenceand bring some stability to a sluggish economy, the meticulous natureand analytical mind of CIOs could cast them as the cadre of executivemost capable of playing watchdog.

The backdrop of bad business behavior is already changing theboardroom agenda. When the seven members of the Sybase board ofdirectors gathered last July in Half Moon Bay, Calif., for thecompany's second quarter meeting, they spent 20 percent of the timediscussing the ramifications of Sarbanes-Oxley and the newrequirements for financial reporting, says board member CeciliaClaudio. To prepare for the meeting, Claudio spent a lot more timescrutinizing the company's annual and quarterly financial statements(10-Ks and 10-Qs, respectively) than she had before the corporatescandals.

"There's a higher level of engagement on the financialside...understanding all the 10-Ks and 10-Qs and making sureeverything is done according to the new act," says Claudio, the seniorvice president and CIO of Farmers Insurance Group who has served onPleasanton, Calif.-based Sybase's board for three years. "There's ahigher degree of responsibility that each one of us feels."

Many current and former CIOs serving on boards echo that sentiment.David Weick, the senior vice president and CIO of McDonald's who sitson the board of Lake Forest, Ill.-based Trustmark Insurance, says thecorporate scandals have "redoubled" his understanding of his role inrepresenting the shareholders' interests. Carl Dill, who served as CIOof McDonald's and Time Warner before retiring and joining the boardsof two technology companies, says board members are required toexercise more oversight and practice better checks and balances. Thatmakes the role much more time-consuming. "There are probably threetimes as many meetings and reviews on my calendar for 2003 as therewere previously," he says.

Companies having difficulty finding executives willing to assume theseadded responsibilities are increasingly viewing current and formerCIOs as an untapped pool of talent. One notable example isinternational apparel retailer Gap, rated by BusinessWeek lastSeptember as having one of the worst, most clannish boards in America.That same month, Gap tapped onetime Wal-Mart CIO Bob Martin for a seatat its table. In a press release announcing Martin's appointment, GapChairman Donald G. Fisher said, "Bob's good business judgment,information technology expertise and international retail experiencewill be an asset to us."

CIOs and former CIOs such as Martin bring important skills andperspectives to bruised and battered boards. Their expertise indesigning and implementing financial systems is a boon to boardsstruggling to comply with government regulations requiring morefrequent - if not real-time - financial reporting. Their experiences withcompensation and retention issues can prove invaluable duringdiscussions about motivating the executive team. CIOs have alsogleaned knowledge of different aspects of business over theyears - fromsupply chain management and sales to marketing and HR.

State of Denial?

While Weick and his colleagues speak of their increased responsibilityand vigilance, they discount the idea that shady dealings arewidespread. "There are a few companies that either had fraudulentpractices or engaged in some unethical activities, but I think thenumber of companies is limited," Weick says.

John Loewenberg has a similar view. "These high-visibility cases wouldlead you to believe there's an issue there," says the former CEO ofAetna Information Technology who sits on the boards of five high-techfirms. "I personally believe you have a few companies where there's aserious problem."

Those comments may be an attempt at positive spin and corporatepolitical correctness, or they may indicate an attitude and a lack ofassertive oversight that's part of the disfunction in corporategovernance today. "It's not just a few bad apples," says Jay Lorsch,the Louis Kirstein professor of human relations at Harvard BusinessSchool and author of Pawns or Potentates: The Reality of America'sCorporate Boards. "There are huge problems across the whole spectrumof our corporate governance system. When you see a law likeSarbanes-Oxley signed by the president, there's a problem. If the CIOsof America don't see it, then God help 'em. They're blind."

Recognizing Conflicts

For CIOs to effectively serve shareholder interests as board members,they must understand the debate around board and CEO compensation andhow conflicts of interest arise. For example, it might sound sensibleto compensate CIOs and other executives with cash (rather than riskierstock options) to encourage them to serve on boards. Max Hopper, whosits on the boards of Gartner and four other companies, advocates thisidea. "People joining boards want to be rewarded for theircontribution," says Hopper, the former CIO of the Bank of America,former senior vice president at AMR and chairman of IT at The SabreGroup. "Over the last two years, there hasn't been a lot ofreward."

Bad idea, says Charles Elson, the Edgar S. Wooland Jr. professor ofcorporate governance and director of the University of Delaware'sCenter for Corporate Governance. Taking cash at the outset sends a"terrible signal" to shareholders, he says, that board members have solittle interest in the company that they want payment up front. "Theproblem with cash compensation is that it links [board members']interests with the management's," he says. Instead, Elson advocatesgiving board members an equity stake in the company. "Equity-basedcompensation for directors links their interests with the company andits shareholders, not with management."

When other conflicts of interest arise, it's critical to acknowledgeand correct them. Last May, while the U.S. Securities and ExchangeCommission was launching numerous investigations into companies'accounting practices and business relationships, it looked into Ernst& Young and its relationship with PeopleSoft, one of its clients. TheSEC alleged that Ernst & Young violated auditor independence rules byjointly developing and marketing software with PeopleSoft while it wasauditing the books for the Pleasanton, Calif.-based company from 1994to 2000. According to the SEC, Ernst & Young agreed to pay PeopleSoftroyalties ranging from 15 percent to 30 percent for the sale of eachjointly developed product. PeopleSoft was allegedly guaranteed aminimum royalty of $300,000.

Although the investigation was directed at Ernst & Young, analystswere split as to whether the allegations would hurt PeopleSoft'sreputation. After all, it takes two to tango. PeopleSoft board memberFrank Fanzilli, the former CIO of Credit Suisse First Boston who alsosits on the boards of software companies CoreChange and Interwoven,downplays the business partnership the company had with its auditorand distances himself from the issue, as it preceded his tenure onPeopleSoft's board. "It amounted to something like $250,000," he says,adding that the value of the relationship is "a drop in the bucket"for a $2 billion company. The correspondence between Ernst & Young andPeopleSoft "was not engineered to create a conflict of interest," headds. "It'd be like me buying you a cup of coffee. It wasimmaterial."

Governance watchers counter that a business relationship with one'sauditor is inappropriate, regardless of its value. They agree that ina climate where the public is hypersensitive to any business deal thatsmells illegitimate, writing off a quarter million dollar partnershipisn't the best way to handle the situation. "The transaction itself isprobably close to a drop in the bucket in corporate terms, but that'sno excuse for dismissing it out of hand. Not in today's environment,"says Ralph Ward, publisher of the Boardroom Insider newsletter andeditor of The Corporate Board magazine.

Fanzilli points out the difficulty boards face in trying to uncoverevery questionable deal and business relationship, especially with thesheer volume of such transactions that occur at large companies likePeopleSoft. "We'd rather not do those things that even look, evensmack of some conflict of interest, but the fact is, it's so small,it's going to be hard to catch them all," he says. "[Board members]are not going to see every transaction. We put guidelines, controlsand procedures in place to give us an orderly flow [of information].The board does not operate the firm."

Risky Business

If a board member's company becomes mired in controversy, thatperson's reputation is at stake. Worse yet, board members could facelitigation if they're not perceived as performing adequate oversight.Barry Lynn, the former CIO of Wells Fargo and president of Wells FargoTechnology Services who sits on the boards of three technologycompanies, best sums up the risks for board members these days when hesays, "Ignorance is no excuse for the law." Doing one's own duediligence can pay off. Barbara Carlini, CIO of Diageo, a Stamford,Conn.-based company that imports Guinness and other liquors, consultedan attorney to determine the extent of her risks when she wasconsidering an offer from Green Mountain Coffee Roasters to join itsboard last spring. "If I'm on the board of directors of a companywhere something goes wrong, that's going to reflect on me personallyand professionally," she says.

If a company engages in unethical practices - whether the board is awareof them or not - board members' names could appear on a lawsuit asdefendants. If the company goes bankrupt as a result of the board'slack of oversight or even perceived lack of oversight, members may beliable for paying employees' salaries, says Hopper.

To mitigate those risks, Fanzilli suggests asking the CEO point-blankabout the company's revenue recognition policies and levels ofdeferred sales before deciding whether to join its board. He saysthose answers should err on the conservative side. Fanzilli alsoadvises speaking with other board members and executives. If thecompany has had problems in the past, don't be scared off, he adds."There is plenty of room for ex-CIOs to go into companies that havehad a problem and help them get things right."

Tough Calls

CIOs who brave the risks and accept the responsibility will findthemselves making some tough calls. Former Aetna IT head Loewenbergcame face-to-face with the same situation that sank Dennis Kozlowski,the embattled former CEO of Tyco. Loewenberg didn't end up in the sameposition because he exercised good judgment.

One of the executives for whom Loewenberg serves as a board member (hedeclined to name the company) asked the board for a company loan topay off another loan. Loewenberg and his colleagues didn't want to seethis person's financial problems distract him from effectively runningthe company, he says, so their first instinct was to give him themoney. While this type of transaction takes place "more than you'dthink," Loewenberg says, he and his board decided againstit.

"It didn't make sense [to give the officer the loan]," he says. He andhis colleagues recognized this was a personal problem and thatshareholders' money was not the appropriate means with which to solveit.

At another company, Loewenberg and his board members had to make asimilar call when an officer wanted a loan to purchase company stock.In that case, the board voted favorably for three reasons, he says.First, the loan was collateralized by the stock, so if the officerdidn't pay off the loan on time and in full, he would lose it. Second,the officer was obligated to repay the loan quickly. Most important,the stock purchase made him an investor and tied his financialinterests to company performance.

Right for the Job

Despite the difficulty of serving on a board in 2003, CIOs have theright stuff for the job, say CEOs and governance experts. GroverThomas, chairman, president and CEO of Trustmark Insurance, whoseboard includes McDonald's CIO Weick, says IT executives contributecrucial perspectives to audit committees as they review financialreports. "Good corporate governance includes a strong audit function.Our board has a strong audit committee, on which Dave [Weick] serves,"he says. "We believe an IT executive has a lot of experience in thedevelopment of financial systems and is able to help us make certainwe have the right controls in place."

University of Delaware's Elson agrees CIOs are often uniquely suitedfor the task. "The knowledge of company operations you get from beinga CIO is an excellent starting point for being an effective monitor."He stresses the importance of individual consideration as prospectiveboard members. "Are they curious? Are they willing to take toughpositions? Are they willing to dig deep into a problem they discover?"he says.

While CIOs make good candidates to serve on boards, boards themselvesmay never be a perfect oversight mechanism. "The board is a weak,little, old, quaint structure that goes back to the 1800s. It's notthe best tool for dealing with [the problems of] the 21st centurycorporation," says Boardroom Insider's Ward. Stricter controls mightnot be the answer either. "If you have an inadequate machine for doinga job, demanding that the machine do twice as heavy a job is not goingto solve the problem." Until something better comes along though,boards are all we've got. The right CIOs can make a difference.