Former board members of scandal-ridden companies such as Enron, WorldCom, Adelphia Communications, and Global Crossing (NASDAQ:GLBCE) have been retained on and, in some cases, added to boards of other publicly traded companies, according to a recent report by The Corporate Library (TCL), a corporate governance analysis firm. TCL tracked 20 former board members of these companies and found that they currently hold over 50 board seats at other companies.
Why would companies retain or hire board members who so obviously and publicly failed elsewhere? TCL said that many of these 50 board seats are at smaller public firms where shareholder bodies may be less activist and practices receive less scrutiny from media and governance rating agencies.
However, some of these board seats are at major firms. For example, former Enron director Frank Savage serves on the boards of Lockheed Martin (NYSE:LMT) and Alliance Capital Management (NYSE:AC). Former Secretary of Defense William Cohen, who was a director of Global Crossing before its bankruptcy, is on the board of Viacom (NYSE:VIA). Former Enron director Herbert S. Winokur is on the board of NATCO Group (NYSE:NTG).
Report researchers Jackie Cook and Randy Evans also offer another explanation for the retaining or hiring of board members from tainted companies -- "corporate performance, including failure, is difficult to distill to the level of individual decisions."
Although I have no science to back this up, I would like to offer an additional possible explanation for why these board members are apparently still valued. I call it "we need a head coach with professional head-coaching experience" syndrome. You can substitute "CEO" for "head coach," and probably a whole lot of other positions as well.
Growing up, I often saw professional sports team owners hire a head coach who had bombed out elsewhere and then give the explanation above for why they hired the coach. Subsequently, I have seen the same happen for CEOs and other positions. This is close to the "better a known evil than an unknown" theory, among others.
Perhaps CEOs and others who choose boards of directors for companies (and a CEO choosing a board should put you on alert) are using the same logic.
Big disclaimer: I do not have an opinion on the competence of the board members in the report. What little I know about some of them, other than that they were on the boards of scandal-ridden companies, is favorable.
However, if you are taking a closer look at the governance of the companies you invest in these days -- and it would appear that we all should be -- you might want to check to see where the directors on the board of the companies you invest in come from.
More:
-- Best and Worst Corporate Boards
Fool contributor Cass Bielski has owned stocks of scandal-ridden companies and is now rich in experience and poor in pocket. He owns no companies mentioned.
