Ovitz Case Highlights Need for Greater Board Oversight

When it comes to the distribution of wealth among the most powerful executives in corporate America, perhaps no group has greater influence than boards of directors.

But scrutiny over who serves on these boards and how they arrive at compensation package decisions is hard to come by in the business press. A lack of staff resources or management support might dictate this lack of coverage.

Although these are tough roadblocks to bypass, the makeup of a corporate board is crucial to shareholders. After all, this is the group that ultimately foots the bill for executive pay. This was also the group at the center of a challenge to the severance package paid to former Disney President Michael Ovitz.

Shareholders of the entertainment giant had filed suit in 1998, alleging that the board improperly approved Ovitz's $130 million package following his brief 14-month tenure. The judge in the case ruled this week that the board had acted within its rights, though he suggested that it did not display high corporate governance standards in arriving at its decision.

"You heard a lot of criticism from the judge, but these guys just got a scolding and went home," says Kathy Kristof, personal finance columnist for the Los Angeles Times. "The fact is, many boards are often hand-picked cronies by the CEO. In reality, the board is extremely collegial when it's all of your golfing buddies."

Many viewed this trial as a benchmark against which future challenges to executive pay would be measured.

"Corporations and directors watched it closely because it raised the possibility that director decisions could be second-guessed," wrote Richard Verrier in the Orlando Sentinel. "Shareholder activists saw it as important in underscoring their argument that too many corporate boards are beholden to management."

Some of these individuals that report to management serve on multiple company boards due to their connections with top brass. Reporters need to ask how they can juggle these various boards along with perceived responsibilities for their own corporations.

And it's not just on their words that journalists should place the most emphasis.

"As journalists, we need to match the actions with the words. It's one of the lessons financial journalists should have learned from the stock market crash," Kristof says. "We need to make sure we're asking good questions and holding their feet to the fire."

Although the ruling favored Disney's board, the majority of companies are not associating any precedent with respect to executive pay.

"The ruling might appear to give comfort to directors who approve lavish contracts for top executives, but some corporate governance experts and employment attorneys said that is not the case," wrote Susan Chandler in The Chicago Tribune. "The fact that the Disney lawsuit made it to court and aired Disney's dirty laundry has already put directors at other companies on notice that their conduct can be subject to judicial review."

Those who set rules and regulations in the Securities and Exchange Commission are part of the shareholder dilemma. Following the Ovitz ruling, SEC Chairman Christopher Cox hinted that the commission may implement new rules to better disclose executive pay to investors.

Dick Grasso, the New York Stock Exchange's former chairman, attracted substantial media attention in 2003 when it was disclosed that his retirement package from the Exchange was valued at $190 million.

"We need to make directors more accountable through the courts, SEC and other regulators," Kristof says. "It's no longer just nickels and dimes. It's money that's going to make their great, great, great grandchildren rich. That money is coming out of shareholder pockets."

In your reporting, explain to shareholders whether certain directors are a benefit or detriment to the organization.

"We have to ask the questions shareholders would want to ask," Kristof says. "If the board of directors is in a CEO's back pocket, (then) as shareholders, that's something to be concerned about."

Whether or not more shareholder groups revolt against excessive executive compensation might depend on market forces. During the technology boom of the late 1990s, many investors were more concerned about how much money they could make on their own portfolio than what a CEO was making.

But after the crash, both personal and executive bottom lines are on the radar. The challenge for business reporters is to hold directors and executives accountable, even when the market returns favorable gains.

"If the market recovers, people tend to get complacent," Kristof says. "Reforms and concerns only happen when the market crashes. These reforms and concerns should always be important."