Looking the other way --- As CEOs rake it in and companies falter, what have the boards of directors been doing?

BEHIND EVERY recent case of outrageous pay for chief executive performance that is so-so or worse, there is a corporate board of directors that happily consented to the fat payouts. How do these fiascos come about? The best explanation now making the rounds might be that boards of directors are to corporate governance as grandparents are to child-rearing.

In a word, boards are indulgent. We'll get to why that is in a moment. But first, some examples.

Hydro One Inc. In the late 1990s, a CEO with a background in banking and the civil service who had never run a business took the helm at the power distribution arm of the old Ontario Hydro. She went on a spending spree, overpaying for more than 80 utilities snapped up at the top of the market. The purchases reduced the value of Hydro One. Meanwhile, Hydro One's three huge projects to connect the Ontario power grid with other markets are behind schedule.

Hydro One's board, in assessing that performance, rewarded the chief executive with a package of pay, bonuses and benefits last year of $2.2 million - more than four times the top compensation for CEOs of other publicly owned power utilities in Canada. As a further incentive to ensure that she would not defect, the CEO was to receive $6 million in severance and an indexed pension of $1 million a year when she leaves, regardless of whether she quits or is fired.

Vivendi Universal SA. Jean-Marie Messier's reward for reporting the biggest loss in French corporate history, totaling E13.6 billion ($19 billion) for 2001, was to be paid a bonus by his board equal to 250 per cent of his E5.12 million salary. As a sop to shareholders who were angry that Messier's gamble on media convergence had resulted in disaster, the board also set up a board-level oversight committee, a sort of board-within-a-board to keep an eye on Messier, which was already the sole purpose of the original board.

"Why is it only now, when Vivendi is in such parlous state, that the board appears to be waking up to its responsibilities?" asked Colette Neuville, president of a French shareholders group. "The governance of this company is a catastrophe."

Neuville and fellow shareholders at least succeeded in voting down Messier's nervy proposal to set aside 5 per cent of Vivendi's shares, worth the equivalent of more than $1.5 billion, for stock options for top executives.

Deutsche Telekom AG. Ron Sommer, CEO of Europe's biggest phone utility, was greeted by a chorus of boos last month as he stepped on stage at the company's annual meeting in Cologne. DT will likely post E6.7 billion in losses this year, almost double last year's red ink. DT shares have lost more than half their value and now trade below their issue price back in 1996.

The booing intensified as Sommer announced that the DT board, of which he is a member, had just approved a 90 per cent increase in directors' remuneration. Sommer tried to explain that DT's reckless overspending on expansion in the late 1990s was less a factor in DT's plummeting share price than capricious financial markets, and asked for patience and understanding. Shareholder activist Jella Brenner-Heinacher would have none of it: "He who orders caviar in times of cholera can't expect any sympathy."

Dynegy Corp. Like crosstown Houston rival Enron Corp., this energy-trading firm succumbed to U.S. government probes of its accounting practices and dubious trading techniques. With its share price collapsing and the prospect of insolvency on the horizon, Dynegy concluded that founder and CEO Charles Watson was a drag on investor confidence. So the board sacked him last month, but sent him off with a severance package worth $33 million (U.S.). Not that Watson needed the money. At the height of the energy trading business, when Dynegy, Enron and other firms were manipulating prices in the California power market, Watson judiciously took $247 million in stock winnings off the table.

Boards, of course, are supposed to supervise CEOs on behalf of shareholders. Why, then, do they let CEOs treat their companies like a personal piggy bank, from which they extract stupendous pay, bonuses and stock-option rewards, housing and car allowances, seven-figure annual pension payouts, and lifetime medical benefits, consulting contracts and use of company planes?

Indulgence comes naturally to directors because, like grandparents, they aren't around much. And, frankly, they don't know much about the business; certainly, they have nothing like the grasp of it that the CEO does. So in their few encounters with the CEO, at monthly or quarterly board meetings, directors at most firms take the advice of Jack Welch, former CEO of General Electric Co.

In his recent memoir, Welch said that the job of the board is to make the CEO feel like he or she is 10 feet tall and to give unwavering support to a leader who has so many challenges to meet.

Boards do that and more. Here's why.

Cronyism. The cure for what ails Vivendi would not be to give Messier an enriched financial incentive to remain in his job and clean up the mess he created, but to replace this dealmaker with a pragmatic cost-cutter who has experience in selling assets, not amassing them. But Messier's ouster is unlikely given that his board is stacked with cronies. These include Bernard Arnault, CEO of troubled luxury goods purveyor LVMH Moet Hennessey Louis Vuitton SA, and Serge Tchuruk, CEO of troubled telecom equipment maker Alcatel SA. (Messier, in turn, sits on their boards.) Arnault and Tchuruk can hardly be expected to participate in a boardroom coup at Vivendi. What kind of signal would that send to their own boards?

The myth of independent directors. The directors on the Hydro One board who resigned en masse this month were independent, or outside, members. Directors with no ties to management and doing no business with the company are a prominent feature of every effort to reform corporate governance. But as with the humbled Nortel Networks Corp. and the now-bankrupt Enron, outsiders were a majority on the Hydro One board. And still they condoned or failed to make themselves aware of dubious management practices.

If insiders are too close to the business, too much the puppets of their boss, the CEO, outsiders are too distant from the company and can't hope to match the CEO in mastering the complexities of the business. As such, they're easily intimidated and readily assent to the CEO's plans. And that would be true even if they didn't owe their board sinecures to the CEO. (CEOs don't always select board members but they almost always have veto power over their selection.)

The Hydro One board that fashioned the CEO's lucrative pay package consisted of directors with backgrounds in turning around struggling British companies (Sir Graham Day), building fast food empires (Bernard Syron of Swiss Chalet and Harveys) and managing the newsroom at the Vancouver Sun (Dona Harvey).

The one person on the Hydro One board with some experience in running a major power utility was the CEO. She had good reason not to fear being countermanded when it came to her buying spree.

Too costly to fire. Failing CEOs are often able to cling to their posts because of the enormous cost of firing them.

Bernard Ebbers, ousted in April as CEO of WorldCom Inc., will get an annual pension payment of $1.5 million (U.S.), medical benefits and the use of company planes for life, and the privilege of paying off $408.2 million (U.S.) in company loans at below-market rates. Rich McGinn got a $12.5 million (U.S.) send-off when he was fired by Lucent Technologies Inc.

Had he not been indicted recently on tax-evasion charges, Dennis Kozlowski, former CEO of U.S. conglomerate Tyco International Ltd., could have anticipated that in the event he was fired, he would reap a $135 million (U.S.) severance payment, annual pension payments of $3.4 million and a lucrative lifetime consulting contract.

Tyco shares have cratered this year with revelations of accounting irregularities and mounting debt. Luckily for Tyco's board, also crowded with friends of the CEO, Kozlowski abruptly quit one day ahead of the indictments. That voided the original "retention" package of goodies, designed to keep Kozlowski from working his magic elsewhere - notwithstanding that he was an unlikely candidate to leave, given that his post at Tyco made him one of America's most powerful and wealthy CEOs. While the original pay deal will be renegotiated, it will still amount to a lot more than nil, to the annoyance of angry shareholders.

Whitewash. Firing the CEO is, of course, often an acknowledgement that the board failed in its basic mission of selecting a CEO in the first place. This is particularly true with short-tenure CEOs like Hydro One's Eleanor Clitheroe and Vivendi's Messier. In the case of the long-serving CEO who is past his or her sell-by date, loyal directors can always point to triumphs early in the CEO's tenure as a reason for sticking by him or her.

Beyond that, the drastic step of removing the CEO could be seen as a corporate admission of culpability, opening the door wider to shareholder class action lawsuits against the company and the directors.

Most boards also seek to avoid messy lawsuits with the CEO. Linda Wachner, dumped at Warnaco Inc. after troubles mounted at the U.S. lingerie maker, has been battling for more than a year to obtain a multi-million-dollar settlement for wrongful dismissal from the now-bankrupt company. And Albert (Chainsaw Al) Dunlap, fired as CEO of U.S. appliance maker Sunbeam Corp., also bankrupt, has been tangling in court with his former employer for four years over the $5.5 million in severance he claims it owes him.

Rather than brace for long-running legal skirmishes, directors tend to close ranks behind their beleaguered CEO. Even retroactively, the board at Halliburton Co., the world's largest oil-services firm, is content to pay former CEO Dick Cheney's $36 million (U.S.) in salary, bonuses, deferred compensation and retirement benefits. This even though Cheney's signature on Halliburton's late-1990s deal to acquire rival Dresser Industries Inc. has condemned his old employer to asbestos-related litigation that threatens Halliburton's solvency. Halliburton, it has since been revealed, also overstated its profits on Cheney's watch and is now under investigation by the U.S. Securities and Exchange Commission.

But "it would be the sheerest demagoguery to suggest that a person should take the blame for a company's shenanigans just because he happened to be CEO at the time," Slate columnist Michael Kinsley recently said of Cheney, now U.S. vice-president. "Heck, no. That's what accountants are for." (Halliburton recently fired its auditor, Arthur Andersen, whose work Cheney once praised in a promotional video for the auditor.)

So in the world of CEO compensation, they get you coming and going, and in between, too. The modern captain of industry can expect a magnificent reward for achieving his targets, a lavish farewell package if he's booted out the door, and an enormous bonus if he sticks around and tries to put out the fires he started.

The perversity of the CEO pay ritual hit home for Frank Glassner recently. In the Wall Street Journal, the New York pay consultant was still shaking his head in amazement at the sweet send-off for Ebbers arranged by WorldCom, the company Ebbers sailed to the edge of the abyss.

Said Glassner: "I don't know that anyone gave a bonus to the captain of the Titanic."

DICK LOEK/TORONTO STAR