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Directors as Corporate Skeptics

Thanks to Enron, WorldCom and Sarbanes-Oxley, boards of directors are no longer the cozy old-boys' clubs they were in the past.

Thanks to Enron, WorldCom and Sarbanes-Oxley, boards of directors are no longer the cozy old-boys’ clubs they were in the past. Today, 80 percent of the directors on retail and apparel boards are independent, and board leadership is now in the hands of either a chairman, who is separate from the chief executive officer, or a lead or presiding director.

As a result, retail and apparel boards are increasingly turning to retired ceo’s for their independent directors. One of those in high demand is Arthur Martinez, former chairman and ceo of Sears Roebuck & Co., who is a board member for PepsiCo and International Flavors & Fragrances, among others. In a conversation at the WWD/DNR CEO Summit, Martinez acknowledged that “there’s no love in the boardroom these days. Boards of yesteryear were very cozy, clubby kinds of relationships. They were often populated with college classmates of the ceo, lawyers, former advisers, even in some cases suppliers to the firm.”

As a result, Martinez said, “There was very little motivation to challenge the ceo in matters of business strategy and performance. All of that has changed. Sarbanes-Oxley, the Enrons, the WorldComs, the catastrophic implosions of a number of major American companies, followed by the legislation that has been put in place to improve governance, has changed the dynamic entirely.”

The majority of directors today are independent thinkers who have a “healthy dose of skepticism” and are keeping more of a distance from the ceo, he said. The ceo, in turn, “is less able to depend on what has gone on before as a premise for what might come ahead.” They are being challenged more than ever on “the integrity of their financial results” as well as “the quality and coherence of their future strategies,” Martinez said.

But not all the changes have been positive, he continued. “There is an awful lot of score-keeping these days around whether the boards are doing what they should be doing.” There’s also “a sort of arms race” among governance activists to “continue to raise the bar on what they define as good governance.”

In Martinez’s opinion, boards need to monitor “the integrity of the financial statements” to ensure the company is in compliance with the law. They also need to advise the company on strategy, which is hard for independent directors since the knowledge within the organization about the marketplace, the competition, consumer preferences and so forth, is superior.

This story first appeared in the November 15, 2006 issue of WWD.  Subscribe Today.

To overcome that hurdle, Martinez said, board members need to arrange for more store visits, more visits with customers, unaccompanied visits to company facilities and unstructured and unsupervised meetings with senior executives.

Boards also need to step forward to help with management succession and development. “One of the highest duties that any board has is the choice of leadership for the corporation,” he said.

Additionally, Martinez said, boards are also charged with preparing “emergency succession plans” should something happen to the ceo.

There are also certain attributes Martinez believes should be represented. For retail and apparel companies, directors should be experienced in consumer businesses so that they understand “competition for the consumers’ pocketbook, how trends develop, how trends evaporate just as fast and how consumer preferences can change.” They also have to be comfortable with failure. “We’re in a batting-average business. Every season is a new adventure, and not everything a team does works to the fullest extent.”