Beat the Street
October 14, 2002
Diplomat. Detective. Politician. Strategist. Entertainer. Financier. Referee.
A chairman of the board deserving of the coveted corner office is a combination of all of these, says Brian Lechem, founding president of the Institute of Corporate Directors in Canada, publisher of Boardroom and recent author of Chairman of the Board (Wiley). Lechem recently spoke with Mutual Fund Market News Editor Lee Barney on what it takes to reach the highest echelons.
What's the most important duty of the chairman of the board?
To ensure the long-term viability and profitability of the organization. The chairman must concentrate on the strategic elements: where the firm is going. That is key. Now that we are in a bear market - the signs have been a long time coming - the best boards are those that probably foresaw this and concentrated ahead of time on what the fund company would do when and if the market should turn south.
By talking years out, the better-run funds would have been prepared, would have adjusted their asset allocation, to ensure that any assets exposed to a bear market were reduced.
In a recent Boardroom interview with former Ontario Securities Commissioner Glorianne Stromberg, she adamantly spoke out against fund boards managing so many funds. Do you have an opinion on this?
It's an impossible situation when you have so many funds it becomes difficult to separate the various requirements of the funds from each other. You get a degree of incestuousness. A degree of asset confusion. Somehow or other, you have to engender a culture that seeks to avoid conflict, whether that is by reducing the number of funds that you group together . . . or separating management of the funds.
And then, when you go down one level further, to the portfolio managers, you face the indomitable greater conflict: long-term performance versus short-term, quarterly gains.
Are fund boards, indeed, able to police investment advisors?
The board oversees the investment advisor. But we're not into micro-management here, right? The board should maintain largely a hands-off position and merely verify the reporting procedures that everything that the manager reports to them is as it should be.
That is totally analogous to the oversights in any other organization where the board has to make sure, without necessarily going into the books themselves, that the executive, the operational management of the organization or the enterprise, is performing as they should be. Providing they do sufficient testing to make sure that there's nothing untoward happening.
Then, the investment advisor should be allowed to use his or her skills appropriately.
In your book, you specifically suggest that audit committee members should be financially literate. Isn't that a no-brainer?
Well, before I answer that question, can I add another requirement? The board must have some knowledge of the industry, that is, the fund industry. In other words, you can't have someone who's an expert in retail sales being expected to be comfortable in fund management.
I actually went back to my sources on this one. I first read about it in the National Association of Corporate Directors' blue-ribbon commission on audit committees in 1999. It asks for the audit committee to be able to read and understand fundamental financial statements, including a company's balance sheet, income statement, statement of cash flow and key performance indicators - as well as the ability to understand key business and financial risks, and related controls.
I'm not saying they have to be cold-faced miners, but they must have some peripheral knowledge.
Do you believe the boards of Enron and company should be held responsible for the cooked books?
The answer, unequivocally, ultimately, is 100% yes. The buck can only stop at the board.
It's all right blaming the CEO and the CFO, getting them to sign off, but at the end of the day, there's only one body, by law, that has the ultimate accountability for performance. And that's the board.
It's different when someone pulls the wool over your eyes, or lies to you, as our friend "Chainsaw [Sunbeam] Al" was supposed to have done. But at the end of the day, the board has got to be held responsible.
What kind of discussions could possibly have taken place in these corridors of power?
O.K. You've honed in. I mean, you know, it's very sexy, it's very scandalous, but I'm not sure that what's happening in these relatively few high-echelon companies that have crossed the boundaries of behavior is typical of the free-enterprise environment as a whole.
One thought is that there is too much concentration of power, usually in one individual. And that one individual tends to be the CEO, who, very often, is also chairman of the board, which is wrong.
The second is this egregious use of stock options, which, I think, has totally distorted and changed the priorities of management.
A big concern of fund companies right now is retention of assets.
Investment advisors and their portfolio managers have a short-term horizon. The companies in which they invest have a long-term horizon. Therein lies the conflict, the tragedy of the situation: The pressures on the investment advisors are totally different from the management of corporate America.
What went so terribly wrong at Enron?
Enron had a blue-blue-chip board. So, it was not the quality of the board, or the competency of the individual members of the board. At the end of the day, it was the way they failed to do their job of overseeing proper checks and balances.
Any advice to mutual fund boards?
I would suspect that the majority of mutual funds do not have separation of power.
Finally, how prestigious is it to be the chairman of the board?
(Laughs.) I knew you were going to finish on that one!
The chairman of the board is no sinecure. Quite frankly, a good chairman is a damn hard worker.