Frank Savage's record is appalling, even by the standards of Enron board members. He is a director of the investment firm Alliance Capital Management (he also chaired one of its divisions), which until recently was Enron's largest institutional investor. Alliance was nearly the last to get out of Enron: The firm bought large blocks of stock on August 15, 2001 -- the day after CEO Jeffrey Skilling resigned -- and continued to buy even after Enron's October 22 announcement that it was under investigation by the Securities and Exchange Commission (SEC).
By the time Alliance sold its 43 million shares of Enron stock, it hadlost its investors hundreds of millions of dollars, including $334 million fromthe Florida state pension fund. On May 8, 2002, Governor Jeb Bush and stateofficials sued Alliance for negligence.
Enron's board of directors long ago secured its place in the annals of poorbusiness judgment. But Savage deserves special recognition: As a board member ofboth companies, he wasn't just asleep at one switch -- he was asleep at two.
The corporate world has a way of dealing with people like Savage.For the last half century or so it has operated under a kind of gentlemen's codein which businessmen who suffer public disgrace discreetly step down in order toavoid further shame for themselves and the companies they serve. This honorsystem has historically functioned more or less effectively -- even O.J. Simpsonleft his spot on the audit committee of Infinity Broadcasting when publicscrutiny became too intense.
Many of Enron's directors complied with this expectation. Wendy Grammresigned from the board of Invesco; Robert Jaedicke left the board of theCalifornia Water Service Group; Herbert Winokur Jr. stepped down from the HarvardCorporation; and, after some prodding from organized labor, Ronnie Chanrelinquished his place on Motorola's board. "Board members are some of the mostreputationally fragile people on earth," explains Nell Minow, a corporatewatchdog who runs the Web site The Corporate Library.
But amid the overwhelming greed of the 1980s, the gentlemen's code began tofray. Though the booming economy largely concealed it, the trend continuedthroughout the 1990s. As with so much else in the business world, Enron -- andFrank Savage in particular -- brought the problem to a head. Savage refused toquit: Not only did he decline to forego his $70,000-a-year spot on Enron's board,he refused to step down from the boards of QUALCOMM and the Lockheed MartinCorporation despite a shareholder campaign (led by the AFL-CIO) to remove him.All of which makes for a vexing dilemma: What do you do when a system governed byshame encounters a businessman who's shameless?
The first to pose that question was the community ofinstitutional investors -- specifically, union and public pension-fund managers.Institutional investors collectively hold about $6 trillion in stock and ownbetween 60 percent and 70 percent of all American companies. Pension-fundshareholders, who account for about one-third of institutional investors, haveorganized over the past decade and become a growing force in the corporate world.Nevertheless, coming around on Enron took some time. (Savage was re-elected toQUALCOMM's board in February, before an opposition could be organized.) "I calledaround [to the community of institutional investors] and said, 'Are you going totry to keep Enron directors off other boards?'" recalls Minow. "The AFL-CIO wasthe only one that said yes." Other organizations, such as the shareholderadvisory firm Institutional Shareholder Services (ISS), soon came aboard.
In January the AFL-CIO contacted the nominating committees at 21companies where Enron directors serve in an effort to get the directors toresign. (To date, four of the 13 directors have complied.) One, Lockheed Martin,proved particularly recalcitrant, refusing to meet with shareholders or even todiscuss its plans regarding Savage. "We talked to a couple of executives," saysPatrick McGurn, vice president of ISS. "They declined to pierce the veil ofconfidentiality." The AFL-CIO responded by launching a "vote withholdingcampaign" among Lockheed Martin shareholders against Savage's April 25re-election to the board -- essentially a vote of no confidence in the companyand in Savage.
The campaign drew the support of six public-pension funds and many moneymanagers, as well as outside companies like the investment firm Barclays, all ofwhich opposed Lockheed Martin's decision. While the group didn't try to blockSavage's election by running an opposing candidate -- a complex and expensiveprocess that's difficult to organize on short notice -- it persuaded shareholdersto withhold 28 percent of the votes, the single biggest withholding vote that'sever been mustered against an individual director at a publicly traded company."It was a shot across the bow," says Charles Elson, who runs the Center forCorporate Governance at the University of Delaware. "It sent a signal to [Savage]and to the company that there's a serious problem."
Even so, forcing Lockheed Martin to drop Savage was a long shot that dependedwholly on the company's compliance. Corporate rank-closing on issues ofdirectorship is unfortunately the norm. And because corporate law tilts sosteeply toward the status quo, shareholders have few viable options. SEC rulesprevent them from organizing en masse to sell their shares -- in effect, makingthe stock tank -- by requiring all sorts of onerous filings. ("You'd rather haveyour fingernails pulled out," Minow attests.) Removing a director through a proxyfight can cost at least $100,000 and up to $1 million or more. Last yearbillionaire investor Sam Wyly spent $10 million trying to replace four directorsat Computer Associates -- and lost. Even sensible laws have unintendedconsequences: Worker-protection statutes that prevent overzealous CEOs fromfiring uncooperative board members actually make it more difficult to removeauthentic bad apples like Savage.
If nothing else, Enron highlights the need for corporate reform."There is not a boardroom in America that hasn't been affected by this scandal,"says Roger Raber, president and CEO of the National Association of CorporateDirectors. "And they're beginning to act." One hopeful sign, Raber says, is thatmany are proactively seeking to evaluate their members in an effort to avoiddisaster. Another promising development capitalizes on that fetish of thebusiness community: status. Both Minow's organization and the ISS are developingratings systems for board members based on factors such as attendance and priorperformance. A recent sign of improvement is that the board of the Walt DisneyCompany, routinely considered to be among the country's worst, has hiredlegendary reformer Ira Millstein.
But the true impetus for reform -- is this a surprise? -- may bemoney. The irony is that the corporate community's assertion that Enron wasevidence of the market's efficiency may soon come back to haunt it. One of theparties most eager for director rankings is the insurance industry, which windsup footing the bill when boards like Enron's fail. In the future, companies withlousy boards will pay hefty premiums for "directors and officers insurance."Until then, Frank Savage will have to serve as a reminder of the need forcorporate responsibility.
