Monday, November 05, 2007

Boardroom Dramas





I’m looking forward to December's release of The Golden Compass even though it stars Nicole Kidman, who gets on my nerves. The movie is based on Philip Pullman's fantasy novel in which every human shares his or her soul with an animal sidekick, called a daemon.

It would be cool if outside directors had daemons - not in the form of animals, but nerdy accountants who would study the numbers and whisper in their ears at board meetings. But in the real world, this NY Times article published over the weekend asked whether Merrill Lynch’s board – more specifically, its finance and audit committees - had peered closely enough at the firm’s risk management practices.

The basic question, which goes well beyond Merrill and its $8.4 billion subprime-related charge (likely to be dwarfed by Citigroup’s writedown), is how much oversight outside directors can and should provide, short of becoming the corporate equivalent of “helicopter parents.”

It’s a question well worth asking (and, some may say, litigating). But Merrill's transactions were complex, which will make it really tough for a judge, or anyone else, to evaluate this board's actions; much tougher than it was in, say, the case against Disney's board a couple of years ago. If you remember that one, shareholders sued after the board obligingly blessed a $140M severance payment for Disney President Michael Ovitz, whom CEO Michael Eisner had hired with wild enthusiasm only 14 months earlier. (I still think someone should make a movie of the Eisner/Ovitz fallout called “Mean Girls II: The Senior Executives,” and it should include a re-enactment of the corporate outing at which, according to Mr. Eisner, Mr. Ovitz “declined to participate in group activities.”) Through a kindly interpretation of Delaware law, the judge managed not to hold Disney's directors liable, but he sure had the facts down.

Merrill’s debacle, by contrast, involves a multitude of intertwined mind-numbing financial dealings, and the board's oversight job was pretty challenging. It's odd that they didn't appoint a chief risk officer for the firm so there'd be someone to fire besides the CEO. But once you get past that simple observation, it will take a long time to sort out what this board did or didn't do wrong.

Some other Wall Street firms apparently did a better job of risk management than Merrill, thus staving off the evil armies of subprime-linked debt. We may never know what role, if any, outside directors played in this victory, and whether they had help from The Golden Compass’s armored bears.