After the corporate governance revolution of the 1990s that led to a new era of accountability to shareholders, the Enron debacle has brought new attention to the role of corporate boards and governance. Board members now increasingly realize the need to act more vigorously to hold managements accountable and actively probe areas such as conflicts of interest and compensation of top executives. At the same time, however, would-be reformers of corporate governance practices must guard against going too far and imposing rules that tie managements’ hands.

These were some key issues that Wharton professors and a former CEO of Campbell Soup discussed at a session on corporate governance in Philadelphia as part of the Wharton Fellows program.

Participants in the session recognized that much of the current soul-searching on corporate governance follows from the failure of Enron’s board of directors to detect that the company was about to implode. “That’s the biggest problem with Enron. Where was the board?” asked David W. Johnson, chairman and CEO emeritus of Campbell Soup Co.

Johnson said that until shareholder activists began to pop up in the late 1980s, corporate executives were focused on so-called stakeholders. “The suppliers, the employees, the unions – all these were stakeholders. It was very confusing in the 1980s. I didn’t know what we were really doing,” he said. “I concluded the prime purpose was to build long-term shareholder wealth.”

Good corporate governance, Johnson said, can be a competitive advantage if the board focuses on performance, “not conformance.” A basic plan for directors would require them to hire and evaluate the chief executive and monitor the strategic plan with clear milestones. The board should also be involved in succession plans, internal development and pay-for-performance. Board members also should be evaluated, the way executives are. Only 20% of corporate directors face performance measures.

The first outsider hired to run family-controlled Campbell Soup, Johnson became an innovator in governance. When he was hired in 1990 after working for companies such as Colgate-Palmolive and Warner-Lambert, he told the board he would work hard to improve the firm’s performance and build wealth. But he also demanded that the Campbell board take on a larger role, including bringing a broader perspective to the company, balancing the views of management. Johnson asked board members for open and honest debate in determining the company’s strategy. But once the course was set, he forbade back-biting and demanded support for the plan in private and public forums. “They could see that their job had just gotten bigger,” Johnson said.

At Campbell Soup Johnson tied executive compensation to performance and required equity ownership. He demanded the same of the board. In 1990 Campbell directors received $47,000 in cash plus a pension, medical benefits and donations to favorite charities. “It was all kissy-kissy,” said Johnson. By 1997, cash payment to the board had dropped to $26,000, with no medical, pension or charitable contributions, but stock options worth $150,000 if the share price grew. In 1990 directors were required to own 400 shares, but by 1997 the requirement was 6,000 shares, or about $300,000 worth at the time.

Johnson said companies help their boards be more effective by holding fewer, more efficient, meetings with materials sent well ahead for study. A chairman trained in running meetings can make a difference, and talented board members should receive extra training. Pay for board members could increase, he said, if the Enron fall-out leads to greater personal risk for serving on a board.

Johnson proposed a diagnostic checklist of trouble signs for boards including failure to meet earnings estimates, industry rankings, long-term problems going unresolved or constant restructurings. “But none of those checklists prepared us for what happened at Enron,” he said. “Everything was perfect, wasn’t it? Except it wasn’t.” He imagines directors around the country with weak financial and accounting skills growing nervous: “Can you imagine all those on audit committees today whose knees are knocking?”


Elizabeth E. Bailey, who chairs Wharton’s business and public policy department and has served on the boards of companies such as CSX and Honeywell, said that corporate governance policies are shaped internally by shareholders, the board and management. The role of the board, she said, stems from the idea that management should operate the core business, but it needs oversight to make sure shareholder interests are maintained.

“The thought is that if someone is not monitoring the management, there could be self-dealing and the kind of things that are on everybody’s mind from the Enron situation,” she said. Managers have been known to give themselves perks ranging “from thick carpets on the floor to surrounding themselves with extra people to golf club memberships.” Academics call this “the agency problem,” Bailey added.

Boards can also use outsiders to monitor management, she said. These can include accountants, lawyers, credit rating agencies, investment bankers and advisors, the media, analysts and corporate governance watchdogs. Regulators also play a role in establishing standards in areas such as accounting or auditing, though she added, “The accounting and auditing standards in cases like Enron clearly failed.”

Bailey pointed out that many established industries, such as packaged goods or food, don’t have much flexibility in auditing. More room to maneuver exists for high-tech industries or with new financial instruments such as derivatives. “The system tends to be behind the innovative capability of people figuring out how to get around these rules.” Regulators also have a role in overseeing the financial sector and markets, with policies on competition, foreign direct investment and corporate control.

Bailey believes that the current attention on what went wrong at Enron appears to be focusing on outside forces, not just traditional internal mechanisms. “We’re seeing that it’s not the internal issues alone that are important.” In other countries, she said, stakeholders still make up an external force on corporate governance. “In Europe there’s a much stronger emphasis on the rights of labor inside firms.” Emerging markets, she said, “really don’t have any kind of good monitoring set up in the public sector.”

She cited recent Wharton research that indicates that companies with fewer shareholder restrictions outperformed those with more restrictions, such as poison pills or golden parachutes, from Sept. 1990 to Dec. 1999. “The people who have the least shareholder restrictions have higher returns than the companies that have a lot of power in the hands of management,” she said.


David Larcker, a professor of accounting at Wharton and an expert on executive compensation, said research shows the pay is higher if the CEO is also board chairman. Large boards also tend to inflate compensation. “If the board if bigger they tend to make worse decisions. If a board has 18 or 20 members that’s not a good sign.” He added that older boards tend to go along with hefty management pay, as do boards with many members serving on multiple boards. Another indicator of governance problems is a company with no block of shares worth more than 5%. “We’re talking about big money here,” he said of executive compensation packages. “I think a lot of board members are asleep at the switch.”

Larcker has researched stock options and found some puzzles. First, he said, it appears that many employees do not understand their options, and many are overly optimistic about their long-term economic value. “Companies are doing a bad job of explaining this,” he said, “which I view as almost fraudulent.” Research also indicates that $1 in stock option value correlates to a $1.79 per share decrease in future operating income. “That’s kind of frightening,” he said. “In my mind its unclear if options are a panacea or not.”

In the future, according to Larcker, compensation will be more directly tied to key drivers within the company, whether it is maintaining a franchise, or focusing on other aspects of the business such as employees, customers, technology or alliances. Boards seem to be decreasing their reliance on simple benchmarks or merely matching competitors. “They still want to know this but they’re not locked into it which I think is a very healthy attitude.”


Robert E. Mittelstaedt, Jr., director of Wharton’s Aresty Institute of Executive Education, pointed out that companies are adding more independent directors. “Lots of ground remains to be plowed but I think we’re moving in the right direction,” he said. Corporate governance is a growing concern abroad. At some large global companies reform is underway, he said, noting Sony has decreased the size of its board from 38 to 12 directors. International companies are motivated to reform their corporate governance practices if they want to attract investors, especially in the U.S. “The long-term impact is that at some point the capital markets get to vote on your performance, and your performance and your governance are all wrapped into one.”

Mittelstaedt, who serves on several boards, said he does not think directors will hire more outside consultants to help them make their own decisions. “If management hasn’t done that themselves then there’s something wrong,” he said. “You can become overly reliant on outsiders.”

Mittelstaedt also warned that in the aftermath of the Enron debacle, corporate governance reform might go too far in directions that tie corporations’ hands. He serves on one board where, in his opinion, the best member of the audit committee was a physician who asked good questions. Under rules passed last year members of that committee must have some financial expertise. “We legislated the physician off the committee,” said Mittelstaedt. “There’s a danger there.”

Mittelstaedt said board members’ long, staggered terms make it difficult to make big changes quickly. He pointed to several circumstances that give companies a chance to upgrade their board. For example, companies can overhaul their boards after a merger or after a public offering of stock. A major crisis or turnaround also offers opportunities when companies can revamp their boards. “When a company is in really serious trouble, it’s time to ask if the CEO and his team have all the help from the board that is necessary,” he said. “At times you have to ask a board member to leave.”