The Burt and Kravis Show

The timing is rarely this good, so I might as well take advantage of it. In my last two pieces, I argued, among other things, that shareholders are delusional if they think that their board will protect them from a wily and greedy CEO. Conveniently, last week’s testimony by two independent directors of Hollinger International proved my point beyond, as they say in the legal business, a reasonable doubt.

The directors in question are Richard Burt and Marie-Josée Kravis. Both are completely independent—the sort that governance experts believe to be most likely to act in the interests of outside shareholders. Both are distinguished and exceedingly experienced. In addition to being an ex-U.S. ambassador to Germany and U.S. chief negotiator in the strategic arms reduction talks, Burt was a director of McKinsey & Company (the world’s premiere management consulting company), a board member of the Lauder Institute at the Wharton School (one of the world’s top three business schools), and perhaps most ironically chairman of Diligence, which is described as a “business intelligence and risk advisory services firm.” While some may see Burt as primarily a government guy, I think the record shows that he is deeply ensconced in the world of business at its highest level. Kravis may be thought of first as the wife of billionaire Henry Kravis and second as a long-time senior fellow of the Hudson Institute, a leading economic think tank. However, she is extremely experienced in serving on large (if not well-performing) company boards, counting Ford Motor Company, Vivendi Universal and Interactive Corporation among her directorships.

These are the résumés of independent directors that shareholders should have been proud to have protecting their interests. Well they wouldn’t have been proud had they listened to them last week. Each was asked directly whether they approved the non-compete payments associated with the Southam transaction. Each denied it categorically. “We didn’t approve these payments,” Burt is reported to have replied. “I did not,” Kravis is reported to have asserted. Aha, so there was clear fraud, right? Not so fast.

Both were subsequently confronted with the undeniable fact that each signed documents that disclosed and sought approval for the very non-compete payments they denied approving. Things got a bit testy as the apparent contradiction was thrown in their faces. “I must have missed it,” asserted Kravis repeatedly. “As I said several times, I missed it,” Burt shot back. I can understand their frustration. It’s annoying and embarrassing to attempt to pass off hopelessly lame logic—the actual approval shouldn’t count as an approval because we didn’t read what we approved—and have that lameness repeatedly picked at in a public forum. At least no one asked Burt whether he checked the definition of “due diligence” before he named his firm Diligence.

But then a brilliant insight apparently flashed into the learned brain of Burt: square the logical circle by blaming someone else. “It was incumbent on management to bring those [payments] to the audit committee,” he intoned accusatorily. He explained (seriously) that he relied “heavily” on management to point out relevant issues in disclosure filings. So since it was totally unreasonable for him to be expected to read the whole document before signing for its contents, it really wasn’t his fault at all: management had completely let him down. They hadn’t told him exactly what to do: plainly, it was their fault.

So let’s follow the logic trail here. Burt’s responses suggest that he saw his role as director to follow management’s instructions as to what to pay attention to and what not to pay attention to, as well as to approve important matters on the basis of paying attention only to what management indicated warranted attention. In what way does such a role definition protect shareholders from a wily and greedy CEO? In no way.

And therein lies the fundamental governance problem. Most of the time, shareholders don’t need protection because most CEOs are not both wily and greedy. And such good-hearted CEOs are inclined to pick thorough and principled directors, whom they encourage to be as thorough and principled as they can be. But in the cases in which shareholders need protection, as Burt and Kravis demonstrate convincingly with their shoddy board workmanship and pathetic court testimony, it just isn’t going to be there.