Life In The Boardroom Becomes More Difficult

If I go to Church on Sunday and ball all day Monday, Ain’t nobody’s business if I do” memorably warbled Billie Holiday. That’s fine for a sultry blues singer, but not certainly so for the founder and CEO of one of the world’s largest companies. Jeff Bezos has gotten himself involved in a scandal with all the juicy ingredients: sex, wild indiscretion by the richest man in the world, new girlfriend, divorce. And politics: The National Inquirer, a tabloid allied with Trump, threatening to leak information damaging to Bezos, owner of the anti-Trump Washington Post.

None of which is in this writer’s area of expertise. Corporate management is. What is of concern is whether the founder and CEO of Amazon, a company with more than 600,000 employees, a market cap of some $800 billion, more than 100 million Prime members can reasonably claim that what he does outside of his office ain’t nobody’s business but his own. After all, aberrant behavior by Tesla’s Elon Musk contributed to a very annoyed regulator’s insistence that he resign his chairmanship; allegations of unacceptable sexual escapades (denied) forced entertainment powerbroker Les Moonves to surrender his posts at CBS; and similar charges (also denied) bankrupted the companies run by Hollywood mogul Harvey Weinstein.

Theoretically, the answer is simple – in more ways than one, it turns out. An executive’s right “to ball” is no business of the board unless the behavior affects his ability to do his job. Since the executive is unlikely to be a dispassionate observer of whether he has crossed the line that separates the private from the corporate, an often- reluctant board of directors must make that decision if it is to do its job of representing the owners – shareholders – who are paying its members’ fees.

Start with Moonves. Jeff Cunningham of Chief Executive magazine writes, “the CBS board … ignored his misconduct …. You do not need to be an investigator to question why a troop of young actresses march into the chief executive’s office for periodic visits of 20 minutes without any possible business reason to be there. You only need an astute and ethical board of directors…”.

The Weinstein saga features a similar failure of corporate governance. According to Shawn Tully of Fortune magazine, “A group of billionaire board members from the worlds of Wall Street and entertainment let Harvey Weinstein stay in power … [and] oversaw an almost unimaginably toxic corporate culture built and led by their friend…”. When news of Weinstein’s behavior spilled out, the board issued a statement, “…These allegations come as an utter surprise to the board.” Not so according to screenwriter Scott Rosenberg, who worked closely with Weinberg, “Let’s be perfectly clear about one thing: Everybody-f***ing-knew.”

It would be hard to argue that something was not obviously amiss in the case of Bezos. A man who only recently claimed his greatest pleasure was helping with the after-dinner dishes, who frequented a neighborhood Indian restaurant according to the Seattle Times, quite suddenly began appearing at Hollywood parties and eateries with a new girlfriend in tow. Catnip for the paparazzi who patrol those venues, something of which the new couple was aware.

Celebrity corrupts and Hollywood celebrity corrupts absolutely.

Bezos soon announced via tweet his impending divorce from his wife of 25 years. Directors who did not notice this sudden, dramatic change in behavior by what The Wall Street Journal calls a self-styled frugal nerd could reasonably be charged with being asleep in the boardroom. And with short-sightedness if, only if, they are not monitoring the divorce negotiations. Because California is a community property state, Mrs. Bezos might end up with half of their CEO’s shares, or about 8% of the total outstanding. It is not impossible to imagine that the scorned Mrs. Bezos might become a focal point for shareholders more interested in current dividends than Jeff Bezos’s use of their funds to reinvest in future growth and new ventures.

It doesn’t take a scandal to reveal how boards can become complicit in executive misbehavior. Elizabeth Holmes, founder and CEO of Theranos and holder of half its shares, claimed to have testing methods that use a single drop of blood to diagnose multiple diseases. On that claim, she built a company valued at $9 billion. Until it wasn’t. According to Pulitzer Price-winning investigative reporter John Caffeyrou and, later the government, it was all a fraud: Ms. Holmes was indicted last year on federal wire fraud charges.

As Caffeyrou writes in his best-selling “Bad Blood: Secrets and Lies in a Silicon Valley Startup,” Holmes carried the scheme as far as she did by adding to ample supplies of chutzpah a board so prestigious that no one thought to challenge her financial or technical claims. Investors took comfort from a board that included former secretaries of state Henry Kissinger and George Shultz, former secretary of defence William Perry, and General James Mattis (ret.), all of whom received shares in return for their service. This apparently impressed Robert Craft, owner of the New England Patriots, apparently a better judge of which lineman can draw an opponents’ blood than of technologies for doing just that. Craft was not the only sophisticated investor to take a flyer on Ms. Holmes, her board, and Theranos.

These seemingly separate stories are related. Boards of directors often include old pals of the CEO, or unqualified but prestigious members whose names resonate with investors, as was true at Theranos. They often see only what managements want them to see. Board members are protected by insurance paid for by the companies that employ them. They are typically re-elected with the proxies held by managements.

Pressure from activist investors is changing some of this. Board membership renewal rates and the quality of members are increasing. But dangerous pressures remain. One is a natural desire for collegiality in the board room, another the pressure to turn a blind eye to misbehavior of super-star CEOs, still another that what should be a quasi-adversarial relationship between boards and managers becomes a chummy one.

Directors now know, or should, they are living in a new world. They will have to expand their notion of their responsibility for oversight of the managers they supervise. And develop fair systems of sorting out malicious gossip from hard facts. The current method of hiring a large law firm, paid by and beholden to the directors, to investigate and apportion blame, can easily deny the accused a fair opportunity to state his or her case.