Board of Directors and their own private circle jerk

YOU might think that board members overseeing businesses that cratered in the credit crisis would be disqualified from serving as directors at other public companies.

You would, however, be wrong.

Directors who were supposedly minding the store as disaster struck at companies like Countrywide Financial, Washington Mutual or Fannie Mae have not all been banished from other boardrooms. In many cases, directors just seem to skate away from company woes that occurred on their watch.

To some investors, this is an example of the refusal of those involved in the debacle to accept responsibility for it. Whether you are talking about top executives loading up on leverage, regulators who slept while companies took on titanic risks or mortgage lenders that made thousands of dubious loans, few in this crowd have acknowledged culpability. Taxpayers and shareholders, meanwhile, who had nothing to do with the problems, are left holding the bag.

“None of these directors have stood up and said, ‘We made a mistake here by not calling management to account,’ ” said Paul Hodgson, senior research associate at the Corporate Library, a corporate governance research firm. “They have certainly avoided the limelight as far as blame is concerned.”

Moreover, they continue to get work as directors at other companies.

Three large public companies provide excellent examples. They are Sunoco, the oil company; Paccar Inc., a truck manufacturer; and Tetra Tech Inc., a management consulting and technical services concern. Each of these companies has two directors who, until recently, were on the boards of institutions that were centrally involved in the mortgage meltdown.

Let’s begin with Sunoco. Its outside directors include two who did stints at Fannie Mae, the mortgage finance giant seized by the government in September 2008. They are Thomas P. Gerrity, a professor of management at the Wharton School of the University of Pennsylvania, and John K. Wulff, former chairman of Hercules, a specialty chemicals maker.

Mr. Gerrity has been a Sunoco director since 1990 and was a board member of Fannie Mae from 1991 to 2006. He was on the board when Fannie Mae’s balance sheet took on enormous risk and when accounting irregularities in 2004 prompted the ouster of Franklin D. Raines, Fannie’s chief executive.

At Sunoco, Mr. Gerrity serves on the audit and governance committees.

Mr. Wulff, who serves on the audit and corporate responsibility committees at Sunoco, joined Fannie Mae’s board in 2004, after the accounting problems emerged, and is no longer a director there. That was also the year he became a director at Moody’s, one of the three credit-ratings agencies that failed so colossally to assess risk in the debt securities at the heart of the crisis.

“I think it is appropriate for institutions and other shareholders to look at the backgrounds of directors and other boards they have served on, but you need to interpret the data in the context of the specific circumstances of each board,” Mr. Wulff said. “If you vilify board members purely because the companies they oversee ultimately fail, you risk discouraging anyone from getting into a situation with any risk.”

Sunoco and Mr. Gerrity did not return messages seeking comment.

At Paccar, two of its 12 directors were on the boards of big mortgage lenders that imploded. Robert T. Parry, a former president of the Federal Reserve Bank of San Francisco, was a director at Countrywide from 2004 to 2008. Mr. Parry served on four committees of Countrywide’s board: audit, ethics, credit, and operations and public policy. Countrywide, a huge subprime lender, was acquired by Bank of America in early 2008 in a fire-sale transaction.

Also a Paccar director is William G. Reed Jr., a board member at Washington Mutual since 1970. Most recently, he was chairman of WaMu’s governance committee and also served on the audit and finance committees. WaMu’s collapse last year under the weight of absurdly risky loans was the largest bank failure in history.

Although other companies often list board memberships held by their directors, Paccar’s proxy statement does not mention Mr. Parry’s service on the Countrywide board or Mr. Reed’s 38 years as a WaMu director.

Paccar’s spokesman declined to make either director available for comment. But the company said in a statement that its board “provides excellent governance and risk management oversight, which is reinforced by the experienced management team.” Paccar added that it had delivered annual returns to shareholders for the last decade that significantly exceeded those of the Standard & Poor’s 500-stock index.

Finally, two directors at Tetra Tech are both refugees from the board of IndyMac Bancorp. IndyMac, spun off from Countrywide, is another subprime lender that failed spectacularly last year.

Hugh M. Grant, a corporate consultant and an IndyMac director since 2000, was chairman of the lender’s audit committee. He also served on IndyMac’s management development and compensation committee as well as those devoted to corporate governance and legal compliance.

His colleague Patrick C. Haden, an executive at the private equity firm Riordan, Lewis & Haden, also spent eight years on the IndyMac board. He was chairman of its strategy and execution committee.

Mr. Grant, a director at Tetra Tech since 2003, is chairman of its audit committee and serves on two other committees: one devoted to compensation and the other related to nominating and corporate governance. Mr. Haden has been on Tetra Tech’s board since 1992; he is chairman of the compensation and nominating committee and serves on the audit committee. Tetra Tech has six outside directors.

Neither Mr. Haden nor Tetra Tech responded to messages seeking comment. Mr. Grant could not be reached. This is not to say that these directors are not performing their duties. Indeed, some would argue that directors who have witnessed at close range the collapse of a company may learn a great deal from that experience and bring to their boardroom activities an increased sense of responsibility. But it is hard to blame shareholders for wondering whose side directors are on, given the broad failures by many board members to recognize and rein in risk-taking at so many companies.

As fiduciaries for the owners of the companies on whose boards they serve, directors have a duty to act in shareholders’ interests. After all, they are the shareholders’ representatives, and they are charged with ensuring that their companies are operated soundly and with long-term profitability in mind. Yet it doesn’t always seem to work out that way.

Frederick E. Rowe, president of Investors for Director Accountability, a nonprofit shareholder advocacy group, said, “Here’s a conversation you’ll never hear: ‘Yes, I get paid $475,000 a year. I play golf with the C.E.O.; he’s a personal friend. I go to interesting places for board meetings, I am around interesting people, and I would never say one word that would jeopardize my position on the board.’”

The main reason for director dysfunction is that board members have little fear of being fired for incompetence or sleepwalking through meetings. Because of the way director elections are structured, board members can win their seats if they receive just one vote of support. And even if a majority of shareholders withholds support from directors at annual elections, the directors who are singled out are often allowed to stay.

Shareholders interested in ousting a director or two must mount an expensive proxy fight to do so.

There is movement afoot to change this arrangement. The Securities and Exchange Commission has proposed new rules that would give large shareholders a way to replace incompetent directors with their own nominees. Two weeks ago, the S.E.C. reopened its comment period for these rule changes.

But the proposal has too many limitations, shareholder advocates say. For example, only those who have owned a stock for one year and who hold a stake of at least 1 percent in a big company may have their director nominees included in a company’s proxy materials and submitted to a shareholder vote.

“It’s a step forward, but a pretty embarrassingly baby step,” said John Gillespie, a former investment banker who, with David Zweig, is co-author of “Money for Nothing,” a forthcoming book on board failures. “The bigger problem is the culture of boards, which doesn’t allow directors to do an effective job even if they wanted to.”

Solutions to the culture problem, he said, would include instituting term limits for directors, in order to keep fresh blood circulating on a board, and separating the roles of board chairman and chief executive.

MOST important, Mr. Gillespie said, United States shareholder groups holding 10 percent stakes in companies should have the right, as they do in Britain and other countries, to call special meetings. Then and there, they could jettison directors who are seen as not doing their jobs.

“The reality of our human nature is to pay more attention to people who can fire you than to those who can’t,” Mr. Rowe said.

Even though the stock market has performed well this year, Mr. Hodgson of the Corporate Library says he thinks that many directors will face significant opposition, albeit still toothless, from shareholders at annual elections in 2010.

“I think we are going to see some of the highest levels of either ‘no’ votes where companies have a democratic process or withhold votes,” he said. “People were at fault there, and saying that nobody could have predicted it is not an excuse. If you are on the board, you have the responsibility to find those things out and not just believe what management is telling you.”