Last week’s testimony of former Illinois governor Jim Thompson stunned even me, though I was already jaded by the previous week’s testimonies of Richard Burt and Marie-Josée Kravis. The implication of the Thompson testimony is nothing less than that we should throw out, trash, absolutely abandon the central premise of modern governance of public corporations.
Let’s review. Shareholders (called “principals” in the governance business) own companies. Management (called “agents”) runs companies on behalf of and at the behest of shareholders. However, management has self-interests, and those self-interests can cause them to take actions that are detrimental to shareholders. This lack of alignment, referred to as the “principal-agent problem,” is the central focus of modern governance theory, which holds as its core that the principals need a board of directors that will enforce the alignment of the agents with the interests of the principals. That is to say, in modern governance theory the board of directors is considered the central answer to the principal-agent problem.
Now I must admit, even though all of modern governance theory holds this central premise, I have always had a bit of a logical nit with it, and here it is. Senior management and board members are drawn from almost exactly the same labour pool—most board members are ex-executives, or advisers to executives (lawyers, bankers, consultants, etc.). And board members are working for shareholders just like management is—i.e., they are agents, too. So remind me again why we would assume that one category of agents (board members) is well positioned to discipline another category of agents (management). Why do we assume that the first category of agents is above reproach while the second is suspect?
That brings us to Thompson. He is a lawyer, in fact a former U.S. attorney of the very office that is now prosecuting Conrad Black in this trial. For 13 years ending in 2006, he chaired the prominent Chicago-based law firm of Winston & Strawn, reported to be the 37th-largest-billing law firm in the world. So he knows more than a little about the law. In between being a U.S. attorney and a law firm chair, he served four consecutive terms as governor of Illinois. So he knows more than a little about responsibility and accountability. And since leaving office he has served on a dozen corporate boards, so he knows board responsibilities—enough in fact to be named chair of the audit committee of Hollinger International, a very important position and central to the board’s purported role in taming the principal-agent problem. In terms of modern governance theory, by background and experience, Thompson would have to be considered the most qualified board director imaginable.
Let’s turn to Thompson’s logic and attitude as revealed in his testimony—and given his long experience as a lawyer and prosecutor, I am going to assume that he realizes that it is a bad idea to lie on the stand, so I will take him at his word. When asked directly whether he approved the contentious non-compete payments, he categorically denied that he had. When then confronted with a number of the resolutions or filings containing details of the non-compete payments that he signed, he confirmed that he had indeed signed them. When quizzed as to why he could possibly say that he hadn’t approved the non-compete payments when he had signed their approvals, he responded that he hadn’t seen the particular clauses because he only “skimmed” the documents. Hence, apparently, his approval didn’t count. What on earth could possibly be his explanation for skimming document after document that contained details of the non-compete agreements? Here we have the clincher: “They were prepared by management and by counsel, and if anything was amiss I would have presumed they would have pointed that out, and they did not.”
So there isn’t even a hint of apology or soul-searching about a job ill-done. It is management’s fault for not bringing to his attention that as audit committee chair he should object to the very non-compete agreements that they were proposing in the first place. He didn’t seem to have an explanation of why management would propose anything that they would go on to point out to the board as being a bad idea against which the board should vote.
Think about his logic, the logic of the man put squarely in the single most responsible position within the hierarchy of modern governance theory: audit committee chair. He defines the entirety of his job as accepting confessions from agents who are picking the pockets of the principals. Should said agents choose not to come to him proactively to confess, he does not see his job as entailing the lifting of a finger. Skimming lightly—meaning documents, not money—is his only responsibility. He believes that today, after it all, unless of course he was lying on the stand, and we have already dismissed that as unthinkable.
After Thompson’s performance, why would anyone, anywhere, think that boards of directors can and will protect shareholders from wily and greedy agents? There is a reason. Modern governance theory is religious dogma, and that dogma is upheld principally by theoreticians and experienced directors who have never experienced up close and personal a wily and greedy agent, and because of that, they design governance systems for non-wily, non-greedy agents. Thompson proves beyond a reasonable doubt that if unaligned agents are a problem for shareholder principals, then they are as much of a problem in the role of directors as they are in the role of executives, and it is bloody well time that the governance priesthood figured that out.