Hawai'i boardrooms spiff up credibility

By Frank Cho
Advertiser Staff Writer

Even before the collapse of Enron and the accounting crisis of WorldCom, Hawai'i corporations had been beefing up procedures and adding more independent voices to their boards of directors to ensure CEOs and management are doing their jobs.

Still, the pace of change has been slow and many local company boards still do not have a majority of outside, independent directors, according to corporate filings. The company boards — which conduct audits, set executive compensation and approve big deals — are often controlled by management. That, many experts say, is not necessarily good for investors or the public.

"You really serve at the pleasure of the chairman, who creates the board," said Lane Kelley, chairman of management and industrial relations at the University of Hawai'i's College of Business Administration. "There's really a lot of pressure to go along with the chair if you want to stay on the board."

For years in Hawai'i, as in other states, companies added directors based more on their relationship with the chairman or what business they could bring to the company than on their expertise or independence. This created a cozy relationship with management that has started to raise questions in business circles with the recent spate of corporate financial scandals.

At companies from Enron to Tyco International to WorldCom, directors are being sued by investors and investigated by the Securities and Exchange Commission for allegedly looking the other way, or not nearly closely enough, while chief executives and other officers misbehaved. Even at companies untouched by scandal, directors are under attack for approving exorbitant CEO pay packages and seeming to protect the interests of management rather than investors.

Hawai'i boardrooms have not been untouched by questions about corporate governance.

• Former Bank of Hawaii chairman and chief executive officer Lawrence Johnson was forced to resign under heavy investor pressure after he cut more than 1,000 jobs and the bank lost millions of dollars in bad loans that drew the attention of federal regulators. Despite the losses, the bank paid Johnson a $2.9 million severance bonus on top of his normal retirement benefits when he left the company in 2000, according to SEC filings.
• The former chairman of Bank of Honolulu, Sukamto Sia, is serving time in a federal prison after pleading guilty to bank fraud. The bank was seized by federal regulators in October 2000.
• Finance Factors ran afoul of federal regulators when management refused to foreclose on nonperforming loans and its board of directors, made up mostly insiders, refused to intervene.

In each case, regulators ordered the banks to add independent outside directors with expertise in banking to provide better oversight.

Experts say independent boards prevent corporate shenanigans such as hiding expenses or raiding the corporate treasury. Independent boards also view corporate operations more objectively than management-controlled boards.

In a recent survey of 1,188 publicly traded U.S. companies, 256 had boards not considered independent, according to the Investor Responsibility Research Center in Washington, D.C. To be considered independent, 51 percent of board members had to be outsiders, and not employees or individuals with strong ties to the company.

"What is important that I see now is you have to have experienced people on the board. Most of our board members were family members," said Stephen Teruya, Finance Factors' president and chief operating officer. "You can no longer operate that way because in the end you guys are going to find yourself in trouble."

Experts say interlocking boards also hold potential for problems. While it is not unusual for some executives to sit on multiple boards, it is unusual for executives to sit on each other's boards, raising some questions about board dedication to disciplining management.

Some have said that with Hawai'i's geographic isolation and limited pool of business people, interlocking boards are inevitable. But not everyone agrees.

"I don't believe it when people say that Hawai'i is a small town and there are not enough good directors to go around," said Kelley, who sat on a Silicon Valley company board for the past two years.

Kelley said there are many experts in business at the university who are never asked to sit on boards of local companies, but are often in demand at Mainland firms.

Still, not everyone thinks interlocking boards — which are not as prevalent in Hawai'i as they were 30 years ago — are necessarily a bad thing. "I think if you look at the people who interlock, you will find highly qualified, well-respected people that are appropriate for those positions," said Rodney Romig, dean of the business school at Hawaii Pacific University.

And Patrick McFadden, current director at Finance Factors, said whether or not boards interlock, it would be difficult for anyone to get away with illegal activity for long because of Hawai'i's small business community: "The key thing that a board brings to the table is an objective set of outside eyes to see what management is up to. And in Hawai'i everybody knows what is going on so you can't really hide anything."