‘Tainted,’ but Still Serving on Corporate Boards

James A. Johnson, a board member at Goldman Sachs.Joshua Roberts/Bloomberg News James A. Johnson, a board member at Goldman Sachs.

When David M. Poppe sat down a little over a week ago to write a letter to his investors, he knew he was taking an unusual step.

Mr. Poppe, who manages money for the Sequoia Fund, one of the most well-respected institutional investment firms in the country, made his letter public last Thursday, setting off a debate within the upper echelons of corporate boardrooms.

His letter, which he wrote with his partner, implored his firm’s investors to vote against the re-election of one of Goldman Sachs’s most prominent board members, James A. Johnson, a former chief executive of Fannie Mae. Mr. Poppe characterized Mr. Johnson’s tenure as being “at the center of several egregious corporate governance debacles.” Mr. Johnson also is a board member of Target, and Mr. Poppe also advises his investors to vote against his re-election if he is nominated again.

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It may be surprising that the former chief of Fannie Mae still remains the director of a public company as prominent as Goldman Sachs and Target. But perhaps more surprising, many other executives who had tumultuous reigns are also board members of major public companies: Charles O. Prince III, the former chief executive of Citigroup, who resigned under pressure in 2007 amid huge write-downs at the bank, is a director of Xerox and Johnson & Johnson. E. Stanley O’Neal, the former chief executive of Merrill Lynch on whose watch the firm loaded up on subprime debt that almost bankrupted the company, is a director of the aluminum giant Alcoa.

And a number of other prominent executives could soon be added to that head-scratching list. Eduardo Castro-Wright, a vice chairman at Wal-Mart Stores who oversaw the company’s Mexico unit and was identified by a former executive there as being part of a bribery scandal that was recently uncovered by The New York Times, is a director at MetLife.

E. Stanley O'Neal, former chief of Merrill Lynch.Susan Walsh/Associated Press E. Stanley O’Neal, former chief of Merrill Lynch.
Charles O. Prince III is a director at Johnson & Johnson. J. Scott Applewhite/Associated PressCharles O. Prince III is a director at Johnson & Johnson.

While we’re on the topic of bribery scandals, it’s worth pointing out that Andrea Jung, who recently stepped down as the chief executive of Avon amid a bribery investigation and financial struggles like declining sales, is a director of Apple. (She remains chairwoman of Avon, though it’s unclear how long she will stay.)

“It always surprises us when we see these directors without any questions being asked,” Paul Hodgson, senior research associate at GMI, a governance ratings firm, said generally of executives who oversaw failed companies or companies that were involved with scandals. “Shareholders are starting to wake up to this.”

Mr. Poppe said he and his partner, Robert D. Goldfarb, had been considering these issues for some time, but had rarely spoken out publicly. In the case of Mr. Johnson, they said that they had voted against him when he was up for re-election last year at the boards of Goldman and Target.

This year, Mr. Poppe said they decided to be more public, in part, because they were surprised that Goldman had nominated Mr. Johnson for re-election and felt he had “a longtime record of failure at public companies.” He cited Mr. Johnson’s role at Fannie Mae in the 1990s as helping to establish the problems that unfolded after he departed.

Mr. Johnson stepped down in 1999, but there has long been a debate about whether he was responsible for creating the culture that led to Fannie Mae’s failure. In fairness to Mr. Johnson, the vast majority of losses racked up by Fannie were the results of loans bought after he departed.

Mr. Poppe also cited Mr. Johnson’s board memberships at the UnitedHealth Group, in which the company’s chief settled claims of backdating stock options, and KB Home, in which its chief was convicted of felony charges for backdating.

Mr. Poppe noted that in both cases, Mr. Johnson was on the compensation committee. “What does that say?” he asked.

He then recounted a famous line from Warren E. Buffett: “I’ve been on 19 boards and they put me on one comp committee — and they regretted it. They’re looking for cocker spaniels, not Dobermans.”

Mr. Poppe added that he felt that when Mr. Johnson was on a board’s compensation committee, the executive pay had “been excessive.”

Mr. Johnson declined to comment.

Goldman Sachs, in a statement, said: “The board has recommended shareholders re-elect Mr. Johnson. He has served them well since 1999 and will continue to do so.” In the firm’s proxy, the company said, “Mr. Johnson offers deep insight into governmental affairs and the regulatory process, gained from, among other things, his tenure at Fannie Mae and his work with Vice President Walter F. Mondale, including as the vice president’s executive assistant.”

Mr. Poppe did concede, “I imagine he’s got a good Rolodex.”

But his letter raises an important question: Does an executive’s failed history at one company automatically disqualify him from serving on the boards of others?

Mr. Hodgson says directors who have been at companies with problems often argue to him “that going through an experience like that makes them a better board member.” He adds, “That’s the excuse we get.” He said that while there might be some merit to that argument for certain directors, most are “tainted” by the experience.

Surprisingly, at least to me, one person close to the Alcoa board praised the work of Mr. O’Neal, formerly of Merrill Lynch, during the summer and fall of 2008 during the peak of the financial crisis. This person, who was not authorized to speak publicly because board conversations are confidential, said that Mr. O’Neal’s intimate knowledge of the financial markets and the impending problems that financial firms were having allowed the company to make smarter decision about lines of credit. Mr. O’Neal, who saw that credit was drying up, urged Alcoa to take out longer-term loans that were more expensive, rather than shorter-term loans that some members of management were supporting.

As for Mr. Poppe, he said he did not buy that previous experience at a failed company should be considered a qualification for board membership.

In the end, he is not hopeful that he will win the vote to oust Mr. Johnson. After all, he said, most investors follow the recommendation of management.

“In terms of winning the vote, it’s tough,” he said. “We’ve gotten good feedback. But the phone isn’t ringing off the hook.”

Correction: April 25, 2012
The DealBook column on Tuesday, about executives from scandal-tainted companies who serve on the boards of other companies, gave outdated information about such service by H. Lee Scott Jr., who was chief of Wal-Mart Stores in the period when its Mexico unit was involved in widespread bribery. Mr. Scott stepped down from the Goldman Sachs board last year; he is not currently a director there.