HOLDING COMPANIES LOOK AT BOARDS IN WAKE OF ENRON
NEW YORK (AdAge.com) -- In cutting four insiders from the board last week, Interpublic Group of Cos. Chairman-CEO John J. Dooner Jr. set a new standard among ad agency companies in a key measure of corporate governance.
With only two insiders on a board now comprising nine directors, Interpublic's board gives outsiders strong majority control, a shareholder-friendly move that comes as corporate boards across America are under pressure to demonstrate independence.
"A board ought to be 80% independent," said Charles Elson, director of the Center for Corporate Governance at the University of Delaware. "Good boards should be substantially dominated by outsiders."
While the number of directors varies, depending upon company size and market capitalization, corporate-governance experts recommend eight to 11 directors for public companies.
But Mr. Dooner said he decided to alter the board's composition more than a year ago -- last January -- after he moved up to chairman and CEO.
"The process took some time," he said. "The drama was that we were headed toward an all-outside director board, which strengthens my interaction with the directors."
Mr. Dooner and Sean Orr, executive vive president and chief financial officer, are the only insiders on the board.
Agencies as public corporations
Interpublic's move is one sign of a coming of age for agency companies, reflecting their emergence as major public corporations following a period of industry consolidation.
Compared with boards of three marketing-communications rivals -- WPP Group, Omnicom Group and Grey Global Group -- Interpublic, which invented the agency holding company four decades ago, now leads in best practices for board composition.
Firing the boss
"There's no benefit to having insiders on the board," said Mr. Elson, the corporate-governance expert. "If the role of the board is to hire and fire the boss, and to monitor in between those times, how can [an insider] vote to fire the boss? Especially if firing the boss may mean [the insider director] will be fired?"
The inclusion of operating unit executives on a board also conceivably could draw the board into parochial debates that are best left to the CEO to sort out.
WPP Group has 15 directors, four of whom are company executives.
With 18 directors, nine of them company executives, Omnicom's board is heavily weighted with insiders. John Wren, Omnicom's president-CEO, declined an interview request and declined to answer questions submitted by Advertising Age magazine.
Grey Global looks good in terms of percentage of outsiders -- 75% -- but the company has only four directors, half what some board experts recommend. Grey is distinct from the three rivals: It's much smaller, and one person -- Chairman-CEO Ed Meyer -- controls the majority of voting stock through his own stake and his position in a trust. Mr. Meyer declined to comment except to note that outsiders account for three-fourths of the board.
At Havas Advertising, nine of 15 board directors are French and three are Spanish. Chairman-CEO Alain de Pouzilhac is known to favor adding more outside directors -- seven now work at Havas companies -- of different nationalities. Havas is also the only holding company whose chief creative officer, Jacques Seguela, sits on the board.
Pleasing to Wall Street
Wall Street analysts generally agree board independence is good. "It's always better to see more power among outside directors than insiders, especially these days when independence of boards and auditors is a key issue," said Michael Russell, equity analyst at investment bank Morgan Stanley.
Of course, definitions of terms like "independent" vary. The National Association of Corporate Directors says the ideal board member has never been an employee of the company or subsidiary; is not a relative of an employee of the company; provides no services to the company; is not employed by any firm providing major services to the company; and receives no compensation from company other than directors' fees.
Viewed under those criteria, the independence of several of WPP's 11 outside directors is open to debate. Board member Jeremy Bullmore is a retired 33-year veteran of WPP's J. Walter Thompson. Masao Inagaki is chairman-CEO of Japan's Asatsu-DK. WPP said Mr. Inagaki does not work at a subsidiary company, but WPP is the largest shareholder in Asatsu-DK and the Japanese agency is WPP's fourth-largest shareholder. Mr. Inagaki and Mr. Sorrell joined each other's boards.
In addition to independence, Mr. Elson advocates that directors be nominated by a board committee of independent directors and elected annually. He also favors term limits of 10 to 15 years.
Directors "get stale," he said. "You want new experience."
Under Mr. Elson's criterion, Grey Global falls short: Mark Kaplan, who serves on multiple corporate boards, has been a Grey director since 1973.
Skills and experiences
Interpublic's Mr. Dooner notes the mix of insiders and outsiders is not the only contributor to creating a successful board. The different skills and experience each director brings is also relevant. The Interpublic board change included the addition of more financial acumen with the arrival of Michael Roth, chairman-CEO of financial services provider MONY Group.
"He's got a couple of dimensions," said Mr. Dooner. "Heavy management and strong financial experience."
The additional outsider is a good thing, but Merrill Lynch & Co. analyst Lauren Rich Fine wonders whether Mr. Dooner has achieved the right balance.
"I would have liked to see David Bell on my board because he asks the right questions and has experience running his own holding company," she said. Mr. Bell, who left Interpublic's board last week, is an Interpublic vice chairman and was chairman-CEO of True North Communications, which Interpublic bought in June.
Dooner's other board
Mr. Dooner created a board of executives who run Interpublic's four operating units: Mr. Bell, who oversees the Partnership unit; Jim Heekin, chairman-CEO, McCann-Erickson WorldGroup; Brendan Ryan, chairman-CEO, FCB Group; Larry Weber, chairman-CEO, Advanced Marketing Services. The group will meet when the board does, though separately.
Messrs. Bell, Heekin and Ryan left the board last week, as did Frank Lowe, chairman-CEO of sports-marketing unit Octagon Worldwide.
Post-Enron, another area of inspection is the potential conflict of interest created when a company's independent auditors perform financial audits as well as other types of consulting work.
Interpublic paid PricewaterhouseCoopers $4.6 million for auditing financial statements in 2000. PricewaterhouseCoopers received an additional $9.3 million for other services; an Interpublic spokesman said the latter fees were for additional accounting and tax services such as acquisition due diligence.
Omnicom paid auditor Arthur Andersen $9 million to audit its 2000 financials and an additional $7.9 million for "other fees," according to filings to the Securities and Exchange Commission. Omnicom declined to comment on the fees or services.
Andersen, the accounting giant that's taken heat for its work on Enron, also audits WPP's books and was the accountant for True North before its acquisition. Andersen's French arm audits Havas Advertising.
Staff writers Mercedes Cardona, Kate MacArthur and Laurel Wentz contributed to this report.