By Maria Saporta
Friday, September 10, 2010
Corporate governance is a key term in today’s business vocabulary as the public has gotten to know the failings of Hewlett-Packard Co.’s Mark Hurd, Enron Corp.’s Kenneth Lay and WorldCom’s Bernie Ebbers.
That wasn’t the case 15 years ago when Kennesaw State University formed its Center for Corporate Governance.
Today, the Center has become a national resource on corporate governance issues by conducting research, by serving as an adviser to companies wanting to improve their board practices, and by teaching the next generation of executives the best practices of management and oversight.
But when it was started by three accountants, the Center was ahead of its time.
It was the summer of 1995. Two Kennesaw business and accounting professors and a practicing accountant got together for lunch. What about starting a Center for Corporate Governance at Kennesaw?
It took one day for them to make a decision to start the center. They received the green light from Kennesaw, partly because they did not ask for any university money.
“Corporate governance was not a popular word at the time,” said Paul Lapides, co-founder and director of the center. “People on boards did not want to hear those terms.”
Within months after the center started, The Wall Street Journal wrote a prominent story about Archer Daniels Midland Co.’s price-fixing troubles, and it mentioned KSU’s governance center.
“Here we were at a relatively small state school starting a corporate governance center. We were just lucky,” said Lapides, who called Kennesaw’s Michael J. Coles College of Business “entrepreneurial.”
In the 15 years since the center was established, the scrutiny of corporate America and its boards has become part of the national conversation. But that’s not the way it was in the 1990s.
Bobby Vick, a former partner with Price Waterhouse who now has his own firm, had been concerned about the lack of oversight from audit committees of boards.
Vick spoke of his concerns to his friend and former client, Lapides, who had joined KSU’s faculty. “It ended up that Paul was a storehouse of knowledge about corporate governance,” Vick said.
At the time, fellow professor Dana Hermanson had just written a research paper on the topic; and that’s how the three accountants ended up having lunch 15 years ago. “Paul came up with the idea of the governance center at Kennesaw,” Vick said. “There were very few centers at the time. And there really weren’t that many experts on corporate governance.”
As someone had told Vick, “There’s great need, but no demand.” That was especially true of the need to have independent audit committees.
“Paul and Dana had a broader perspective of corporate governance. But accounting was the enzyme that sparked the conversation,” Vick said. “Dana and Paul took the ball and ran with it.”
It wasn’t always easy going. A few years into in, the Center sent a letter to every audit committee board member of a public company in Georgia.
“One director wrote back and said: ‘I don’t want to learn anything about audit committees.’ And he was on an audit committee,” Lapides said. “In 1995, most boards were still very much of an old boys’ club. There was very little concern about getting sued.”
Then came Enron, WorldCom, Arthur Andersen, Tyco and Adelphia, shining a harsh light on the failings of corporate governance.
“The clarion call came in 2002, and at that point, director education programs exploded in the United States,” Lapides said. “In January of 2002, there were 15 different bills being proposed in Congress. Directors weren’t happy about that.”
As Vick said, the corporate governance issues that had surfaced at the Center years earlier “proved to be relevant.” All sorts of practices that had been commonplace in the 1990s now are frowned upon — companies that have interlocking directors, boards that have a majority of inside directors and executives who decided who would serve on the board.
“Once Enron happened, the public got mad, and when the public got mad, the politicians were motivated to act,” said James Tompkins, director of the Center’s Board Advisory Services and a KSU professor of finance.
Hermanson said that led to passage of the controversial Sarbanes-Oxley Act. “There’s a lot of research in accounting that looks at pre-Sarbanes versus post-Sarbanes, and we clearly see changes that are desirable,” Hermanson said of the law. “We find management being more conservative in financial reporting. We see audit committees spending more time on their board duties.”
As Tompkins said: “Directors work harder, and they take it more seriously.”