A Change for Business, If Not for Washington
July 17 2005 by Chief Executive
THE Sarbanes-Oxley Act, the broad corporate reform legislation passed in 2002, has improved the way companies manage themselves, says Robert L. Crandall, the former chief executive of American Airlines, who now serves on the boards of Anixter International, Celestica, Halliburton and i2 Technologies. The biggest challenge now, in his view, is holding government to similarly high standards of performance. Here are excerpts from a conversation:
Q. What’s happening in the relationship between chief executives and their boards?
A. The net impact of Sarbanes-Oxley has been to make boards generally much more aware of the fact that they have a real responsibility which society expects them to fulfill. Sarbanes-Oxley has had a favorable effect on a lot of boards.
Q. Do you agree that part of the thinking in this legislative and political climate is that directors, not chiefs, should manage?
A. No, no, that’s very much the wrong word. Directors have one primary responsibility, and that is to judge the performance of management. Directors cannot manage. To manage something, you have to be there every day and know every detail of what’s going on. A director simply can’t do that.
Q. Are boards taking more powerful roles by having their audit committees manage relations with outside auditing firms so that chiefs don’t control earnings numbers?
A. That’s not true. You’ve got a fundamental misunderstanding. If you read auditors’ reports and if you read the charters of audit committees, all of them make the point it is management’s responsibility to produce the numbers. What the outside auditor does is to check and crosscheck to see whether the processes by which the numbers are produced are reliable. The audit committee, using the resources of the outside auditors, makes its best effort to determine whether it’s likely that the processes being used can be relied upon. But management produces the numbers. The audit committee cannot take over the numbers.
Q. Do you agree with a study by Fuld & Company, a consulting business based in Cambridge, Mass., that directors are spending so much time on regulatory issues that they can’t concentrate on longer-term competitive challenges?
A. No, I think that’s nonsense. The primary business of the company is to compete successfully. The job of the board is to determine whether management is doing an adequate job: is management paying adequate attention to the shape of the marketplace?
Q. Do you find that you can adequately perform the task of being a director on four boards?
A. Yes. I’m not managing those businesses. I’m serving as a director.
Q. Hasn’t the time commitment increased?
A. It has increased, sure. You have to pay attention. But you don’t go to work every day. There’s a big difference.
Q. Is the period of scandal in parts of corporate America now behind us?
A. You’re always going to have failures. I think the number of failures and kinds of failures are likely to be different. Certainly, Sarbanes-Oxley has made it more difficult for managements to be as quite as egregiously contemptuous of the numbers.
Q. If you believe that things are working pretty well in corporate America, what are your hot-button issues?
A. The big issues of our times are much more focused on government than business. If the government kept its own books the way it requires corporations to keep their books, the U.S. financial statements would look a whole lot different than they do. How many Americans do you suppose are aware that the present value of future commitments by the U.S. government is $47 trillion? That exceeds the net worth of the United States. I think what happened in corporate America, the scandals, are disgraceful, but I’m much more concerned about the honesty and integrity of the government and its governance process.
Q. What’s wrong with the political system?
A. It’s very corrupt. The process of gerrymandering, for example, which has reduced the number of competitive seats in the House of Representatives, is bad. In the last election, we had perhaps 25 seats in the House that were actually contested. That’s one reason the political process has gone out of whack. You tell me why Social Security hasn’t yet been fixed. We have very few people in Congress prepared to make the necessary compromises, moving toward the center from the ideological left and the ideological right. You’ve got a process that cannot deal with problems.
Q. How do you assess the longer-term issues of competitiveness?
A. We used to graduate many more engineers than any other country. Today we are producing 25 percent as many as China produces every year. We don’t have an energy policy. We are still allowing manufacturers to build sport utility vehicles and call them cars when they’re actually trucks. We’re burning more energy per capita than anyone else in the world. And we’re not doing anything about it. The long-term implications of these things are profound.
Q. Which airlines will survive?
A. . Those airlines that get their labor costs down to competitive levels will survive. Those that don’t, won’t.