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vol. XV no. 3 A.D. Frazier is uniquely positioned to call for changes in corporate governance. He has viewed the way corporations make their most important decisions from two distinctly different angles the boardroom as well as the pinnacle of a major stock exchange - and he offers specific steps that boards of directors can take to begin to overcome the national crisis in confidence in American business institutions.
The 56-year-old North Carolina native spent six years as chief operating officer for the 1996 Atlanta Olympic Games before becoming president and CEO of INVESCO Inc. and then chairman and CEO of the Chicago Stock Exchange.
At the end of July, he left the stock exchange to become president and chief operating officer of Birmingham-based Caremark Rx Inc., a corporation with $5.6 billion in annual revenue that manages pharmacy benefits for large, self-insured organizations. Frazier will continue to live in Chicago - Caremark is run out of Northbrook, Ill. - and keep a condominium in Atlanta and a house in the North Georgia mountains.
He earned bachelor's and law degrees from the University of North Carolina at Chapel Hill and took several business courses at Georgia State University during a stint with C&S Bank in Atlanta during the 1970s.
In an interview during his final days at the Chicago Stock Exchange, Frazier said he sees the current crisis that has swept across the corporate world as part of a cycle that extends back more than a half-century. In a nutshell, Frazier said, "We are wringing out the excesses of greed in today's marketplace."
On the day he spoke, a CNN/USA Today/Gallup poll showed that only 23 percent of people surveyed believe they can trust CEOs of large corporations, trailing lawyers (25 percent), government officials (26 percent), journalists (38 percent) and people in general (41 percent). That same week, American Banker wrote: "The current system is broken in too many places and needs to be overhauled." The week before, BusinessWeek wrote: "To dismiss the rising swell of calls for substantive reform is to ignore fundamental problems that led to widespread financial manipulation and outright greed."
Four Principles for Reform As an antidote to deteriorating confidence, Frazier said boards of directors should follow certain principles of corporate governance to represent shareholders, employees, customers and suppliers. "And when they don't, shame on them. They're not doing their job."
Frazier's recommended principles for corporate governance:
According to Frazier, it has unfortunately become common for auditors, as they have diversified their offerings to add value by consulting, to earn consulting fees that in some cases are well in excess of the audit fee itself.
"These things have come together at the same time," he said. "The abusers who have begun to topple are susceptible to one internal person, a whistleblower or an outside auditor, bringing questionable behaviors to light."
A classic example of that phenomenon, he noted, was the confidential Enron document that showed how the company's traders drove up power prices during the California power crisis.
"When you become susceptible to that, the market wonders whether everything is as it should be. The market is highly liquid and fast-moving. A rumor or concern can create huge movements. With large numbers of investors, everybody jams the exit at the theater when somebody screams fire."
Frazier believes most companies will clean up their acts. "I look for more companies formally adopting commitments to these types of corporate governance principles."
From his stock exchange perspective, Frazier said former SEC Chairman Arthur Levitt took important steps to encourage the independence of directors and to formalize the role of the audit committee. "At least one person has to be thoroughly knowledgeable in financial matters, and all of them have to be financially literate."
Levitt also had asked Congress for money to expand the SEC. "Congress was not particularly inclined to encourage that expansion, probably as a result of lobbying on behalf of the companies," Frazier said. "But now Congress has found this to be a cause celebre. I think the American people will feel better when Congress passes a bill, whether or not it is exactly on point or whether it is an acute or blunt instrument. I think the fact that Congress is interested is a little bit of a lagging indicator."
The Coca-Cola Company's announcement in July that it was planning to report stock options as expenses led Frazier to predict that more large companies would take such a step. But, he said, there are sometimes good reasons not to do this.
"Options can work in your favor, and they can also work against you if you are an individual who is awarded options. If the stock is up and you get awarded 1,000 options at 55 and the stock falls to 45, your options are underwater. That serves as a disincentive to the person who has gotten the options granted, because he knows there is no value in them. In many cases, the people who are awarded options leave, and the options expire unexercised. So it is an estimate no matter how you cut it.
"It's like anything else. An occasional dessert isn't going to destroy your diet, but if you overdo it, you're in trouble. The excesses are opposed to the fundamental tool itself, so it seems to me that excesses are the area to focus on, as opposed to whether stock options are inherently bad or not. And any sort of excess is likely to cause trouble."
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