Big Brother, Big Sister and the Penny Stock Trickle-Down

 


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The dog-days of summer are behind us. So too are the cushy days of serving on a corporate board.

Being a board member used to be easy; all you had to do was attend a few meetings. . . say “yea" or “nay" (in harmony), enjoy the odd charming meal, and maybe walk. . . or drive 18 holes.

And for this privilege, you were paid quite handsomely. Directors at Fortune 1000 companies reported an annual average retainer and per-meeting fee that totaled $76,707 this year, up 35% from 2004. Directors at companies with revenue in excess of $20 billion made an average $115,375, a 43% increase.

But the lazy days of being a corporate director may be ancient history. Tough rules enacted in the wake of Enron and WorldCom mean that corporate directors put in more time and bear more responsibility.

But ultimately, that's for the better, say corporate-governance experts. Board members who are engaged, active and willing to question management do corporations far more good than those who blindly rubber-stamp the CEO's agenda.

"Five years ago, you wanted the minutes to say that everybody was in unison, " said one business ethics professional. He noted that corporate lawyers use to remind board members that a unified front looks more appealing to Wall Street. Who can say “no" to that?

While corporate-governance experts maintain it's vital for directors to debate and ask probing questions, they state that repeating any of that outside the boardroom is a no-no. After-all, a divided front could hurt a company's share price. . . or at the very least, its reputation.

And that became very clear recently when it was announced that Hewlett-Packard was under investigation for spying on directors, and journalists.

In January-February 2005, the H-P board of directors held several meetings and retreats. The subject was the company's high profile CEO Carly Fiorina and her refusal to delegate, her reluctance to hire a Chief Operating Officer. . . and H-P's stock price; flat over the four years of Fiorina's residency.

During and following all of this, several accurate accounts appeared in the press. The H-P board chair, Patricia Dunn set out to find the leaks to the press. Investigators hired by the company to uncover news leaks assumed false identities to obtain directors’ and journalists’ phone records. Unfortunately, that's a felony.

It has also been reported that detectives tried to plant software on at least one journalist's computer that would enable messages to be traced, and also followed directors and possibly a journalist in an attempt to identify the leak on the board.

Eventually they did find the leaks, or most of them, which had come about when a long time director had lunch with a Wall Street Journal reporter.

It should be noted that neither board of director deliberations nor board minutes are confidential. Sure it's illegal to trade on information or tipping others to do so. But it's not illegal to communicate that information to people who will do neither.

Also, directors are not agents of the corporation. As such they do not have the power to “do" anything. . . let alone initiate corporate action.

The revelations at H-P have provided a rare glimpse of boardroom turmoil – resulting in Ms. Dunn's agreement to step down as chairwoman in January, and two resignations from the board. Not the sort of publicity the bastion of Silicon Valley was hoping for.

And not the kind of press that is going to make experienced business people line up to become board members.

Even though the likelihood of personal liability for directors is remote, lawsuits are (I'm guessing) unpleasant.

But how does all of this affect penny stocks? I think these recent actions will have a material impact on both the big old boring blue chips and the more aggressive, riskier and fun, penny stocks.

A more responsible board of directors ensures corporate transparency and accountability. And accountability means you should be able to trust that your favorite penny stock is heading in the right direction.

In a world replete with corporate scandals and corruption a penny stock with more credence and respectability is indeed. . . a good thing.

So, while some big blue chips may fear a divided board room or want to hide dissention in their ranks. . . when it comes to choosing a penny stock, I want to know that my board of directors is looking out for the shareholders. Even if that means they have to do more work. . . and less play.

A seasoned investor with a keen interest in international business and current affairs, John Whitefoot has been working alongside Peter Leeds for the last several years. With over ten years experience in the investing community, Whitefoot is devoted to uncovering the news, trends and ideas that shape penny stocks on a daily basis.

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