At this writing, in the midst of proxy disclosure season, the headlines are full of articles on executive compensation--and bile levels are running high. But let's be reminded of this wise counsel: "Vastly more money is wasted on bad acquisitions than on overpaid CEOs."
That sensible note comes from Robert Denham, in an article he wrote for Directors & Boards 10 years ago. Bob Denham, as you likely well recall, parachuted into Salomon Inc. with Warren Buffett to help stabilize the investment firm following its 1991 Treasury auction scandal. He had been a partner in the law firm of Munger, Tolles & Olson, where he had worked for 20 years advising clients on strategic and financial issues, and to which he returned after resolving all the legal and regulatory issues that threatened to destroy Salomon and negotiating the sale of the investment firm to Travelers Corp. for almost $10 billion.
When the dust cleared on all this travail, he recorded a set of thoughtful observations on corporate governance that we titled "What Should We Expect from a Board?" In addition to the indisputable observation that I kicked off this column with, he devoted several passages to the role of the board in M&A. It is always a worthy endeavor to dip into a classic advisory from the Directors & Boards archives, so let me reacquaint our Boardroom Briefing readers with a bit of his counsel on doing a deal that directors don't live to regret:
* "The board can play a valuable role in connection with proposed acquisitions. Ego, animal spirits, and badly structured compensation systems all conspire to encourage CEOs to love acquisitions even when shareholders should hate them."
* "For a board to be effective here, however, it has to have its own sense of the value of things--the value of their company and the target. While a good investment banker will seek to privately discourage management from a bad transaction or from paying too much, the board is unlikely ever to get a sense of this."
* "If the transaction is being presented to the board, any good management will have found an investment banker to endorse it. There is really no substitute for the board making its...