TIAA-CREF, long an advocate of promoting good corporate governance at corporations, now finds itself in need of a strong commitment by its board to improve its own corporate governance practices.
Casey Stengel once remarked of his pathetic baseball team: "You look up and down the bench and you have to say to yourself, ‘Can't anybody here play this game?'" Looking at TIAA-CREF's board and trustees, you wonder whether some of the people in place can practice good corporate governance the same time they preach it.
At issue are revelations of conflicts of interest with two trustees and TIAA-CREF auditor Ernst & Young LLP, as well as a lack of communication about the problem to its board by Herbert M. Allison Jr., TIAA-CREF chairman and chief executive officer.
The trustees — Stephen A. Ross, trustee of the College Retirement Equities Fund, and William H. Waltrip, trustee of the Teachers Insurance and Annuity Association of America — violated the SEC's auditor independence standards by engaging in a private business arrangement with Ernst & Young.
The problem affects several fundamental areas of corporate governance, all where TIAA-CREF should know better because of its own shareholder activism: auditor objectivity and independence; board communication; and separation of the roles of chairman and CEO.
This discovery shows an amazing lack of understanding or concern by Messrs. Ross and Waltrip. It also raises troubling questions about Mr. Allison, who from early August until late November failed to inform the full board about the conflicting business relationship between Ernst and the trustees. Mr. Allison's own inaction raises doubt about his concern of the significance of the issue and his judgment on the need to inform the board.
Mr. Allison's neglect to inform the board earlier, except for one member, certainly makes the case for the separation of the roles of chairman and CEO.
The revelations are no small matter: They involved the departure of two trustees under questionable circumstances and an unexpected search to replace its auditor, all involving costs and unnecessary disruptions.
TIAA-CREF on Dec. 3 announced the resignations of Mr. Ross and Mr. Waltrip from their respective boards effective Nov. 30.
In 2003, Ernst entered into an agreement with a company called Compensation Valuation Inc. The majority owner was Mr. Ross. Mr. Waltrip and others were part owners, according to the TIAA-CREF announcement.
"The business relationship was created to develop intellectual property and related services to value corporate stock options," the TIAA-CREF statement noted. "The agreement and business activity thereunder was terminated on Aug. 20, 2004, and a dissolution agreement was signed as of Nov. 17, 2004."
"On Aug. 9, 2004, E&Y informed TIAA-CREF that the business relationship between E&Y and the company owned by the two trustees was not in accordance with the auditor independence standards of the Securities and Exchange Commission. Professor Ross and Mr. Waltrip said that neither was aware that this business relationship raised an issue under the SEC's auditor independence standards. They resigned to ensure there would be no question regarding the independence of the auditor."
It's astonishing CREF and TIAA had such clueless trustees.
Following the revelations, TIAA-CREF announced it will seek bids for an auditor for 2005. That's a no-brainer decision. A tougher call would be to examine how two trustees formed their relationship with blatant conflicts and why Mr. Allison decided not to inform the full board right away.
The board needs to examine Mr. Allison's action and his ability to carry on with his two positions. Mr. Allison himself should be frank with participants and explain his rationale for his actions. TIAA-CREF participants have to have confidence in the judgment and objectivity of the directors and trustees, just as they understand TIAA-CREF is pursuing such standards in the companies in which it invests. TIAA-CREF would help restore that confidence by naming an independent chairman.
TIAA-CREF, while it has general corporate governance standards for its portfolio companies, often applies them on a case-by-case basis. In this case, it should see the need for such a separation.