Monday, May 4, 2009

Louis Lowenstein (1925-2009): 'A Stitch in Time...'

Hang around long enough as a publication's editor and one thing that happens, sadly, is you begin to see a steady stream of your past authors move on to the big boardroom beyond. A loss this past month was Louis Lowenstein. 

The New York Times in its April 25th obit described him as an "influential law professor and former corporate executive who for nearly three decades dissected the excesses of Wall Street and warned of the dangers of short-term investing." I describe him as one of the most incisive analyzers of corporate governance to appear in the pages of Directors & Boards during my 28-year tenure as editor. 

I had the pleasure of publishing several pieces by Mr. Lowenstein. An article he wrote for me in 1997 is as vital to pointing the way forward for a sound governance system as it was when it first appeared a dozen years ago. Titled "A Governance Tool that Really Works," Lowenstein highlighted a factor that often is not fully recognized and appreciated in debates over how to make corporate boards and managements more effective: our financial accounting and disclosure system.

In the nonstop handwringing over how to improve governance, he wrote, "we usually look to board structures, compensation patterns, independent oversight, and the like. The debate has thus far been waged without so much as a nod toward the day in-day out impact of our accounting standards. I will suggest that good financial accounting, the extensive disclosures mandated most often in the English-speaking world, and notably in the U.S., is an often overlooked but powerful tool for enhancing corporate performance."

He went on to flesh out brilliantly this thesis. Let me cut to his two concluding paragraphs:

"According to a proverb that was popular in America when I was a child, 'A stitch in time saves nine.' My mother darned my socks, as most mothers did in those days, and as few if any mothers do today. But my mother would have understood corporate governance in those same terms: It is better to act before more damage is done.

"As we have recognized in the U.S. for over a half-century, good financial accounting is important to the integrity of our markets — but it is also an important corporate governance tool. It provides the brightest light and the most objective, detailed, and textured portrait of managerial performance. Without it, neither the financial press, nor shareholders, nor markets could scrutinize that performance, except by inference from sketchy data or by reliance on inside information of uncertain quality and consistency. Without it, the necessary stitches will not be taken in time."

Did I say his article is as vital as ever? My misspeak. Make that more vital than ever. As this Great Recession grinds on with its profusion of accounting and disclosure atrocities (hello Citigroup and Bank of America/Merrill Lynch, et al), Mr. Lowenstein's paean to accounting integrity and full disclosure should be Exhibit A in the reading list for all new board members, especially those assigned to audit committees. From my past interactions with this famed Columbia Law School prof and former president of Supermarkets General Corp., I believe he would approve.
[Photo by Gabriel Cooney]