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10/06/92

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Stanford Bookstore begins attempt to change governance structure

STANFORD -- Implementing an independent audit recommendation, the Stanford Bookstore board of directors is asking the 36 "members" of the corporation that owns the bookstore to vote themselves out of existence.

In other bookstore-related news, the state attorney general's office, which has been studying bookstore problems since last spring, has decided to launch a more formal investigation.

The members of the bookstore's nonprofit public-benefit corporation are being asked to approve a new governance structure. An expanded board of directors and board committees would be charged with monitoring all finances and guiding major operational policies. The association of "members," which is deemed anachronistic, would then cease to exist.

Packets that include proposed new articles of incorporation and new bylaws, along with a ballot, were to be mailed Wednesday, Oct. 7, according to law Professor Robert Weisberg, interim president of and spokesman for the bookstore's board of directors.

Directors spent the summer working out details of the proposed governance changes, which, if approved, would allow them to begin expansion of the board in late November. The augmented board would include new directors drawn both from the university and the outside community, Weisberg said.

The changes were proposed last May by an outside committee that directed an investigation into allegations last February by the Stanford Daily about unusual perquisites, including a vacation home in the Sierra foothills and eight luxury or high- performance vehicles for top managers.

Additionally, the investigation included a $1.8 million investment loss the bookstore suffered in 1990. The loss occurred when former controller Patrick McDonald, without authorization by the board or senior managers, invested a large amount of the bookstore's reserves in highly speculative equities through margin accounts.

McDonald then ignored orders by managers to convert those investments back to safer securities, leading to the large loss when the stock market dropped significantly. McDonald subsequently was fired.

The bookstore is independent of the university, but has been governed by a board of seven faculty, staff and student directors elected from among the "members," who each pay $1 to be part of the nonprofit corporation.

Despite their theoretical authority, members have few duties: They meet annually to elect the store's board of directors and new members; otherwise they do little more than provide informal advice on bookstore operations.

"Everyone who has studied it agrees it is an inefficient anachronism," Weisberg said of the organization, which was formed in 1897 as a cooperative association but now is classified as a nonprofit public-benefit corporation.

Weisberg said that an informal poll of members showed that many favored disbanding the body.

State attorney general's investigation

Regarding the state's investigation, Deputy Attorney General James Schwartz said he was trying to resolve "still unanswered questions." He declined to be specific, citing confidentiality rules imposed on his office when an investigation reaches this stage.

He did say that the investigation is civil, not criminal. He wants to determine, he said, "whether there was a misuse of funds" and if so, who was responsible and what needs to be done to recover the funds on behalf of the nonprofit bookstore.

Schwartz said that if his office finds cause, "we could take action to remove officers or directors."

Weisberg said that the attorney general's office would likely end up interviewing people who already had been interviewed by bookstore investigators and asking mostly the same questions and "likely getting the same responses."

"At this point, it remains unclear what can be accomplished" through the more formal investigation, Weisberg said.

He said that bookstore directors and outside attorneys "are very distressed that the bookstore's expenses may mount, especially when the attorney general's ostensible goal here is to protect the very bookstore assets which are diminished by legal expenses."

The bookstore has spent more than $300,000 on legal and auditing fees, and the total is expected to end up much higher, Weisberg said.

By now, the Stanford Bookstore is "certainly the most thoroughly scrutinized nonprofit organization in California, and perhaps the most thoroughly scrutinized corporation of any kind," Weisberg said.

In May, an independent study commissioned by bookstore directors found no evidence of fraud, but criticized directors and senior managers for lax oversight and poor judgment.

The report recommended the revisions in governance - endorsed this summer by directors - that must be approved by a majority of the dues-paying members.

Those overseeing the investigation also suggested that the bookstore find a way to "unwind" its relationship with the vacation home in way that would preserve bookstore assets.

The bookstore leased the home from a consulting company owned by the store's top two managers, Eldon Speed and Philip Chiaramonte. The bookstore has paid $283,900 in lease payments and costs of other items at the property, including utilities, cleaning, furnishing and improvements.

Weisberg said technicalities are still to be worked out on divestiture of the house.

As recommended by the committee, the bookstore has divested itself of the cars that were considered part of managers' compensation package. Their cash compensation was increased to make up for the lost perquisite, although Speed's and Chiaramonte's salaries increased less than the value of their cars, Weisberg said.

Filling board vacancies

With the departure of two students and two faculty members, the bookstore's board of directors this summer briefly shrank to three members: Weisberg; Agnes Peterson, curator of Central and Western European collections at the Hoover Institution; and Nancy Padgett, director of finance for the School of Humanities and Sciences.

In August, Los Angeles businessman Morton Winston was elected to the vacancy created last year by the resignation of sociology Professor Sanford Dornbusch. A lawyer by training, Winston served on the bookstore's independent, three-member audit committee last spring.

At its September meeting, the board elected William Lazier to the slot formerly held by history Professor Peter Stansky. Stansky, who had been serving as board president, is away from campus on sabbatical this year.

Lazier is a businessman who has been a lecturer at the Graduate School of Business and now also teaches courses in business for lawyers at the Law School, with particular emphasis on business ethics.

Weisberg said both Winston and Lazier have "vast experience in business and sit on a number of corporate boards."

Although he ran "fervently away from it," Weisberg was elected interim board president this summer. "I agreed to serve only until the full expanded board is elected." he said, expressing the wish that a new full-term president be elected at that time.

Expanding the board

The proposed bylaws call for a board composed of a minimum of seven and maximum of 15 directors. At least two directors must be individuals who are affiliated with Stanford, such as faculty, staff, students or retired faculty and staff. It is expected that most directors would fall in this category, Weisberg said.

For outside perspective, the proposed bylaws also call for the election of at least two directors who are not otherwise associated with the university, such as Winston.

If association members approve proposed changes in the bylaws, the board will be able to elect 10 additional directors.

Weisberg predicted that three or four individuals would be elected quickly.

"We have contacted a number of able people, both affiliated and nonaffiliated, who seem exceptionally qualified and have expressed some tentative willingness and interest," Weisberg said.

He said others would be approached in the future. The new bylaws would require directors to solicit nominations from faculty, staff and students through announcements in Campus Report and the Stanford Daily.

Under the new structure, directors will not be viewed as non-working figureheads who merely represent faculty, staff and student opinions.

"Maybe the most important lesson of this miserable experience," Weisberg said, "is that being on the board of directors, whether you're faculty, staff or student, is not the equivalent of being on a university committee. It is much more than that."

Serving as a director will be a "serious legal and business responsibility, with legal and economic accountability." Nevertheless, Weisberg said that "we contemplate continuing to have student members."

Weisberg said that results of the bylaws election will not be available until late November because association members must be given at least 45 days from receipt of the ballots to cast their votes. The board has set Nov. 25 as the deadline for return of ballots.

For the governance changes to take place, a majority of the 36 members must vote, and of those, a majority must approve the new articles of incorporation and bylaws.

An informational meeting open only to association members will be held at 4:30 p.m. Tuesday, Oct. 13, in room 185 at the Law School.

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