INdiana Systemic Thinking

December 18, 2007

Mrs. Bayh and Sell?

“Sometimes the appearance of questionable activity is as bad as actual questionable activity,” says Jeff Smulyan, founder of Emmis Communications, one of the boards on which Susan Bayh, wife of Sen. Evan Bayh, serves.  Remember that quote, it will become important the more one reads this post.  

On Sunday, Sylvia Smith, the Fort Wayne Journal Gazette’s Washington reporter filed a plethora of stories on the various boards Susan Bayh serves on, how much she was paid, and raises the question of appropriateness.  From one of the stories

“People put people on boards for a lot of different purposes,” said Diane Denis, senior associate dean at Purdue University’s business school. “Certainly one such thing would be connections.”The spouse of a senator “could be a very valuable contact” for a corporate board, said Warran Batts, a University of Chicago adjunct professor of business and a retired corporate executive who has served on the boards of several major businesses.

But “there’s almost an inherent conflict of interest there, so the board and the individual need to police that relationship very carefully,” he said. “A lot of spouses are just as bright; one is just as competent as the other. They shouldn’t be penalized. But on the other hand, their position shouldn’t have the appearance of opening up doors that shouldn’t be opened up.”

The Senate does not prohibit lawmakers’ spouses from sitting on corporate boards, but its ethics manual cautions, “A senator’s spouse’s lobbying on behalf of a corporation on whose board the spouse served, might, under certain circumstances, reflect adversely upon the Senate as an institution.”

The wife of a senator resigned from a corporate board in 2005 to avoid potential conflicts with her husband’s assignment in the Senate.

Susan Allen, wife of Sen. George Allen, R-Va., resigned from the board of Virginia’s biggest utility after her husband was appointed to the Committee on Energy and Natural Resources, which oversees the energy industry.

George Allen told the Richmond (Va.) Times-Dispatch that his wife had maintained “from the very beginning” that if he was appointed to the energy panel, she would resign from the board of Dominion Resources Inc.

The Senate’s rules changed as the roles of women evolved.

“In the past, the major issue with spouses was nepotism,” said Don Ritchie, associate historian of the Senate. “Back in the days when Harry Truman was a senator and John Nance Garner was speaker of the House, their wives often worked in their offices, to supplement their incomes and keep an eye on their husbands. Sons also clerked for committees chaired by their fathers.

“After World War II, nepotism rules prohibited this kind of employment, so those spouses who wanted to work looked outside the Senate. For many years this kind of work was usually back in the home state or selling real estate or organizing functions and tours in the capital. Slowly, spouses began lobbying, and that prompted revision of the ethics rules,” he said.

In a 2003 update of the manual, the Senate Ethics Committee reminded lawmakers (whom it refers to as “Members”) that “given the heightened public interest in the professional activities of spouses of Members, the committee hopes that spouses, as well as Members, will conduct their professional and business activities so as not to reflect adversely upon the Senate as an institution.”

Congress has adopted legislation to prohibit Senate staff members from having any contact with any senator’s lobbyist-spouse. The bill makes no reference to lawmaker’s spouses who serve on corporate boards.

Sen. Evan Bayh, D-Ind., said he adopted even stricter rules that prohibit contact between his staff and representatives of his wife’s business interests. He said the couple observe that wall in their domestic conversations, which mostly revolve around their family and – sometimes – politics.

None of the corporations that added Susan Bayh to their boards has informed its stockholders that she is married to a senator who deals with issues that would affect the business’s bottom line.

For instance, when Dyax named Bayh to the board in 2003, it issued a statement describing her as “a Washington, D.C. based attorney with significant experience in legal and regulatory affairs” but did not identify her husband as the two-term senator from Indiana.

In proxy statements that are sent to shareholders before annual meetings, corporations must provide some background on nominees and current board members. Corporations do not typically list the family connections of a person nominated to be a director.

The one-paragraph WellPoint description of Bayh’s qualifications in its April mailing to shareholders is almost identical to the background information all the boards she sits on provide to their shareholders:

“Susan B. Bayh, age 47, has been a director of the Company since 2001 and a director of Anthem Insurance from 1998 to May 2003. Ms. Bayh was a Distinguished Visiting Professor in the College of Business Administration at Butler University from 1994 until 2004. She was a member of the International Joint Commission between the United States and Canada from 1994 to 2001. Ms. Bayh is a director of Dendreon Corporation (biotechnology), Curis, Inc. (biomedical), Emmis Communications Corporation (telecommunications), Nastech Pharmaceutical Company Inc. (biopharmaceutical company) and Dyax Corporation (biopharmaceutical company).”

But the fact that the brief bio on WellPoint’s mailed information to shareholders doesn’t mention Bayh’s husband’s job should not ring alarm bells, said Peter Gleason, chief operating officer and director of research at the National Association of Boards of Directors.

“It’s not an issue if that’s not why she’s there,” he said.

Gleason said non-profit agencies often seek directors with connections – particularly to money – but for publicly traded corporations, “it tends to be the skills set and background you bring.”

Bayh said his wife is an accomplished lawyer, having worked for prestigious law firms in California and Indianapolis. Susan Bayh declined to be interviewed about her corporate work.

Bayh described his wife’s professional career has having sometimes been thwarted by his political activities. For instance, he said, Susan Bayh had to change her practice area of corporate and security law when he became Indiana’s secretary of state and oversaw the state’s private securities industry. He said his wife then switched her specialty to utility law, which she had to give up when Bayh became governor.

Asked why the couple didn’t decide to ensure that questions of possible conflicts could never be raised, Bayh said, “The only way to avoid that would be to ask my wife to have no career.”

No matter what kind of law Susan Bayh would practice, he said, it would raise the same kind of questions.

“It’s sort of an avoidable part of being in the year 2007 with two-career couples. In my case, I just don’t think it would be fair to ask her to give up her career,” he said. “We tried to set up a system that can answer those questions, and I think that it does.”

The main story in the JG states:

Since leaving Indiana as a first lady, Susan Bayh has become a professional board member, earning more than $1 million a year in director fees for advice she gives to companies that make pharmaceuticals, operate radio stations, sell health insurance policies, offer online banking and distribute ingredients to fast-food restaurants.

In the past four years, Bayh collected more than $1.7 million in pre-tax income when she exercised stock options from two of the corporations. Her actual income from exercising stock options is higher, but the details of one transaction were not publicly reported.

During the same time, her husband, Sen. Evan Bayh, D-Ind., cast more than 3,000 votes, including some on issues of keen interest to the pharmaceutical, broadcast, insurance, food-distribution and finance industries.

Bayh said his wife’s business interests never influence how he votes, the bills he introduces or the positions he takes.

“I can honestly tell you that if my wife did not have a job, none, I can’t think of a single decision I’ve made that would be any different. I look at what’s best for our state and our country and my own conscience,” he said. “My integrity matters more to me than anything, so I always do what’s right for the people who put their trust in me.”

Bayh said he and his wife don’t discuss her business interests, and he rarely talks about legislation the Senate is considering.

“The reality is I don’t even know the people who run the vast majority of her companies. I’ve never even spoken to them,” Bayh said. “The reality is, we don’t talk about stuff that she’s involved with.”

Sloan said it’s not plausible to think a lawmaker-board director couple never discuss their jobs, and it’s unrealistic to think Sen. Bayh could recuse himself from any vote that affected the bottom line of businesses in industries his wife receives payment from.

“Then suddenly the constituents of Indiana are out a vote, and that’s not fair, either,” she said.

In fact, there are examples of Sen. Bayh voting in a way that could hurt the financial interests of one of his wife’s boards.

Last year, the Senate unanimously passed legislation to dramatically increase the size of fines the Federal Communications Commission can impose for objectionable words used on the radio. A single “no” would have stalled action on the bill, which would increase the maximum fines from $32,500 to $325,000. Sen. Bayh took no action to derail the higher fines. Emmis Communications, which Susan Bayh has helped direct since 1994, paid $300,000 in fines three years ago because of indecent remarks by shock jocks on some of its radio stations.

But sometimes action by Congress has a powerful effect on the financial well-being of Susan Bayh’s business interests.

For instance, Susan Bayh was named to the board of Curis Inc. in October 2000, shortly after it was founded to explore how stem cells (although not specifically embryonic stem cells) could lead to treatment for diseases. Less than a year later, President Bush announced that federal money could be used for research only on embryonic stem cell lines already in existence. Twice – in 2006 and this year – the Senate voted to expand federal funding of embryonic stem cell research. Sen. Bayh voted for the expansion each time.

Bayh said he was guided by what he thinks honors life the most – using unwanted frozen embryos for research rather than throwing them away – not by whether Curis could benefit from decisions Congress made.

Professional director

Last year, Susan Bayh served on the boards of six publicly traded and two privately held companies, putting her into a class described as “professional board member.”

For her work attending meetings and serving on board committees of six of the businesses in 2006, Bayh received $94,591 in cash payments and $816,436 in stock or stock options, the companies reported. A conscientious board member would have spent at least 32 weeks of full-time work on the business of serving on six publicly traded boards, according to an organization that trains directors and advocates for responsible boards.

Publicly traded companies must file annual reports with the Securities and Exchange Commission that disclose the compensation paid to board members. Privately held companies file no such publicly available reports.

Senators are required to file annual reports that list – in broad ranges – the financial holdings of themselves and their spouses. According to Sen. Bayh’s report for 2006, his wife’s stock and stock options in the eight companies were valued at $1.3 million to $2.7 million.

Susan Bayh’s income and assets from the boards are a major portion of the Bayh family’s net worth, according to her husband’s report. He said he and his wife have assets worth between $4.3 million and $15.1 million, not counting the couple’s $1 million Washington home, which is in Susan Bayh’s name.

Senators are paid $165,200 a year.

Susan Bayh’s position as a director for eight businesses puts her in the league of “professional directors,” a term used to refer to people who sit on multiple corporate boards and are not otherwise employed.

Whether professional directors benefit shareholders is debated among academics and others who study corporate boards.

“My view,” said Nell Minnow, president of The Corporate Library, which rates board performance, “is you can have just as many conflicts of interest. If you’re a professional director, the last thing you want to do is rock the boat.”

That’s a dangerous quality for a director, she said, because good directors are not reluctant to challenge the company’s CEO.

Minnow said one of the best qualities a director can have is a sense of independence. The National Association of Directors, which runs training programs for directors, also puts independence at the top of the list of important qualities.

Susan Bayh’s advice on how to direct businesses has been sought especially by pharmaceutical companies. She was a lawyer for Eli Lilly & Co., the Indianapolis-based pharmaceutical company, for five years while her husband was Indiana’s governor. Since 2000, she has served on the boards of eight companies that develop drugs.

She was first appointed to a public board seat in June 1994 when she was named to the Emmis Broadcasting board. Since then, she has been named to the boards of 14 businesses, primarily in the insurance or pharmaceutical industries. As of last year, she sat on the governing bodies of eight companies: Indianapolis-based Emmis Broadcasting and WellPoint Inc., the second-largest U.S. health insurance company; four pharmaceutical companies: Curis Inc., Dyax Corp., Nastech Pharmaceuticals and Dendreon Corp.; and privately held Golden State Foods of California and E-Trade Bank of Virginia.

Bayh previously served on the boards of Cubist Pharmaceuticals, Esperion Therapeutics, Novavax and LWWI Broadcasting.

In return for attending board and committee meetings several times a year – either in person or by phone – Bayh is paid in cash or in shares of stock. Her cash payments last year ranged from zero from Emmis, which pays directors in stock and options, to $74,306 from WellPoint.

In addition, each company gives its directors stock and offers them the chance to buy stock in the future at a fixed price. If the price of the stock rises in the meantime, Bayh will pocket the difference. Last year, the value of the stock and options she received from the six companies ranged from $23,923 to $253,498.

Bayh’s 2006 stock and cash compensation from WellPoint – $324,250 – is well above the median amount paid to directors of the largest U.S. corporations. The Corporate Library, a corporate governance research firm in Maine, found that median director pay at the nation’s 250 largest companies was $192,400. (The median is the middle number in a series of numbers.)

This year, Bayh has collected $248,700 from options she received from WellPoint and exercised when the stock prices were high. In two days in January and May, she bought 6,667 shares at $44.18 a share; she sold them for $78 to $84.98 a share.

In the past four years, she has exercised options for WellPoint and Curis stock, netting more than $1.7 million. In addition, in 2006, she exercised options of E-Trade Bank stock for a transaction worth between $500,000 and $1 million, according to the financial disclosure report her husband filed with the Senate. But because E-Trade Bank shares are not publicly traded, the amount she paid for the stock and the sale price are not publicly reported. In addition, senators’ financial disclosure forms list values of assets, shares and outside income for themselves and their spouses in broad categories, not specific amounts.

Morningstar evaluates the boards of publicly traded companies based on how well they husband investors’ money, giving grades ranging from A (“excellent”) to F (“very poor.”)

In Morningstar’s most recent stewardship evaluations, WellPoint was rated C (“fair”); Emmis deserved a D (“poor”). Morningstar did not evaluate the other companies Bayh helps direct.

Its criticism of WellPoint is that the board pays company executives too much.

The Emmis board was criticized for not adequately protecting shareholders’ financial interests.

The Corporate Library, which also rates corporate governance, said Emmis’ board deserved a “C” for accelerating vesting options and WellPoint a “D” for overpaying its CEO.

Minnow said overly high compensation packages for a company’s top executive is used as a measurement of a board’s independence because “it’s an indicator of the ability of the board to say ‘no.’ ”

The other boards Bayh serves on received middle or high marks from Minnow’s organization.


Bayh’s appointment to six publicly traded boards is at the extreme end of what the National Association of Boards of Directors considers reasonable. The organization recommends that a professional with a full-time job serve on no more than three boards and that a retired or unemployed person limit directorships to five.

Peter Gleason, chief operating officer and director of research for the organization, said that’s because serving on a board takes a lot of time. His group estimates 210 hours a year, based on surveys of directors. The Corporate Library estimates the average director spends 240 hours a year on attending meetings and preparing to attend them.

Under those formulas, Bayh’s director duties would take 32 to 36 weeks of full-time work to fulfill.

While directors were once considered “the parsley on the fish,” Minnow said, “that changed very dramatically as a matter of law and a matter of culture” after scandals involving Enron and other corportations.

Sen. Bayh said he couldn’t estimate the number of hours his wife works on board business, but it is sizable, involving travel to board meetings, lengthy conference calls and poring over thick packets of material that arrive at their home daily.

Susan Bayh declined to be interviewed for [the] story.

Susan Bayh’s Board and Compensation from the Journal Gazette Story

Emmis Communications Corp. (EMMS)


What it does: Owns radio stations throughout the U.S., including several in Indiana, and publishes magazines, including Indianapolis Monthly.

History: Founded as Emmis Broadcasting with the purchase of one Indiana radio station in 1980 by Jeff Smulyan; went public in 1994.

Number of employees : 1,300

When Bayh joined the board: June 30, 1994

Bayh stock ownership: As of July, 72,832 shares of stock or stock options, less than 1 percent of the voting shares.

Bayh’s compensation in 2007: $67,025, all in stock or options.

Dyax Corp. (DYAX)

Cambridge, Mass.

What it does: Develops drugs to treat a rare plasma disorder and to prevent blood loss during coronary artery bypass surgery.

History: Formed in 1995 and went public in August 2000.

Number of employees: 161

When Bayh joined the board: July 16, 2003

Bayh’s stock ownership: As of March, 38,750 shares of stock options, less than 1 percent of the voting shares.

Bayh’s compensation in 2006: $62,423, including $23,923 in stock options.

WellPoint Inc. (WLP)


What it does: Operates managed health care plans for employers, individuals, and Medicaid and Medicare programs.

History: WellPoint Health Networks merged with rival Indianapolis-based Anthem in late 2004 in a $20.8 billion deal. WellPoint become the nation’s second-largest insurance company.

Number of employees: 42,000

When Bayh joined the board: 2001. She was a director of Anthem from 1998 to May 2003.

Bayh’s stock ownership: As of January, 8,552 shares or options, less than 1 percent of the voting shares.

Bayh’s compensation in 2006: $324,250, including $249,944 in stock or options.

Curis Inc. (CRIS)

Cambridge, Mass.

What it does: Makes pharmaceuticals, particularly drugs that help repair tissues and organs. It focuses on cancer, neurological disorders, kidney and heart diseases and hair-growth regulation.

History: Formed in 2000 when three biotech firms merged.

Number of employees: 50

When Bayh joined the board: Oct. 19, 2000

Bayh’s compensation for 2006: $156,942, including $124,942 in stock or options.

Nastech Pharmaceutical Co. (NSTK)

Bothell, Wash.

What it does: Develops drugs for osteoporosis, obesity, pain, inflammation and metabolic diseases; is working to develop nasal sprays to treat osteoporosis, deliver insulin and promote weight loss.

History: Founded in the early 1980s; went public in 1984.

Number of employees: 150

When Bayh joined the board: July 20, 2005

Bayh’s compensation in 2006: $264,283, including $253,498 in stock or options.

Dendreon Corp. (DNDN)


What it does: Develops cancer treatments and is focusing on a drug to treat prostate cancer.

History: Founded in 1992 as Activated Cell Therapy; went public in 2000. When the Food and Drug Administration delayed approval of its prostate drug, Provenge, a patient-advocate group sued the federal agency.

Number of employees: 250

When Bayh joined the board: July 29, 2003, when Dendreon acquired Corvas International, another biopharmaceutical company. She had been a Corvas director since 2000.

Bayh’s stock ownership: 74,050 shares or options as of December 2006

Bayh’s compensation in 2006: $136,104, including $97,104 in stock options

For more complete information regarding Mrs. Bayh’s trades in stock and compensation, see this side story in the Journal Gazette.

Oh, remember the quote at the top of this post, well it came from this end note from a side story in the Journal Gazette:

“We talk about everything under the sun,” Jeff Smulyan said of Sen. Evan Bayh, “but the media.”

The president of Emmis Communications said the verboten topic with his longtime friend was to ensure that there’s no hint of impropriety.

“Sometimes the appearance of questionable activity is as bad as actual questionable activity,” Smulyan said. “For that reason, and I think now Sen. Bayh now has rules, but long before he had rules, we have absolutely not lobbied him on media issues. Not discussed it with him. … That’s the only way you can do it when you have a personal relationship.”

But 14 minutes after an interview last week with a reporter working on a story about Susan Bayh’s role in Emmis and other corporations she helps direct, Smulyan’s press aide, Jodi Wright, was on the phone – to Bayh’s Senate office.

Wright misdialed, however, calling the reporter instead. She asked to speak to Jonathan Swain, who is Bayh’s press secretary.

Bayh said Emmis staff had informed his office of the interview and promised to call “to tell us how it went in case there were anything off the wall or anything. … I frankly don’t find that to be too surprising.”

If you want to read about the “stellar job” one big investor thinks Bayh and Smulen are doing, here is another side story from the JG

Interestingly, there has been scant coverage of Mrs. Bayh’s activities in other papers around the state.  Media often will pick up other outlets stories, but this appears to either be a non-issue for other media, or too hot for them to print.  In addition, very few blogs have anything to say about it.  An exception is over at Advance Indiana.

For the Blogmeister, these articles do raise interesting questions about ethics and conflicts of interest, especially when there is this much money involved.  Interestingly though, Sylvia Smith missed some background material.  In a 1998 interview with “Indianapolis Woman“, Mrs. Bayh made the following statements:

“Everything is subject to scrutiny for the spouse of a public figure, but I examine everything before I even accept, for Evan’s sake.” 

 “At this point I can’t see much changing, because I don’t report to Evan,” she says. “Still, if there’s even the appearance of impropriety, I’ll back out. I’m not about to jeopardize his credibility.”

 There we are with that appearance thing again.  The reader is left to draw their own conclusions.

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