Case II

Tambrands, Inc
Several years ago, the accounting profession and the financial community introduced the concept
of the audit committee ,as a means for strengthening internal control, promoting auditor
independence, and better representing the interests of third-party shareholders and creditors.
Ideally, the audit committee, a committee to the board of directors consisting mainly of outside
directors, has oversight responsibility for the entitys internal control system and is responsible
for arbitrating disputes between management and independent auditors-particularly disputes
involving disagreements regarding financial statement presentation. Often these disputes are
sufficiently serious as to produce a qualified audit opinion or change in auditors if not resolved.
Although the concept appears sound, its implementation in practice has mixed results. A
question might be raised, for example, as to how effectively audit committee members can
maintain independence from management when they are compensated by the same managers for
whom they have oversight responsibility. Two sides of this issue were presented in an article
appearing in The Wall Street Journal, entitled While Outside Directors Pay increases,
independence from managers may Fade. Donald P. Jacobs, dean of Northwestern Universitys
Kellogg School of Management, and an outside director for several companies, offered the
following argument supporting the indepence concept;
There are enough potential plaintiffs out there that would attack a director for failing to
act independently, that the risk is too great for compromise.
Robert monks, a shareholders-right activist, in contrast, asserted:
A chef executive officer runs a board by overpaying them. The phenomenon of the
independent director is being diluted to the point of illusoriness.
The Tambrands, Inc., case lends support to Monks assertion that boards of directors may not be
sufficiently independent. In the case, Martin Emmett, during his four-year term as president and
chief executive officer of Tambrands, had channeled millions of dollars of consulting business
annually to Personnel Corp. of America (PCA), a human resources consulting firms managed by
two of Emmetts long-time friends, David Meredith and Jack Lederer. Moreover, former PCA
executives said that Meredith and Lederer were placed on the Tambrands board of directors and
received annual retainers that exceeded the salaries of most Tambrands officers. By the end of
Emmetts term as CEO, Tambrands market share in Tampax tampons had decreased by 8 percent
and the market value of its shares had declined drastically. Much of this was due to a decision
by Emmett to capitalize on consumer brand loyalty by raising retail prices of Tampax and
reducing the number of tampons in a box.
In response to the loss of market share, Tambrands reduced it workforce by one-third. At the
same time, however, in response to recommendations consultants, the Tambrand broad of
directors voted it self a pay raise and awarded Emmett a package of unusually attractive stock
options and other benefits.
By June 1993, Tambrands share had lost nearly one-third of their market value and Emmett was
force to resign. Immediately following the resignation, Tambrands severed its contracts with
PCA.
Required;
1. In your opinion, do means by which directors are appointed and compensated contribute
to a loss independence from management? Explain.
2. How might selection and compensation be improved to make the board of directors more
responsive to third-party needs?
3. What is the independent auditors responsibility in cases like this?