Target's Board Has a Target on its Back

When it comes right down to it, not only should the CEO of Target  have been more attuned to the security risks that developed when hackers compromised its customer information database, but the board of directors ought to have been on top of it, too. While they were all too willing to throw CEO Gregg Steinhafel to the lions as a sop to the masses clamoring for blood after the massive data breach, perhaps many board members -- or even most of them -- should also be tossed into the den.

That's the view of influential proxy service Institutional Shareholder Services, which last week recommended Target investors oust seven of the company's 10 directors for not doing enough to ensure the retailer was sufficiently protected from security threats. It's not often you'll see this type of call from a service such as ISS, but it underscores the breadth of the problem and the initially timid response the board offered.

In particular, ISS holds Target's audit and corporate responsibility committees accountable for the morass. They monitor fraud and other dangers the retailer could face, but were "inadequately prepared" for the security breach, according to the ISS report: "It appears that failure of the committees to ensure appropriate management of these risks set the stage for the data breach, which has resulted in significant losses to the company and its shareholders."

The seven board members ISS is seeking to oust are: consulting firm president Roxanne Austin, a director since 2002 who stepped in as interim nonexecutive chairman; Mary Minnick, partner at Lion Capital; Anne Mulcahy, former Xerox chairwoman and currently head of the Save the Children Federation; Derica Rice, executive vice president at Eli Lilly; real estate developer Calvin Darden; Henrique De Castro, former COO at Yahoo!; and private consultant James Johnson. 

This is a long overdue call to action, not just at Target, but at companies everywhere. All too often the clubby nature of boards ensures that few people are ever turned out for their actions, or lack thereof. It's the circular nature of compensation committees that look to their peers for executive pay package guidance and then use the increases they just granted as justification to have bestowed upon them additional pay hikes and perks.

Yet if boards are there to provide guidance, they should be called to account for their stewardship failures. While noninstitutional investors have little hope of individually making a difference in board elections, there's no reason to support boards when the companies themselves underperform.

While rival proxy service Glass, Lewis doesn't agree with ISS that the board was ultimately at fault -- at least there's no proof at the moment that management or directors were negligent in their response -- ISS contends that risk assessment and oversight of the company's reputation were part and parcel of their duties and they failed miserably.

Institutional Shareholder Services can be an influential voice when it comes time for mutual funds and others to cast their votes for board membership. Target issued two informational notices in the days after ISS' broadside, plaintively pleading its case that it did all it could. It's clear the board feels it has a target on its back and that investors are taking aim.

Target's stock has tumbled more than 20% from its recent high, and while sales may be starting to improve, it shouldn't mean the directors get a pass for their lapse. It may be time for investors to target the retailer for their portfolios, but also for them to pull the trigger on Target's board.

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Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Yahoo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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