Whack ‘em with a board!

By Lucy P. Marcus
July 2, 2012

Boardrooms around the world are going through an extraordinary transition. There is a greater understanding of the power and responsibility of boards, and they no longer operate in a black box. The message from investors now is: We’re watching you!

The Shareholder Spring, as the recent period of shareholder activism has been dubbed, shows that investors, stakeholders, regulatory bodies, governments, and the general public are taking a greater interest in what goes on behind closed corporate doors. Ignoring this new call for transparency is futile, and will lead to accusations of being out of touch—tone-deaf in a soundproof room.

This year brought a rude awakening for boards. HP, Yahoo, News Corp., Facebook, Goldman Sachs, MF Global, AstraZeneca, Barclays, Olympus, RIMM, Kodak, and many others were in the headlines for all the wrong reasons. Boards were criticized by investors and other stakeholders on a wide range of issues, including their composition, competence, diversity, voting control, and dual stock structures. No sector is immune, no director untouchable.

Gone are the days of the rubber-stamp board. The lesson is clear: Organizations suffer greatly when independent board members don’t ask hard questions, and refuse to hold executives accountable for not just the profit margins but also the ethics of the company. A complacent board jeopardizes a company’s future.

Boards need to change, and serving on a board needs to be considered a job, not an annuity. As board members we are treated very well. We are sent manicured board papers in advance of board meetings. We are collected at the airport, transported to meetings, treated to lovely meals, and given slick and painstakingly prepared presentations. If we are not careful, we can become too comfortable, complacent, and we won’t have a fingertip feel for the organization.

The best boards have chairs and members who are truly independent and engaged, who work hard to get a complete understanding of the business their organization is in—and the one it wants to be in. As board members, we should be assessed on how well we fulfill what I call our “grounding and stargazing” responsibilities: making sure the company manages its risks prudently and operates at all times  in a responsible, legal, and ethical manner, while at the same time making sure it is ready and able to respond shrewdly to future challenges.

It is also clear from reading the stories accompanying all the recent headlines about boards behaving badly that they need to be more diverse in every way—gender, professional expertise, ethnicity, age, international perspective, and more. A truly diverse board will present more opinions from more perspectives, have fewer common assumptions (and misconceptions), and is more likely to understand the various needs of all of the company’s customers, employees, and investors.

It is critical to have the right group of people sitting around the boardroom table, but those directors will only be useful if they are allowed to operate with complete candor. Independent board members have to be comfortable asking hard questions; in fact, it needs to be clear that asking tough questions is a basic requirement. In such an environment board members can discuss a wide range of topics essential for their organization’s short- and long-term success, including sustainability, the changing workforce, innovation, infrastructure, technology, internationalization, communication, and the balance of continuity and change.

Better boards require better leaders around the table, and being a leader in the boardroom isn’t just the job of the chair or lead director—it is the responsibility of every board member. Leadership means not bowing to peer pressure or groupthink. It means not acquiescing when you are the only “obstacle” that stands between clarifying a point and breaking for lunch. It is about being the voice of caution when the rest of the board is in a state of euphoria.

Being a good leader also requires active engagement inside and outside the boardroom. When you first join aboard, get to know the people you will be working with, and the business your organization is in—its competitive landscape, its stakeholders, employees and customers, and even the communities in which it operates. Independent knowledge is power.

Showing great leadership in the boardroom also means knowing when it is time to leave. Keeping a board fresh is important, but it is a topic too often discussed in hushed tones. There is a real danger of board seats being treated like sinecures. As companies grow, boards need new faces, new ideas, new perspectives, and new expertise. As board members, it is our individual responsibility to know when to go, rather than waiting to be pushed by the nominations committee or the board chair.

There are several reasons to leave a board, including: you’ve served too long, your expertise is no longer required, you’re not pulling your weight, you’re obstructively disruptive, or your actions, inside or outside the boardroom, bring distraction or disrepute. No one wants to be the person everyone around the table feels is not contributing, and you never want the board to have to take formal action because you have outstayed your welcome. Although humbling to admit, no one is irreplaceable, and sometimes the best service you can give is to walk away.

The Shareholder Spring has been a good thing for investors, and a good thing for boards, even though many directors might not feel that way right now. It has fostered a long overdue public conversation about the role of boards and board members. A good board—one that is engaged, transparent, and accountable—is a tremendous asset to an organization. The evolving boardroom requires every board member be a great leader, from the moment we are appointed to the day we step down.

12 comments

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Wow, I’m dizzsy from all that SPIN.

Posted by tmc | Report as abusive

I have sat on just one board, a hospital board. The board members were without exception fine people, all intent on serving their community. All were upstanding business people of great character. Only the executive commitee of the board, tho, met with the CEO/president privately and whatever transpired between them was not open to the board. In addition, quite limited information, all very filtered, was given to the board. As well, the process of evaluating high level hospital administrators was evaluated by the same external consulting firm as evaluated the hospital in general, a practice I felt was a conflict of interest. For example, had the external entity not come back with high praise, would they have risked losing their lucrativie auditing contract? As well, as a variety of studies have shown, these firms which evaluate company senior management virtually always rate the senior management as superior. Anything but a superior rating would endanger a job. But, the problem with a superior rating is that it is equated with the notion that superior means a person’s salary and benefits should be a top percentile rank. The problem, then, becomes rapidly escalating senior management compensation when, in fact, performance is roughly similar acrose many hospitals and other corporate entities. Or, in other words, being profitable in todays hospital markets requires towing the line in many substantial ways but the vast majority of hospitals know how to do it; not just a few top percentile high performers. A major mismatch then exists between the perspective of what senior management compensation should be which results in rapid escalation across many entities. In the last decade, I have seen hospital CEO compensation packages increase by 400% and I have seen university medical school vice president salaries increase by over 200%. Both have occurred while physician and other health care provider compensation has declined. Similarly, it seems, many publicly held companies have also seen massive increases in leadership compensation, way, way beyond what has historically been the case.
It is my view that one of the ills of capitalism is that boards, perhaps inadvertently, rig senior managment compensation and that such drives a growing and now obscene gap between management salaries and workerbee salaries. As the shareholders of major companies now gain some power, this ill will hopefully be moderated.

Posted by lbartels | Report as abusive

I agree with everything said in this article – and everything goes doubly for members on the compensation and audit committees. I would also add that the positions of President and Chairman of the Board always need to be split, except possibly when held by the founder of the company.

Posted by QuietThinker | Report as abusive

This is boarding

Posted by whyknot | Report as abusive

The underlying problem is that the corporate system is broken. Giving shareholders more power over the boards is akin to placing the fox in charge of the hen house.

To fix our corporate problems we need to “think outside the box” by getting rid of the laws that presently govern (and protect) corporations and their investors. We treat corporations as though there are people, which is a fiction that is destroying our economy. Quite simply, it rewards extremely bad/antisocial behavior, in both the corporate and investor sense.

There is NO way to fix a fatally flawed system with the present system of rewards.

Right now, the laws protect investors by not allowing the “corporate veil to be pierced” — i.e. investors share in the profits, but not the losses — so the ONLY way to correct the problem is to eliminate the laws protecting the investors. They MUST share in losses, as well as profits, just like partnerships or sole-proprietorships.

Right now, they have no “skin in the game”, so there is no incentive to control the BOD or the corporation.

That single change in corporate law would solve ALL of the present problems we have with corporations, especially international corporations, because if each shareholder was held responsible for losses, not just profits, in proportion to their investment — and personally legally liable the same as partnerships or sole-proprietorships, whose personal property can be attached to settle debts — there would be a sudden enormous change in the attitude of those investors, who are today totally indifferent as to what the corporation does, except in terms of profits.

Yes, it REALLY is that simple.

Posted by Gordon2352 | Report as abusive

I swear if I could round up a cadre of motivated High School seniors and replace the entrenched executive officers of almost any major corporation with them and within six months performance would rise. The problem with the people currently running corporations is they’re not as good at their jobs as their compensation infused egos make them think they are. They might be nice, well meaning and even smart, but none of those attributes holds a candle to being hungry, daring and innovative. It’s like the (very wealthy) owner of a large consulting firm once told me, “When the economy is bad our business booms because when the board of directors grills the CEO about what he or she is doing to navigate rough waters, the easiest thing they can say is that they’ve brought in an army of expert consultants to ensure a steady course during tough times.” This lazy, unimaginative management is what masquerades these days as managerial brilliance. Unfortunately, this keeps the truly brilliant from ever having a shot at running the company.

Posted by GLK | Report as abusive

The nation has an overwhelming need for good management of major corporations. Therefore, there should be laws to ensure that the board has the resources to investigate and have membership not beholden to management.

In the late 1980′s GM was in the case studies of every management text book I had as the exampled of some bad management practice. It was most likely near the same in the whole US auto industry.

Posted by SamuelReich | Report as abusive

[...] Article: Whack ‘em with a board! [...]

Board members all belong to the same club. If you look around the boards of companies in your cities they all have members who sit on multiple boards. this is a protected group interested in enriching themselves at the expense of the companies they control. Kodak is the perfect example. Go back to 1988 and you will find that the board members of Kodak also were board members of Coke, Zerox, B&L, Pepsico and others. A board member of Kodak was paid $18,000.00 to attend 1 board meeting. Times 3 a year and they made more money than the majority of the 80,000 employees working for Kodak. Now where are they? Add in what they were paid to attend board meetinings of the other companies and they made quite a bit of money. They didn’t have to work very hard either while hiring inept presidents and CEO’s (who by the way got to be board members also). You can see this is when a lot of these companies began their declines. We even started calling them the “good ol’ boys clubs”.

Posted by lensmanb | Report as abusive

[...] Article: Whack ‘em with a board! [...]

What we lack in serious measure is integrity in the general populace which includes boards. The unfortunate attitude prevailing is “do it to him before he does it to you,” protect your backside,and don’t make waves or you’ll lose your favored position. It is a big boys club.

Posted by Cybs | Report as abusive

As founder of a former savings & loan company, I can vouch for the “group think” that I encountered with my fellow investor/board members who comprised a clique. Although we did well and sold the firm profitably, the group think proved costly during operation and imaginative thinking was non-existent. The sale ended my constant frustration.

Posted by act1 | Report as abusive

This novel debate has been around for 30 years. Yawn.

Posted by amateurediteur | Report as abusive

Check out how Australia does it-training, etc.

Posted by heliogobalus | Report as abusive