Are the supervisors asleep at the wheel? Simply incompetent? It appears unthinkable that company disasters of such magnitude could occur without gross or perhaps criminal negligence on the part of members. And a detailed examination of these boards shows no wide pattern of incompetence or corruption. In reality, the planks followed many of the approved criteria for board operations: Participants showed up for meetings; they had plenty of private money spent in the business; audit committees, compensation committees, and codes of ethics have been set up; the boards were not too small, too large, too old, or too young. Ultimately, though some businesses have experienced problems with manager independence due to the amount of insiders in their boards, this wasn't true of the neglected boards, and board makeup was normally the exact same for businesses with neglected boards and people which have well-managed ones.
To put it differently, they handed the tests which would usually be implemented to determine if or not a board of supervisors had been going to do a fantastic job. And that is exactly what is so frightening about these occasions. Seeing the frustrations throughout the lens of my 25 decades of experience analyzing board operation and CEO leadership leads me to a conclusion: It is time to get some fundamentally new thinking about how corporate boards must function and be assessed. We will need to consider not just how we design the job of a plank but also how we handle the social network a board really is. We are going to be fighting the incorrect war if we just tighten procedural principles for boards and dismiss their more urgent need--to become powerful, high-functioning work teams whose members hope and challenge one another and participate directly with senior managers on crucial issues facing companies.
The Inadequacy of Traditional Wisdom
As time passes, good-governance advocates have developed no lack of treatments for failures of government. The majority of these treatments are structural: They are concerned with principles, processes, composition of committees, and so on, and collectively they are assumed to generate attentive, boards that are involved. But good and bad businesses likewise have adopted most of these practices. Let us take a peek at a number of the most usual.
Regular meeting attendance is regarded as a hallmark of their conscientious director. It matters a lot , however, as shareholder activist Nell Minow remarks,"Many big names on the boards...barely appear because of other obligations, and if they reveal, they are not ready." Really, some WorldCom supervisors were on over ten planks, so how nicely ready would they be? Fortune's 2001 record of those most-admired U.S. companies shows no difference in the attendance records of board members of their very - and least-admired businesses. Information in the Corporate Library, a corporate governance Internet site and database cofounded from Minow, reveal exactly the same"acceptable" attendance records in both sorts of businesses. Excellent attendance is essential for individual board members, but it alone does not appear to have much effect on whether firms are successful.
Board members are supposed to be vigilant if they maintain large chunks of their organization's inventory --but data in the Corporate Library do not imply that this step alone distinguishes great boards from poor, either. Many members of the board GE, Fortune's most-admired company in 2001, had less than $100,000 of equity, whereas most board members of those least-admired firms held considerable equity stakes. Not only did all of those Enron board members possess remarkable amounts of equity in the organization, but a few were buying as the stocks collapsed.
Patrick McGurn of Institutional Shareholder Services, as with other specialist observers, has regularly questioned the financial literacy of distressed businesses' audit committee members. It is certainly true that lots of board members have their own tasks because they are famous, wealthy, well attached --whatever but financially literate. But as most board members have the instruction and smarts to discover problems and somehow neglect to perform their jobs anyhow. In the time of the meltdowns, as an instance, Kmart had six recent or current Fortune 500 CEOs on its own board, and Warnaco had many notable financiers, a renowned retail analyst, and also a top-tier CEO; those outstanding credentials made small difference. With this step, againwe discover that Fortune's - and - least-admired firms alike had board members together with the training and expertise to assess complex financial difficulties and also to understand what types of risks a company is happening.
Regardless of Enron's disastrously complicated financial strategies, no company might have experienced more proper financial competencies and expertise on its board. Yet members of the board have claimed to have been confounded by Enron's financial trades.
According to a single government specialist,"Enron melted because it lacks independent supervisors and many are very long in the tooth" His opinions reflect an overall belief that boards become less powerful as the average age of the members climbs. My study on executives within the last two years has proven that, to the contrary, era is often an advantage, and this overall finding is supported by board info in the Corporate Library. Michael Dell (Dell Computer put tenth on Fortune's 2001 record of most-admired firms ) told me when he included in 1987, as a 21-year-old school dropout, he found it valuable to have 70-year-old George Kozmetsky, Teledyne's visionary founder and the former dean of the McCombs School of Business at Austin, Texas, function on the board; Kozmetsky remained for at least a decade.
The complex truth is that occasionally a previous CEO's existence is useful and at times it's not. In the years that I served on as well as chaired commissions for the National Association of Corporate Directors (NACD), a few commissioners regularly vilified the"older dragons" who chased successors by working on boards. In certain instances, this may be an issue; you can just imagine board meetings in Warnaco, in which deposed CEO Linda Wachner reasoned her 9 percent of the organization's equity for many months following her November 2001 conclusion. Alternately, a retired CEO can play an important inner part for a mentor, sounding board, and connect to crucial outside parties.