Having an actively engaged, independent board is a must for the long-term viability of any corporation. Unfortunately, there are still many management teams that feel that their prospects for long-term employment, as well as generous salaries and perks, are dependent upon a “friendly” board of directors composed mostly of friends and associates.
History has proven the opposite to be true. In the long run, it is in the best interests of the shareholders (the true owners of a corporation), as well as management, to have a board where the majority of the members are independent. In this fashion, good strategic decisions can be made that will put the corporation on the right course — a course where growth and progress are achieved through the active participation and input of independent directors.
A Classic Failure Caused by an Inactive Board
About two years ago, General Motors was on the brink of bankruptcy. It had succumbed to a long-term arrogance characterized by a board and management that didn’t respond to the changing vagaries and tastes of buyers. Some pundits put the blame on the fact that U.S. gasoline prices had been quite low compared to gas prices overseas, thus making gas guzzlers more attractive to the consumers. Others put the blame on cheap money that made financing a car relatively easy.
Of course, there is enough blame to go around. However, management did become lazy and non-responsive, even when the bulk of GM’s profits for its North American division started coming from gas-guzzling SUVs. Manufacturers failed to spot consumer trends that “drove” U.S. consumers to buy reasonably priced, fuel-efficient foreign cars.
The GM board was certainly complicit in this failure. My feeling is that they were also lazy and non-responsive, either unable or unwilling to take an active role in overseeing the management and direction of the company.
Another Cautionary Tale
Another classic failure that didn’t end as well as the GM story was that of Enron. A U.S. Senate Committee issued a damning report entitled “The Role of the Board of Directors in Enron’s Collapse.” The summary of this report goes as follows:
“Enron’s Directors protest that they cannot be held accountable for misconduct that was concealed from them. But much that was wrong with Enron was known to the Board, from high risk accounting practices and inappropriate conflict of interest transactions, to extensive undisclosed off-the-books activity and excessive executive compensation.
At the hearing, the subcommittee identified more than a dozen red flags that should have caused the Enron board to ask hard questions, examine Enron policies, and consider changing course. Those red flags were not heeded. In too many instances, by going along with questionable practices and relying on management and auditor representations, the Enron board failed to provide the prudent oversight and checks and balances that its fiduciary obligations required and a company like Enron needed. “By failing to provide sufficient oversight and restraint to stop management excess, the Enron Board contributed to the company’s collapse and bears a share of the responsibility for it.”
The above statement by the Senate Committee should serve as a permanent warning to board members nationwide. Board members are expected to take an active role in overseeing — and restraining when necessary — the officers of a company. For additional information on the Enron collapse, see my article, Enron: Could It Happen Again?
What to Expect From a Board Member
Board members should have a good knowledge of the operations of a company. They should know its mission and be totally familiar with its business model. Members should also have a thorough grasp of the industry in which the corporation operates.
Though expected to oversee the company and not run it, the board should act as a “fire wall” between management and the owners of a company, the stockholders, by acting as a level of assurance that their investment is protected and will survive and prosper in the future. This certainly does not mean that the board member should be a malcontent and gadfly. Such a board member does nothing to help management or the ultimate success of a company.
An ideal board member is a strategist who sees the overall picture and who looks for changing economic dynamics that can alter the success of a business. He or she should be working in concert with management to be on the lookout for opportunities and threats. Such a strategist is further described in my article “The Unique Role of the Board Strategist.”
I once asked a friend of mine — a board member of several international corporations — how he assesses his contributions to the board. He gave me a very simple answer. He said, “Ted, at the end of each year I ask myself whether I have brought value added to the corporation. Whether I have brought substantially more value to the company than my annual board of directors’ fee. If I can honestly answer that my annual fee is more than covered by the value that I brought to the company, I will stay on. If I can’t honestly say that I have advanced the value and wealth of a company, I would tender my resignation.”
I then asked him if he ever came to the conclusion that he was not adding value to the company on which he serves and should therefore resign. His response was, “Not yet!”
Theodore F. di Stefano is a founder and managing partner at Capital Source Partners, which provides a wide range of investment banking services to the small and medium-sized business. He is also a frequent speaker to business groups on financial and corporate governance matters. He can be contacted at [email protected].