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— Judgment Call —
Don't bet what's left of your 401(k) on it. The terrifying view from the financial precipice has improved, so count on a new era of the same old structural fixes and palliatives that followed past crises of corporate misgovernance, leading once again to the imperial CEO, watched over by a distracted board, often populated by celebrities and individuals under the heavy influence of the CEO.
In the mid-'90s, when institutional investors were clamoring for more accountable and effective corporate governance, the gurus were hard at work fabricating structural fixes: strategic audits, formal CEO evaluations, splitting the CEO and chairman functions, appointing lead directors, board self-evaluations and the like. Governance guidelines on the composition and role of the boards -- promulgated by General Motors Co., of all companies -- were hailed as an elixir to remedy boardroom failings. But board members, still chosen in the same old ways, continued to pander to their patrons, doling out lavish compensation packages that in some cases included granting retiring CEOs lifetime access to the corporate jet and other perks. Some of the more notorious abuses finally raised outcries from shareholders as the press brought them to light. But for the next decade, the resulting governance fixes tended only to seduce shareholders into a false sense of security, while an ever-rising stock market covered up boardroom shortcomings. On the day it collapsed, the board of Lehman Brothers Holdings Inc. was populated with nine retirees (including four over 75 years old), a theater producer and a former navy admiral. Only two members had direct experience in financial services. Fast-forward to the current market crisis engendered by numerous boardroom failures, including GM, which is now on the dole. The government, when it steps in and puts taxpayer money on the line, is demanding boardroom and other reforms. Shouldn't this crisis make institutional shareholders equally assertive? The real power, however, will not be displaced from its historic residence in the CEO suite. Once the markets recover sufficiently, the sacred myth that the CEO, like the entrepreneur, must be allowed to pursue his or her vision unimpeded will continue throughout the institutional investor realm. The checks and balances of a real board of directors sounds too much like the president being tied up by a Lilliputian Congress, which is fine for a democratic government but not for a capitalist business enterprise. What's been needed all along is a fundamental change in the way CEOs and directors view their own and each other's roles. The CEO needs to acknowledge the power that the board requires to fulfill its legal obligations. This means CEOs will welcome into the boardroom high-quality, independent-minded directors willing to put in the time required to learn the business. The board members' credentials will be based on substance, not star power. Prospective directors will need to be extremely cautious before they take on a board assignment. They will be exposing themselves to potential liability, putting their assets and reputations at risk and, in the event of a major conflagration, tying themselves up into endless crisis meetings. They should satisfy themselves that the CEO is really committed to working with the board, using it as a resource and allowing it to meet its legal obligations to shareholders and the other constituencies. Bluntly put, will the CEO allow the board to have sufficient influence over the company's strategic direction and provide it the information and access to allow the board to understand the issues facing the company and the risks inherent in the path the CEO is pursuing? And will the board's oversight be welcomed? In some companies the relationship between the CEO and the board has worked because of the right chemistry between the two parties. But this has often been serendipitous rather than created by design. Perhaps it's time for institutional investors, who have the voting power, to assert themselves as the government has done and no longer hand over to management the reins to select and then perpetuate board membership. The stakes are too high for this to be the right paradigm for running global companies that, when they fail, can drive the economies of the most powerful countries to their knees. Institutional shareholders, whose voices seem to be heard only after boardroom failures have become too pronounced to ignore, should exercise greater power in the election of directors than they have done to date. At least then, if the company does fail, the shareholders will have no one to blame but themselves. Mark Kessel is a founding partner of Symphony Capital LLC and the former managing partner of Shearman & Sterling LLP, where he counseled a number of boards. |
After so many "visionary" chief executives led their blinded companies over the cliff or grasping for the hand of government, the era of the imperial CEO must surely have come to an end.
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