Boards, CEOs, and management development

In the US, it has long been common for the CEO of a corporation to also be chair of the board, and for several other members of top management to be executive, or inside, directors. As for outside directors, the ones who are supposed to keep everyone honest, they were typically CEOs of other companies.

This was revealed as the facade it is when the corporate scandals of the closing decades of the 20^th century culminated in the Sarbanes-Oxley (SOX) Act. Among other efforts to clean up corporate governance and tighten up internal accounting, the Act allows directors to be held personally responsible for violations of the Act.

Many studies have been done since the Act took effect in 2002 to determine what, if any, fallout it produced in board makeup - especially outside directors. Some seem to indicate that CEOs are turning down outside director positions in droves, resulting in a drop of around 1/3 in their representation on boards.

But a new study reported in the WSJ shows that their places are simply being taken by senior executives at levels just below that of the CEO.

The item suggests that the senior executives taking these positions are gaining experience, exposure, and great embellishments to their resumes. CEOs who are turning them down, on the other hand, may be losing an important source of access to valuable information and insights about the general business environment and special opportunities, according to the study’s authors.

But that just forces two questions: Do CEOs not have other sources and venues for networking with their peers? And is performing as a director really good training for performing as a manager?

Peter Drucker used to argue that boards should be completely independent, and even that directors should occupy a profession separate from management. It certainly seems that having chickens guarding each others’ chicken coops is a recipe for repeating what SOX was intended to fix.

We don’t have corporate governance of our public companies figured out, yet. This is principally due to our inability, in the anonymous shareholder setting, to properly organize and charter our boards.

What do you think?

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