Corporations have been under assault around the world lately from a variety of quarters. Activist shareholders are concerned that managers are not adding wealth, or that they are operating their companies in politically or socially immoral, or environmentally unsustainable ways. Many are even trying to address their grievances directly, by having their own nominees placed on boards as directors. Some of the corporate behaviors leading to all of this have been so egregious as to attract the attention of regulators and even legislators.
This widespread dissatisfaction with the current state of corporate governance has drawn the (reluctant and resentful) notice of boards and management. Unfortunately, most of the response has been to insist that boards just need to be prodded out of their sinecure-induced slumber, and that the pod-people who direct them need to take a more convincing role in helping the CEO keep an eye on things.
That is, the board is still viewed - at least, in the US - as largely a tool of the CEO. Its effectiveness is determined by how carefully he or she assembles and leads it.
There is some increased discussion of separating the CEO and chair positions, and as many as 35% of large US companies now do this. However, this is resisted mightily as a weakening of the force of the top boss’s leadership, and an unhelpful and unnecessary constraint on his or her influence and freedom of maneuver. The rather preposterous idea is advanced that separating the roles dangerously divides lines of authority (rather than establishing them, and attempting to terminate them where they belong, in ownership or its representatives).
But it is understood that something, however cosmetic, must be done to stanch this rising tide of criticism. And a solution has been vigorously proposed: supporters of the combined CEO/chair model have constructed a new board position to address concerns that there is insufficient oversight of excessively powerful bosses in today’s corporations.
This is the lead (sometimes called “presiding“) director. More than half of large US public corporations now have such a position on their boards.
But what is it? That is less clear. The general consensus seems to be that it is an outside (although, it would appear, not necessarily an independent) director.
What role does this person play? Some say the independent director is a “devil’s advocate” ensuring that the CEO’s ideas are rigorously examined. Others venture further that he or she should be a rather more pushy “loyal opposition.” Some even suggest the lead director should hold meetings where the CEO is not present, in order to evaluate the latter’s performance in an un-intimidating environment.
If all of that isn’t lame enough for you, still others assert that this new position should simply provide leadership to the administration of the board that the CEO may lack the time and focus to invest. Which pretty much puts us back at square one: the board is the tool of the CEO.
But that typically is, or can be made to be, the case whether or not the positions are separated or combined, or whether there is or is not a lead director. Normally, especially in the US, it doesn’t even matter what the mix of inside, outside, and independent directors is. If the CEO is reasonably astute, he or she will ultimately be on or behind the throne.
Moreover, whatever the current method may be of organizing the board, the CEO can manage affairs such that it transforms into whatever he or she wants. There is nothing to prevent this as long as management’s role is so pronounced in the boardroom - its own and, collectively, each other’s. And at the end of the day, even if directors reject a particular CEO, they will never reject management’s preeminent role in corporate governance. After all, they may be directors, but they are also managers, themselves.
But that may be changing. Please stop by tomorrow to discuss why and how - see you then!
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This post is a part of a series. You can learn about and link to the other articles here: Directors and managers
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Today’s tip: So why do we always get the same result, no matter how many efforts we believe we are making to shake things up? Please visit this intriguing and intelligent post by Tyler Cowen at Marginal Revolution for a fascinating insight about this.
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2 Comments
An overwhelming problem with boards appears to be that the members don’t put in the time and effort required to do the job right. How can a person who is CEO of a company and a board member of 5 others possibly do justice to all those roles? If more board members did the job that they were hired to do, they would be less inclined to be pawns of the CEO, regardless of whether s/he held the dual role of CEO/Chair.
Hello Nick,
You make a very good point. And there is attention being paid to this, now. In the past it seemed as though CEOs collected directorships like accessories, or like markers to show off their influence. They could do this because everyone knew they didn’t want each other actually acting like directors and interfering in the directed company’s CEO’s business.
But, as you indicate, that is changing, and there is more pressure on boards to perform with some degree of fiduciary professionalism. Some consultants and analysts have developed minimum standards about such things as hours per month required to do a good job as a director. This goes directly to your point about how many boards a CEO can reasonably sit on.
I would agree that if practice followed your excellent observation by CEOs only sitting on one or two other boards, this would represent a strong advance in the way boards perform their roles.
My only remaining concern, though, would be that these directors are still managers - of each other’s companies. On the one hand there would remain a strong bias toward quiet complicity in each other’s roles at the companies where they are the CEO. And on the other, we would still have an institution intended to represent owners over managers filled with those selfsame managers.
Nevertheless, I agree that your point is a strong one and deserves increasing attention in the way boards operate. Where directors do take the time to “do the job that they were hired to do” they, my concerns to the contrary notwithstanding, often do play decidedly robust roles, and definitely not as “pawns of the CEO.”
Thanks for adding this important point into the discussion, and, as always, for your visit.
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[...] It is happening, though. In some cases it is because of growing pressure on CEOs to pay proper attention to the directorship duties they do take on. This may limit the number of boards they join to just one other than their own - sometimes none (please see Nick McCormick’s comment to yesterday’s post for some insight as to why this pressure is mounting). Demand to fill seats remains, though, so boards are beginning to accept non-CEO directors in greater numbers. Many jump at the chance to serve, believing that it provides great experience and contacts for a later move to the top spot. [...]
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