In the past several days we have argued that the fact of managers serving as directors on boards is an inherently unstable concept, leading inevitably to fissures in the practice of corporate governance. There are two basic reasons for this:
- Boards of directors are intended to serve the interests of owners
- The interests of owners and managers do not naturally coincide
Numerous efforts - some of which, it must be said, are patently disingenuous - have been made to try to rectify this discrepancy. However, as long as they rely on the presence - moreover, the dominance - of managers in the boardroom, they cannot overcome the weight of their built-in shortcomings.
So, that leaves us with the proposal, referred to yesterday, that we develop and promote a new vocation, that of the professional director. Certainly this will not solve all of our corporate governance problems, but it will clearly remove the most troublesome one: the presence in - or more accurately, the operation of - an institution intended to protect and further the interests of one party in the corporate structure from the potential for negligence and depredation by another, by members (or supporters) of that other party.
This is a major advance. But, of course, there may be a price to be paid: what about that advisory role we hear of so often for the board? That’s actually pretty valuable. It certainly can be important for a CEO to have access to real-world experience, practical judgment, and even to a wider network of professional contacts in business, academia, and government. And the thing is, the people best able to play that role are the ones we just threw out of the boardroom.
Are we to improve corporate governance at the cost of weakened management? Not necessarily. The promising growth of advisory boards could easily move into a permanent status in order to answer this need.
Many corporations currently establish temporary “blue-ribbon committee” style assemblages of experienced CEOs and experts to examine everything from a serious fiduciary failure to new business and market proposals. Lately, others have been establishing more lasting specialty advisory boards to offer guidance and to act as a sounding board on matters ranging from environmental issues to globalization. Especially interesting is the use of women’s advisory boards.
Specialty, or targeted, boards such as these are a terrific idea. But in a new era of corporate governance dominated by professional directors, the use of a standing advisory board of networked CEOs would provide a powerful venue for vital services to a company’s CEO and senior management team.
Everything from acting as a sounding board, recommending new ventures, extending the CEO’s reach out into the broader business and governmental contacts of the boards’ members’ networks - even to providing advice regarding interacting with the professional board of directors would be excellent duties for such a board. It would also provide an important outlet for the otherwise underemployed experience and judgment of CEOs. Moreover, the relaxed environment possible from the less onerous liability involved would likely generate positive, robust, and immensely helpful debate.
Professional directors and experienced advisors, in two separate bodies; one serving owners, the other strengthening the strategic role of managers. Sounds good to me. How about you?
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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: On a rather different (although equally frightening!) topic, please stop over to Execupundit to see Michael Wade’s excellent essay on the phenomenon of predatory employees; Michael’s depiction and discussion of the problem make this a must read.
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2 Comments
Once again, nice post.
“The interests of owners and managers do not naturally coincide”
I’d like to explore this a bit… because it seems counterintuitive.
After all, both desire to make money — for the company and, as a consequence of this, for themselves.
What is at odds is the desire to serve the short-term interests of many of the owners (dividends, quick, rapid growth, hedge, etc., ) vs. the long-term interests of the company (sustainable growth, steady or growing income, quality of life, etc.)
In many cases, the actual owners of the company (the shareholders) have no interest in the workings of the company as long as it serves their short-term needs, even if it comes at the expense of the long-term future of the company.
This is why you hear people saying either:
1. “I wish I sold my shares before the price tanked,” or
2. “I sure am glad I sold my shares before the price tanked.”
What was important to them was that their investment yielded a return, not that the company was doing the right thing.
The assumption isn’t always that the company that does the right thing will be rewarded with short-term gains. Many times decisions made decades before have a tremendous impact on what the company can do with respect to those decisions, and correcting them the right way may be more painful than realizing a short-term gain (investment in infrastructure vs. layoffs).
Shareholders aren’t necessarily the only ones who are shortsighted.
Managers’ careers can span across several companies, and if one company tanks, they can still find gainful employment elsewhere. Consequently, they may desire to increase the stock value just long enough that their own value is raised.
That way they can point to the increase and say, “You need to hire me as CEO because I did this for Company XYZ,” only to see the price drop once the CEO leaves because of the mess he created.
Where does it all leave us? Probably pretty close to where you led us. If two or more parties must share control of a machine, one way to make less likely that one would use it to harm the other is through adequate checks and balances.
However, another way to make the board and shareholders more accountable is to remove the personal liability protection they currently enjoy. Then they would be more discerning about what they invest in, more personally vested in what the company does, and how the board governs.
It would also likely dry up the capital, though, or else consolidate it.
Hello Cam,
Thanks for your visit and your thoughtful observations. You caught me completely by surprise with this one: “remove the personal liability protection they currently enjoy” - I didn’t see that one coming!
But you’re right about the consequences of that sort of exposure to liability - it would likely dry up the availability, and innovative deployment, of capital. That is why protection from it (albeit eroding due to egregious negligence) via the corporate veil is so important to the ownership side of the legal structure behind the concept of shareholder organizations.
Which brings us back to ownership, its motives, and the relationship between those and many of the corporate scandals we have experienced over the past decades (and before).
You pointed this out before, and I agree it is a shortcoming in the way I’ve approached this topic, and one that should be filled. As a result, I’m going to do one or two posts on it this week, to try to see if I can close that gap. I hope you don’t mind my putting an answer off until this week.
Thanks again for this - it’s important to address and to establish its position in the overall framework, and the basis of that position.
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[...] Two great posts written yesterday and today by management guru Jim Stroup. [...]
[...] Today’s tips: Please see this excellent discussion at Tim Ferriss’s blog about how certain types of entrepreneurs can find themselves “working for a lunatic” (thanks to Michael Wade, at the Execupundit, for the tip). After that, you will want to see this piece by Phred Dvorak in the WSJ, about how some entrepreneurs use advisory boards to avoid this problem. [...]
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