Board members banned from consulting?!

• Author: Greaver, Maurice F., II

The risk/benefit analysis depends on the director's professionalism and the situation. It requires the type of judgment that we expect a board to be able to make.

Last year, the National Association of Corporate Directors (NACD) released a report on director compensation in which it listed as Best Practice Number 5: "Boards should adopt a policy stating that a company should not hire a director or director's firm to provide professional or financial services to the corporation." In defending its position, the NACD explained that: "Boards of directors should hire directors to be directors and service providers to provide services....The director's role is distinct and separate from that of a consultant; both roles can be severely compromised through commingling."

American novelist Norman Mailer, as quoted in "Management" (1987), warned that "When considering regulations, half of what is published is probably 50 percent incorrect. The rest is 75 percent wrong." I would suggest that the NACD's Best Practice Number 5, while on the surface seemingly logical, meets Mr. Mailer's probability of a wrongheaded policy. The NACD has taken what appears to be an extreme position to ban the director/consultant relationship because "Both roles can be severely compromised" (emphasis added) if board members make unethical judgments about their potential conflicts of interest.

To show the opposite extreme position, the entire contents of the highly successful retailer Nordstrom Corp.'s Policy Manual is encompassed in the directive, "Use your own best judgment at all times." Imagine that - trusting employees to use their judgment. If Nordstrom can trust its employees' judgment, cannot we trust board members' judgment?

To be sure, conflicts of interest can and do occur. I observed such a situation (involving current litigation, so names are not used) in which a company's director also served as its outside counsel. The director's legal consulting fees were significant in amount to the director's law firm, of which he was a senior partner. His director's fees were insignificant. Over time, it appeared that his legal advisory role was conflicting with his corporate governance role.

A Sad Conflict

For example, as the company's financial health deteriorated, his advice supported actions which "window dressed" the company's financial statements, continuing the facade of a viable company (and his significant attorney's fees) as opposed to supporting prudent business actions which simultaneously would have brought on regulatory supervision, reducing or eliminating the board's control (and his significant attorney's fees). This sad conflict of interest ended with the regulators liquidating...