Change the dialogue with management: this is what directors need to do to head off embarrassing strategic errors.

• Author: Carroll, Paul B.
• Position: AT YOUR BEST

IF THE BLAME GAME goes as it usually does, criticism about the mistakes that led to the current recession and to poor performance at so many companies won't stop with the CEO. Aspersions will be tossed at boards, too. To see how this might look, read the withering complaints about the Lehman Brothers board that failed to stop the CEO from running the company out of existence.

While it's obviously not possible to reset the clock and avoid mistakes that have already been made, it's possible to learn from errors and protect yourself from future attacks.

To identify the lessons from business failures, we assembled a database of the 2,500 biggest disasters of the past quarter century (principally write-offs, bankruptcies and discontinued operations). We had a research team of 20 consultants torture the data for 18 months to make it yield up its secrets. We found that a fatally flawed strategy was at the root of the failure half the time, and identified numerous red flags that can alert companies that they're heading down a dead end.

Interestingly, directors often saw problems coming but failed to prevent them. In those cases, the board's interaction with the CEO took one of three forms:

* Because outside directors have less information than management does and generally have less experience in the industry in which the company operates, board members may censor themselves. Why take the chance of looking silly? At Samsung, directors had doubts about moving from electronics into car manufacturing in 1997 but deferred to the chairman, even though there was already too much capacity in the Korean auto market and Samsung had no particular strength in cars. Samsung spent $5 billion on the venture, which went into receivership and was sold three years later for some $700 million.

* Even when board members speak up, the CEO may outmaneuver them. At Ames Department Stores, two directors objected to the purchase of another department store in 1988, in a misguided attempt to match Wal-Mart's scale. The CEO cut them out of conversations on the topic and had them go last in any voting, so their opinions wouldn't influence others. Ames bought the chain--and soon filed for bankruptcy protection.

* Directors sometimes objected so strongly to a bad idea that they went public--and still failed to head off disaster. At Oglebay Norton, directors concurred with a decision to move away from the iron ore business and into limestone, but two objected strenuously when...