Directors: step up to your responsibilities.

• Author: Malott, Robert H.
• Position: Governance and the Board - Column

Governance and the Board

I was invited to become FMC Corp.'s chief executive officer in a very civilized manner. The chairman of the board's search committee invited me to dinner in San Francisco, and over drinks he broke the news. I was the board's choice for the top job.

My response rather startled the director. Instead of the usual, "I am honored by the board's confidence in me, etc." I replied flatly, "How do you know that I'm the man you want?"

No board member had asked me what I stood for, or what I would do as CEO. As it happened, I had a number of plans, most of which represented a significant break with the status quo. (For example, I intended to move corporate headquarters out of San Jose, home to FMC for almost a century.) The directors needed to know about these plans. They needed to accept them. They needed to give me authority to move forward decisively, without being routinely second-guessed. And they needed to hold me accountable for achieving what would now be mutually agreed-upon goals.

In recent years, and coincident with the emergence of an environment where corporate control is increasingly challenged, corporate boards have come under attack for inadequately monitoring management performance and protecting shareholder value. I think much of the criticism levelled against corporate managers and directors is deserved. But I am highly skeptical of proposals to "reform" corporate governance by mandating a legislative or regulatory overhaul of board procedures.

Some of the proposals that are being discussed include: * Requiring formal institutional investor representation on the board; * Giving major stockholders the power to sponsor their own proxies independent of board approval; * Creating two tiers of power and authority within boards, by giving outside directors specific additional powers; * Appointing a committee of shareholder representatives to review management performance; * Requiring major stockholders to participate in determining top management compensation; * Enabling courts to second-guess whether boards acted properly in turning down "strike suits" (in effect overturning the business judgment rule); * Requiring companies to separate the positions of chairman of the board and CEO; and * Imposing a special "fat cat" tax on executives compensated above a pre-determined level.

While the direct damage that these proposed "reforms" would inflict varies, they all have one important, and dangerous, element in common. They would all deprive -- and therefore relieve -- the board and the CEO of some of the responsibility they now have (at least in theory) to take decisive action to protect and enhance shareholder value.

In my view, these uninformed -- and in many cases unworkable -- "solutions" would be a move in precisely the wrong direction. As recent initiatives by the boards of General Motors and several other major corporations have demonstrated, directors already have very significant, if often latent, powers. The question that should be exercising would-be reformers of corporate governance is not "How can board powers be enhanced or circumscribed to promote stronger governance?" but rather "How can directors and top management be persuaded to wield the authority they already have more responsibly, more effectively, and more decisively?"

Fundamental Reality

Efforts to strengthen corporate governance must start by recognizing a fundamental, albeit...