Founder's target: The think-alike board
From "The Board As a Team' by Stanley Foster Reed [Fall 1996]. Who better to lead off our portfolio of governance thought leaders than the founder of Directors 8c Boards? This is a passage from a set of reflections on the founding of the journal that Stanley wrote for our 20th anniversary edition. He died in 2007 at the age of 90.
GOOD corporate governance comes from the joint efforts of directors with known abilities formed into a group with complementary talents. It does not come from groups of people brought together because they enjoy each other's company.
I came to this opinion back in the 1960s serving on the boards of a number of companies where board membership was the result of shared experience either on the golf course, in college, or in social congress. We directors all looked alike, dressed alike, talked alike, and enjoyed each other's company. And, one after another, the companies got into trouble. Serious trouble. How come? Because the boards were created for social purposes, not business purposes. They lacked diversity. They were think-alike boards. There were never arguments. On one board on which I served for 10 years, no one ever interrupted another board member. Never!
One board was composed entirely of members of the Young President's Organization. Another of engineers who had each started his own high-tech company. Another of all MBA/management consultants. Another of all members (except me) of the founding family. Were any of these boards a "team"? We thought we were. Were we effective? No! We were like a baseball team of all pitchers!
While I didn't know then as much about management as I know now, I knew that those boards were ineffective. So I founded Directors & Boards to help stakeholders create effective boards. One of my targets was the think-alike board.
This is how boards get into trouble
From "How Do Boards Get Into Big Trouble?" [Fall 1986], an interview by James Kristie with Victor H. Palmieri, at the time one of the country's premier corporate turnaround executives. This interview was a key feature in the journal's 10th anniversary edition.
WHAT YOU FIND in the great corporate disasters with remarkable consistency is the same kind of culture--in which dissent is suppressed, in which loyalty is measured by agreement rather than disagreement, and where, as you approach the top of the management structure, you find the people have been selected by virtue of their willingness to go along rather than to speak their mind. Where that situation exists there's often a progressive loss in what 1 call the collective grasp of reality. In that type of setting, usually with an authoritarian leader and a group of people around him who are either conditioned not to see the realities, or afraid to call attention to the realities, you see time and time again a tendency to reject warning signals, to ignore realities, to create those defensive attitudes, and ultimately the company goes into a crisis.
The culture in these kinds of companies is usually a reflection of the style of the chief executive. If the chief executive is reasonably open, chooses strong people around him, encourages questions, or if the board is strong enough to require access to hard information and to ask hard questions, it's possible to create a culture in which even the most authoritarian executives succeed in building impressive records of growth and profit. Not by a long shot do all authoritarian leaders wind up leading their company into bankruptcy. You can think of many who succeed very well. They may be geniuses, and geniuses are hard to account for. They may be lucky and that's hard to account for. But when you look at Penn Central or Baldwin-United, or perhaps any one of the great corporate disasters in the past 10 years, when people ask how they happened, you see a distinguished group of directors who had been aboard during the period in which the company went into decline and finally into crisis. You see that that group crisis. You see that that group of directors essentially didn't understand or were paralyzed to take any effective action in the circumstances long before the crisis arose.
A call for a 'hard-boiled' compensation committee
From % Personal Performance Review of the Board" by Irving Shapiro [Summer 1984]. At the time this retired chairman and CEO of DuPont Co. was a partner in the law firm of Skadden Arps Slate Meagher & Flom. He died in 2001,
ONE OF THE MOST destructive mistakes a board can make, destructive to morale inside and confidence outside, is to leave the impression that top management lives in a feathered nest and will stay warm and dry regardless of stormy weather.
There have been cases where large companies have been devastated by adversity, even to the point of collapse, while the management took excellent care of itself through some sort of self-managed protective network. Meanwhile, employees have been tossed out and stockholders left to pick over the corporate carcass for whatever scraps remained. To avoid such instances, you need not only an alert board (how did the patient get so sick before the doctors knew it?) but one with a hard-boiled, independent compensation committee.
There is a further prerequisite here, though, and that is good judgment as to what constitutes performance. If a company is rolling on momentum, a do-little management may turn in pleasant-looking numbers for several years while in fact the company's future prospects and internal organization are falling apart. A company battered by hard times may continue for a time to show losses, even though a brilliant management team is taking all the right steps to rebuild and will in future years be recognized as the corporate savior. It takes some wisdom in a compensation committee to know what to compensate.
There are joys in being a director
From "The Joys of Directorship!" by Robert K. Mueller [Fall 1986]. Mueller truly personified the exalted position of governance guru. In between writing more than a dozen books on management and governance, he wrote several memorable articles for Directors & Boards, including this classic, which was the keynote for our 10th anniversary special issue. He had just retired in 1986 as chairman of Arthur D. Little Inc. He served for many years on our editorial advisory board and we sadly miss his spirit and support to this day (he passed away in 1999). This passage focuses on just one of the joys he enumerated in his famous article.
LEST WE CAST all those accepting election to a board as not knowing enough about the liabilities and stress to be qualified to serve, let's quietly reflect on the joys of being a director--of which there are many, despite the demise of the pleasurable, if passive, ceremonial board service of the past.
Exhilaration of Challenge: Directors tackle vexing issues in their stewardship of owners' and public interest. They do this with thoughtful enthusiasm and experience the thrill derived from surviving a risky experience or in chancing adventuresome deeds. Most of us derive satisfaction out of challenges faced and resolved. To illustrate: the market share is always lower than you think; the number of competitors never declines; strategies develop most easily from big backlogs; anytime things appear to be going smoothly, you don't have the right information; no matter how much of a dividend is declared, or how significant an acquisition or merger, some of die shareowners won't like it.
The exhilaration of gaming to overcome these challenges and conflicts is ever present in the boardroom. This motivates many to seek directorships even though the peer power is fierce and the liabilities are increasing. In the Lady of the Lake, Sir Walter Scott called this exhilaration reaction "the stern joy which warriors feel in foemen worthy of their steel."
Do your homework and yes, ask embarrassing questions
From "Problems with Boards of Small Companies by Harry Edelson [Fall 1994]. Edelson is managing director of Edelson Technology Partnersy a venture capital firm. That background gives him an expert perspective on small-company governance, with his article addressing such sub-topics as "The Do-Nothing Board," "The Gutless Board" "The Gullible Board," and other permutations of board dysfunction, including the one in the passage below. This article was a big hit with our readers and was even reprinted in The Wall Street Journal.
IN MY EXPERIENCE, boards can be divided about equally in three categories: terrible, mediocre, and good. Why not upgrade the former to the latter? If only it were so easy. Matty obstacles stand in the way, including investment agreements, lethargy, questions of control, factions, and ignorance. Putting aside the difficulty of changing a board, what about improving a board? What follows, based on real experiences, is a litany of what is wrong with the boards of small companies and what can be done about it
The Furtive Board--Problem: The company could be going down the tubes, but you wouldn't know it by attending a board meeting. Management is either afraid or too embarrassed to relate the bad news. Besides, by the next board meeting, everything is going to be okay. Yeah, sure. Solution: Do your homework, ask embarrassing questions; you may even learn the truth. The questions are not embarrassing if the answers are comforting and forthright. Make routine contact with more than one executive. It is always wrong to depend solely on the CEO for information.
A chairman, an 'irrational' court, a watershed legal decision
From "The Big Bang for Director Liability: The Chairman's Report" by J.W. Van Gorkom [Fall 1987J. The Smith v. Van Gorkom decision from, the Delaware Supreme Court in 1985 was a bombshell that had boards scrambling to adjust to what would become a whole new era of risk...