How a corporate board can be strengthened.

• Author: Crandall, Robert L.
• Position: The Shape of Things to Come - Brief Article

THE UNITED STATES is fortunate that a well developed code of commercial law, strong and vigilant regulatory agencies, a business-oriented culture and powerful peer pressures have combined to foster corporate managements which are, on the whole, both competent and honest. As widespread public ownership has separated ownership and management ever more widely, managements have provided, generally, fully satisfactory stewardship. As a consequence, the role of the board of directors has become increasingly ceremonial.

Nonetheless, the importance of the board of directors to responsible corporate governance has long been a popular theme among students of Corporate America. Essays without end deal with the ideal qualifications of directors, tell us how directors should interface with management in shaping the company's strategic plans, and hold forth about the role of directors in setting compensation standards and successorship guidelines. In recent years, the importance of the audit committee and the qualifications of its members has been a favorite theme.

The reality is that few if any directors have enough information about the companies on whose boards they serve to make any meaningful contribution. In the vast majority of cases, the board is both unable and unwilling to intercede in a company's affairs until the numbers turn bad -- by which time, action is long overdue.

There are many reasons for this, foremost among them the fact that boards simply do not meet often enough, and for long enough, to make anything but the most cursory judgments about the state of the company's business. Another is the use of board committees, an arrangement which inevitably results in most directors knowing nothing whatever about the subjects covered by the committee in question and which prevents the ebb and flow of debate and discussion among all board members. A third is the fact that many boards are too large; another is the natural enough desire of chief executives to have a board composed primarily of other chief executives -- all of whom are too busy, assuming they are running their own companies properly, to spend any meaningful amount of time thinking about third-party problems. Still another is the natural reluctance of people with relatively little information to challenge a chief executive with comprehensive knowledge, particularly if that CEO has had a successful tenure. Finally, there are few if any incentives, beyond a sense of personal...