What should we expect from a board?

• Author: DENHAM, ROBERT E.

To demand more from boards than they can provide, or to demand the wrong things from boards, will surely be counterproductive.

THE DECADE OF the '90s was marked by perhaps unprecedented attention to corporate governance. The board of directors is the centerpiece of all efforts to reform or improve corporate governance, and we have seen numerous initiatives aimed at changing the structure and composition of boards and the way that they function. This corporate governance or board reform movement is not limited to the United States. Spurred in part by the expectations of institutional investors, we have begun to see changes in governance expectations in Europe. Last year I was moderator and discussion leader for a one-day meeting on corporate governance that the Conference Board put together in Hong Kong for about 25 Asian CEOs.

This heightened attention to the way boards do their job has in general been beneficial. Nevertheless, I think this is a good time to reflect on the successes and failures of this movement. In particular, it is a good time to talk about what boards do well, what they do badly, and the circumstances that affect board performance.

Our objectives for corporate governance -- what we want boards to do -- should be based on the reality of what boards are capable of doing. To demand more from boards than they can provide, or to demand the wrong things from boards, will surely be counterproductive -- at best wasting valuable resources that could be more productively applied to other board activity and at worst discouraging board membership by conscientious, able individuals.

A very curious statement

On my first or second day of the Corporations class in law school, I remember I was taught that "the business and affairs of the corporation are managed by the board of directors." I suppose they still teach that in law school. The courts certainly still recite it, and words to that effect are found in many state corporations statutes. But it is a very curious statement. I remember finding it curious as a second-year law student when I was first exposed to it, though I certainly didn't have the experience with corporations then to appreciate how really curious it is.

I did recognize that since we use words like "managers" or "management" in contradistinction to "directors," there must be more going on in this statement than meets the eye. I remember another student who was perhaps wiser, or bolder, or simply more ingenuous than I, asking about the notion that the directors manage a corporation's business and affairs. The professor gave a fairly standard answer: that "manage" as used here refers to setting overall policy for the company and making decisions on critical issues, as opposed to day-to-day management. I suppose that is one way to make sense out of a nonsensical statement, but I didn't find it very satisfactory and, after a fair amount of experience with boards, I still don't.

My alternative explanation at the time was that this was an example of the law being aspirational instead of descriptive. It was the law's way of saying "this is what we want a board to do," even if boards don't really behave that way. So, even at the basic level of what is taught on the first day of a Corporations class, the law is confused about its expectations for a board of directors.

That observation returns us to the basic question: What do good boards do...