Millions of words have been written on the bankers, traders, regulators and CEOs who helped trigger the current economic correction; and countless articles have been published about firms who either lived on the edge or were pushed over the edge as a result of this financial reversal. Much less has been said about the boards of directors who appear to have abdicated their oversight responsibilities and allowed high-risk business activities or latent non-competitiveness to flourish at so many companies in recent years.
I realize that most boards at most companies are doing a good – or at least decent – job. But after the warning signals that resulted from the Enron, WorldCom, Tyco and Arthur Andersen episodes at the beginning of the decade the lax behavior described above is surprising.
Staying Awake and Paying Attention
I’m still scratching my head after the debacles at Lehman Brothers, AIG, Merrill Lynch, Bear Stearns, GE, GM and Chrysler; and you’ve got to wonder about the razor-thin close calls at Citigroup or Bank of America. If the directors at these behemoths had been active in strategy development and execution, paying attention and assessing business operations and results, and identifying and evaluating systemic business risk, is it possible they could have missed the problems?
The larger – and more lasting – issue, one that goes well beyond opaque derivatives and their corrosive affect on the balance sheet and long-term complacency, is that boards of directors are in a real position to lead and model by example so that we can counter-act the economics of uncertainty and the continued fraying of the social contract between business and its stakeholders.
This is one of the biggest upside opportunities for companies right now – assembling and mobilizing the best, brightest and most engaged boards possible. But to unlock this potential commercial goodness, we need to step back and look at what directors can – and should – be doing to maximize value.
New Variables for Capturing Long-Term Value
In my view, board members today must understand that their long-term value is tied to the social contract between business and stakeholders. This is especially important to consider because the economic correction will last longer than most people think; and, to be perfectly honest, there’s very little trust out there right now. Business doesn’t trust consumers or the government; the government doesn’t trust business or consumers; and consumers don’t trust either business or the government. To put it another way: there is now an inherent lack of trust that has overwhelmed an inherent sense of trust – a broader definition of “counterparty risk.” This stems from our abandonment of the core American values that have helped build this country over more than two centuries.
Adhering to Core Values
With so much fear, loathing, anxiety and suspicion floating around, we need a new and credible leadership cadre in the private sector that can help re-establish trust even though there’s so little faith. From where I sit, that’s the burgeoning role, new opportunity and potential competitive differentiator that a solid and far-sighted board represents.
To boil it down, boards simply must adhere to the core values of a company – and to those of our society as well. Harry Truman once said: “Progress occurs when courageous, skillful leaders seize the opportunity to changes things for the better.”
So how should boards change things for the better today? How can they start us back on the long and winding – and sometimes bumpy – road to a prosperity that is tied to core values?
Teamwork on the Board
Well, first of all, in addition to rolling up their sleeves, digging in and getting involved in every aspect of the companies they serve – strategy, execution and operations, finance and risk, and organization and performance – board members need to become more active and available to each other and management. That means commitment, real focus, real learning, real analysis, and much more than lip service and a couple of nice dinners and structured quarterly meetings each year.
To be precise, board members must deliver and be conversant with fact-based analyses of industry and strategy; participate in strategy development and oversight at the time of execution; create a clear and detailed strategy blueprint that defines the end game and interim beachheads; define and monitor strategy as well as financial, operational and organizational leading and lagging metrics; and help align performance to goals and objectives.
Clearly, to deliver in each of these areas, boards must have access to the very best situational, functional and industry expertise. This is particularly true in the current environment, where change is definitely occurring at an accelerated rate and in less predictable ways.
Modeling Real Leadership
The board has a great opportunity to help lead us back to the future today. Back to the future is reclaiming behavior that’s characterized by doing the right thing for the company, not the individual. The board can do this simply by enforcing its existing fiduciary rights and obligations.
The board and, to an equal extent, executive leadership also have the opportunity and obligation to elevate integrity. Reasserting the value of a person’s spoken word and handshake, and honoring the intent or spirit of a contract, law or regulation, need to be seen as good and necessary things in business today.
Board members have to take themselves – and their responsibilities – seriously; they must show the way for the CEO and his executive team, and they must have reasonable access to the second and third layers of management. But above all, they must absolutely insist upon and achieve formalized top-to-bottom transparency throughout the companies they oversee. That way, when senior executives want to skirt the truth on business performance or exploit a regulatory loophole that may lead to undue risk or deviation from the core values and strategy, the directors can listen – and then just say “no.”
Rebuilding Trust From Within
These are not feel-good symbols or PR spins; they are hard-core values that have profound bottom-line implications. If trust is further degraded inside (employees and investors) and outside (customers and partners), companies will eventually experience the systemic loss of goodwill; that ultimately affects valuation in a negative way and erodes shareholder support; and this, as we all know, makes it exceedingly difficult to raise capital at reasonable rates and with reasonable terms. The net result is that companies don’t survive.
Generally speaking, though, even the most powerful board will have trouble transforming a company unless it communicates a clear vision for the future, establishes lucid goals and performance objectives, aligns performance incentives to those objectives, puts into place and supports a strong leadership team, maintains competence governance standards and procedures, and sustains a corporate passion for change.
Four Board Reforms
On a more pragmatic level, I believe there are five corporate reforms that board members must implement, and live by, if they are to help their companies look over the horizon, survive in the short term and thrive in the long term. Some of these reforms are old, some are new, and some are evolving – but all are crucial and require discussion, debate and consideration.
- Board members must make certain that the chairman and CEO roles are separated so that there isn’t too much concentrated power and too much filtering of information at the top.
- Board members must make sure that there is proportional representation of the shareholders that provides for the balance of long- and short-term shareholder interests.
- Board members must make it a requirement to serve on fewer boards so they can give full oversight attention to a smaller number of companies and act on an informed basis.
- The board must be more active in strategy development, require transparency monitoring in strategy execution, and evaluate short -and long-term business risk.
- Board members must make it a priority to meet more often, review monthly management reports, and call ad hoc meetings as required.
The decline of leadership and loss of core values in the private sector requires that boards truly step up and lead; and the ultimate challenge for any board – but especially those trying to guide their companies to financial safety and economic high ground in today’s uncertain environment – is to find the right balance between constructive oversight and guidance versus overly negative intrusion.
Boards are not corporate operators, nor are they corporate police; they are, however, responsible in the truest sense possible for the progress and performance of their companies. That responsibility requires a sure-footed but nimble posture, active engagement, decisive and timely action, wise and far-sighted counsel, informed impartiality, and a ruthless and relentless pursuit of the truth in achieving long-term shareholder value.
Serving as a strong steward of any company during the current economic correction is a daunting task; but it’s a job that must be done, and done well, if we are to restore the trust that makes our American capitalistic system work.