Corner Office-Horse-Sense Governance

Corner Office-Horse-Sense Governance

The difference between boards that "technically" fulfill their duties and those that really do.

“Where was the board of directors?”

“Why didn’t the company’s executives see signs of trouble before it hit them?”

“Why didn’t the board think about risk and manage it?”

“How could this happen with all the information that

was available?”

 

Shareholders, employees, managers, customers, and taxpayers are asking these questions as they look into the “black box” of how our country got itself into this economic mess.

After all, weren’t post-Enron regulations supposed to prevent the type of business disasters that are in the headlines every day? Remember that, in an effort to restore confidence in Wall Street after the business failures of a decade ago, Congress passed the Sarbanes-Oxley Act in 2002 to address flaws in corporate reporting and governance.

But in their effort to provide a quick fix for problems in American corporate governance, our government leaders glossed over a fundamental truth: The effectiveness of a board of directors is determined by the character of its members.

During the decade of the 1990s, democracy and the free market system spread around the globe, creating unparalleled economic growth and an age of confidence and optimism. Despite a few hiccups as the decade closed and a new one began, the modus operandi was to continue running things as they had been. Why tinker with a well-oiled machine that keeps producing profits and shareholder returns year after year?

Corporate directors who had the nerve to raise their hands at board meetings to point out the risk or downside of a strategy got the same response they might have if they’d told a politically incorrect joke. They were deemed not to be “team players.” Some were admonished. Some chose not to play the game anymore. (I’m speaking from personal experience here!) It was as if everyone were intoxicated, blinded by the rising stock market and living in a sea of greed and excess. Common sense was tossed out the window because running a business without it was just too much fun . . . and, for a while, too rewarding.

Eventually, however, malfeasant behavior on the part of some corporate boards contributed to the failure of major businesses, historically high levels of unemployment, and our envelopment in a recession deeper than any other since the Great Depression. CEOs, directors, lawyers, accountants, and bankers are being hung in the court of public opinion (as some should be). It will take years to restore the damage done to our greatest asset of all: our collective reputation as corporate leaders.

Some believe that a self-regulated corporate governance system of checks and balances monitored by independent boards of directors is what failed. I don’t believe it was a system failure, rather, it was an execution failure on the part of directors, individually and collectively, to effectively discharge their stewardship duties. In many recent corporate failures, an accountable, engaged, and informed board of directors could probably have prevented a full-scale crisis.

Most state laws hold that directors and officers owe three fiduciary duties to the corporation and its shareholders. (By the way, “fiduciary” refers to “a holding of something in trust for another” or something “founded in trust and confidence.”) These duties are:

The Duty of care, which requires that directors and officers act with the care that an ordinary, prudent person in a like position would exercise given the same circumstances;

The Duty of loyalty, which requires them to put the interests of the corporation above their personal interests; and

The Duty of good faith, which requires that they make informed decisions while considering the potential risk of harm to the corporation.

One would think that the framework provided by these statutory duties, combined with all the recently added laws and regulations, would make corporate governance a no-brainer. However, I’m reminded of how my mother, a southern belle from Arkansas, would describe people who thought they had it all figured out. She’d shake her head, frown, and say, “Well, son, he may have a lot of book sense, but he sure doesn’t have much horse sense.”

You see, following rules and regulations does not replace following the common sense or good judgment of engaged, experienced, and ethical people. When corporate directors provide “check the box” stewardship instead of following their internal moral compass, they stray from the path of business excellence.

After more than three decades of serving on more than 40 boards, I’ve developed a list of horse-sense duties that go beyond simply following government regulations. You won’t hear about horse-sense duties from legal advisors or in corporate governance seminars, but they’re what might keep you out of the news and out of jail.

The Duty of good judgment: Too many times, directors rely on analytical data for decision making. Trust your instincts as well. Most directors are accomplished leaders who achieved success by trusting their common sense. There is no substitute for your own sound reasoning.

The Duty of no bull#$@*: No hiding behind clever business jargon and gobbledygook technical words when describing the business to shareholders and the public. Good boards are honest, fess up to mistakes when they need to, and don’t give anyone a reason to question what they’re saying or doing.

The Duty to speak up: An unwritten rule of proper society prohibits discussing tough stuff out in the open. However, the opposite is true in the corporate board room. Attentive directors voice opinions and concerns based on their experience. What allowed the corruption on Wall Street and in our boardrooms to occur was fear-based silence and complacency. It takes courage to speak out, but we must.

The Duty of suspicion: When engaged directors read management reports, they don’t simply read. They analyze the information and are curious about every detail. They ask as many questions as necessary in order to be comfortable that they know everything they need to know.

The Duty to drain the swamp: You know that CEO who needs to be let go and everyone knows it but is afraid to do it? You remember that quality issue hiding in the closet that nobody wants to talk about? Engaged directors don’t let anything hide in the swamp. They know it’s their job to face the alligators.

The Duty to avoid self-interest: Technically, conflicts of interest might be defined on a director-and-officer questionnaire that’s quickly dispensed with. But engaged directors think continuously about potential conflicts and use common sense to steer clear of even the slightest hint of conflict.

The Duty to achieve: The bottom line is that corporate directors have a duty to ensure that the company achieves its goals. That means ensuring that the business is run by ethical, smart people executing a solid business plan and focused on a common strategic goal. But boards cannot simply hold management responsible for achieving company goals. The board needs to own the goals and strategies as well.

The Duty of horse sense: No matter how many titles and degrees they hold, enlightened directors know that using intuition, logic, and common sense is what will keep them out of trouble. Follow the simple rule: If it looks, walks, and smells like a skunk, it’s a skunk!

Serving as a corporate director is not for the weak of heart or spine, or for those simply looking to improve their resumés. Board service is a demanding job, even for the most experienced executives. Along with the great honor of serving on a board come great responsibilities to learn the business and its industry, exercise independent leadership, and insist on the highest ethical standards. Get it right and you’ll enjoy the journey of service. Get it wrong and your reputation could be forever tarnished.

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