Too often the question is: “Has anything happened lately that could embarrass us?”
Do you think boards today are running better or worse than before?—Anonymous, Phoenix
Actually, too many of them are running scared. And while that may give some governance groups a self-satisfied twinge of victory, a board in defensive mode is bad for employees, companies, and the economy.
So what's going on? We've been speaking recently with groups of CEOs—a total of about 300—in several small, in-depth sessions. They have come from a variety of companies, but one thing they all share, to varying degrees, is a pressing concern about the changed nature of their boards, a direct result of the governance scandals and the reforms that followed. As one CEO put it: “Every meeting starts in one form or another with the question, `Has anything happened since we last met that's going to show up in the papers and embarrass us?' Then we hunker down over financial reports and risk assessments to give everyone a sense of comfort.”
Now, a board getting a strong dose of comfort is fine. Boards have to feel confident that companies are abiding by the spirit and letter of the law. No one wants another WorldCom or Enron to erupt, let alone responsibility for it.
But hunkering down over numbers and downside scenarios is just not what boards should be doing with all their time. Compliance doesn't happen because a group of overextended, far-flung executives flies in 10 times a year to examine the books. Compliance happens because control systems are carefully monitored by internal managers, who are understandably in a state of hyperawareness.
Control systems today are also being monitored by newly energized outside accountants. Ironic, isn't it? The same accountants who failed to flag the scandals are now the biggest beneficiaries. All those additional billed hours for extra, extra due diligence! Regardless, accounting data have never been more meticulously scrutinized.
Which should free boards to do their real work—developing a healthy dialogue with management about building a better future, together asking “How big can we get?” and “How fast can it happen?” After all, who wins if a company has no growth? Not employees, who don't get the opportunity to improve their lives with better jobs and careers. Not shareholders, who don't get the equity appreciation from successful acquisitions or the payback from daring organic growth initiatives. And not communities, who don't get the extra tax revenue from thriving companies, new and old.
Importantly, wide-ranging debate about growth and risk can happen only in an atmosphere of sharing and trust. That's why we're so opposed to the recent push by some activist shareholder groups to change SEC rules for electing directors, which would open the door to the possibility of boards filled with special-interest “representatives.” Just imagine the union organizers who are taking the anti-Wal-Mart campaign to a national level sitting in the boardroom in Bentonville, Ark. What a disaster! We guarantee there wouldn't be much candid debate about the inevitable crises of management, let alone growth opportunities, in that war zone.
No, constructive dialogue occurs only when a board comprised of savvy leaders and experienced entrepreneurs uses its wisdom, character, courage, common sense, and collective judgment to help the CEO and top team get to the right answer. Of course, the board must assess and challenge management. It must get out of headquarters to see if employees in the field are really carrying out the mission and hewing to the values that the brass espouses in the boardroom. But ultimately, a board and management must play on the same team, not operate at cross-purposes.
There's just not enough of that happening now. Directors are too paranoid. Which is why change—and change is imperative—must be led by CEOs themselves. Naturally, many of them are paranoid, too, in this era of tenuous tenures. But for the current impasse to break, CEOs must have the self-confidence to put themselves on the line with a commitment to their boards that controls are fully functioning. They must earn and demand broad trust, and the board must give it, or put the right CEO in place. With that dynamic, boards can let go of their crippling fear. And together, the CEO and lead director can set a new tone and create a new agenda, where Item 1 deals with any financial (or other) bumps ahead, and Items 2 through 10 concern exciting strategic objectives.
To your question, then, boards today are running better—but only for cover. To run better for the sake of employees, shareholders, and communities, they need to climb out of the bunker and get back to the business of the future.