This primer offers useful, if sometimes equivocal, ideas about getting back to good-governance basics
The Board Book: An Insider's Guide for
Directors and Trustees
By William G. Bowen
Norton; 230pp; $26.95
In a new rite of spring, each proxy season seems to bring with it a fresh spate of corporate governance outrages. Last year, it was options backdating. This year, outsize pay packages have taken the spotlight. The latest egregious spectacle: At Washington Mutual (WM), chairman and CEO Kerry Killinger tried unsuccessfully to exclude mortgage-related losses from 2008 bonus calculations. Of course, those same mortgage-related losses have contributed to Washington Mutual's 70% stock price decline since last summer and now threaten its future as an independent entity.
Irate shareholders wound up voting Killinger out of the chairman's seat. Splitting the CEO and chairman posts has for a long while been regarded as a best practice. But WaMu is just one example of how increasingly shareholders must take over such basic good-governance duties from boards.
In such a milieu of board dysfunction, it's a good idea to get back to basics. A useful primer is The Board Book: An Insider's Guide for Directors and Trustees by William G. Bowen, a former president of Princeton University and the Mellon Foundation and a director of 14 public company and nonprofit boards. The author draws on his own experience of boards at such places as American Express (AXP) and Merck (MRK) and weaves in commentary from high-powered friends including Larry Bossidy, Harvey Golub, and John C. Whitehead. The volume also pays particular attention to nonprofits. It must be said, however, that the book is dry and sometimes hedges its judgments. Moreover, Bowen resists drawing conclusions on some of the most pressing governance dilemmas of the day, chief among them the rise of the activist shareholder.
Still, there's thoughtful reflection on how good directors can establish productive relationships with chief executives. Acknowledging the rise of the imperial CEO, Bowen writes: "The right way to redress this balance is [not] to "defang' the chief executive.... Boards needed to be less supine." What's key is a widely experienced slate of independent-minded directors. Board members must be able to balance collegiality and constructive criticism.
Bowen argues persuasively that the CEO should not remain on the board after he or she retires. The former chief's very presence in the boardroom makes it nearly impossible to have a frank discussion about strategies that need retooling. At Reader's Digest, for example, where Bowen was on the board from 1985 to 1997, George Grune became a director after retiring as CEO. Grune "had great difficulty accepting that times had changed, that the Digest's customer base was—literally—dying off, and that the company needed a dramatic shift in directions," Bowen writes. He wound up resigning from the board in frustration.
While public companies often face the problem of acquiescent boards, nonprofits can face the opposite dilemma: boards that wield far more power than the chief executive. That's not necessarily a bad thing, points out Bowen, since nonprofits rely on trustees to preserve a broad mission—and, in some cases, to get funding. But often, the size of nonprofit boards, larded with donors and other constituents, can be a "major obstacle to good governance." Large symphony orchestras, for example, average 65 board members, says Bowen. Sheer numbers can lead to a diffusion of responsibility that boards of public companies rarely have to confront.
Bowen's waffling can be tiresome. For example, he writes: "The arguments in favor of the separate chairman model are persuasive at the level of first principles. Certain practical considerations, however, argue in favor of the single CEO-chairman model in particular situations." Yet Bowen helpfully tackles a number of pragmatic concerns: how many directors there should be (11 to 20); how they should be paid (in stock, held until retirement); and whether there should be term limits (yes). As such, The Board Book will be useful to board members new and old, notably in the nonprofit sector.
CAN WE TALK?
According to consultants Stuart Crainer and Des Dearlove, constructive dialogue is often rare within corporate boards. They offer thoughts about how to alleviate this problem in The Conference Board Review article "Boardroom Blitz: What Happened to Real Debate Among Corporate Directors?" Among the topics considered: managing intra-board conflict and keeping it from turning toxic, and defining the roles of the executive team (insiders) and independent directors (outsiders). The article can be found at www.conference-board.org/articles/atb_article.cfm?id=404.