By David A. Nadler
The current imbroglio involving the Hewlett-Packard Co. (HPQ ) board of directors illustrates a problem that could threaten to wipe out much of the recent, hard-won improvement in the quality of corporate governance. Believe it or not, I'm not referring to how the HP leaks were investigated; I'm talking about the long-running leaks that prompted the investigation.
I'm sure the combined investigative powers of the Justice Dept., the Securities & Exchange Commission, the California Attorney General's office, and the U.S. Congress--all of which have expressed interest in the case--will get to the bottom of who did what and whether anyone broke any laws in the course of investigating the leaks. What I don't see is any equivalent interest in the critical issue of boardroom leaks: how they can disrupt the work of boards and do a disservice to shareholders. Quite the contrary, writers in some leading business publications are extolling the virtues of leakers and leaking, arguing that those who break the boardroom's code of silence are acting in the best interests of shareholders.
As someone who has spent years working with boards and chief executives to help them improve the quality of corporate governance, I firmly believe that boardroom leaking is not only morally reprehensible but also a major obstacle to a board's effective performance. Here's why:
First, to function effectively, boards must engage in open discourse that challenges management's thinking and holds members accountable for their performance. When boards sit silent and passive, keeping misgivings to themselves, bad things can happen. Boards learned from the Enron-era scandals that to do their job effectively, directors must feel free to ask dumb questions, float unorthodox ideas, question management's judgment, and challenge a CEO's performance.
I'm thrilled we're finally seeing the board evolve from a courtly gentlemen's club to an active business team working to safeguard shareholders' interests. And the most visible evidence of change is the sharply altered give-and-take within the boardroom. More and more, we're seeing the kind of unfettered debate that can raise questions about a flawed strategy before it's too late, or help a CEO improve performance while there's still time to get back on track.
I know firsthand that these conversations do not take place on boards where members suspect their colleagues will leave the meeting and immediately leak a heavily edited, one-sided, self-serving version of what transpired. I also have seen situations where the bond of trust has become so unraveled that CEOs have become reluctant to raise important issues with the entire board in the room. And with good reason.
Then there's the issue of timing. Unlike the days when management would present the board with complex decisions to be rubber-stamped, today's most effective boards get involved with issues such as corporate strategy, mergers, or executive performance evaluations while they can still make a difference. But once a leaker decides to publicly disclose those discussions, it's game over. Pressure mounts, people get squeamish, alternatives vanish. Perhaps a CEO who might have succeeded over time gets fired because time has prematurely run out. In other words, the leaker, in an astounding act of hubris, has taken it upon himself to derail the board's deliberative process.
Without question, the board has an absolute duty to communicate actions and decisions to the shareholders in a timely manner. But to assert that full and immediate disclosure of all of a board's deliberations--including preliminary discussions far in advance of any decisions--is in shareholders' best interests is simply wrong.
Of course, there is an honorable course of action open to directors who believe they've exhausted every option for properly influencing their boards: They can quit. I don't suggest this lightly. But there are cases when a director is so at odds with the rest of the board that the only honorable thing to do is to resign--loudly, publicly, and with a full explanation of the disagreement. That's what should have happened at HP.
None of this is intended to condone or excuse excesses in the HP investigation. But ignoring the equally important issue of board leaks isn't the answer. Boards have a duty to provide a secure environment for doing their business with sufficient confidentiality. They owe that to their directors. More important, they owe that to shareholders.
David A. Nadler, chairman of Mercer Delta Consulting, is co-editor of Building Better Boards: A Blueprint for Effective Governance