Competence, Ethics & HP’s Board
A corporation’s Board of Directors has a fiduciary duty to represent the interests of the company’s shareholders. In particular, the Board does that by selecting a CEO (and sometimes by participating in selection of other members of the management team) and by helping set the company’s strategic course. The work they do is of crucial economic importance — both to investors (to whom they are directly accountable) and to the functioning of the economy more generally. But (or maybe precisely for that reason) good governance and board effectiveness are also ethical issues.
By way of illustration, take a look at the recent controversy over the departure of Mark Hurd as CEO of Hewlett-Packard.
The short version: HP’s (now former) CEO, Mark Hurd, got caught fudging his expense reports. Sexual improprieties were also implied. So, the Board fired Hurd, and payed him a huge severance package. Then just a month later he joined HP’s rival, Oracle, which was very bad news for HP. Now HP’s Board is suing Hurd. It’s a huge mess, and much of it reflects badly on HP’s Board. See, for example, Joe Nocera’s recent piece in the NYT: H.P.’s Blundering Board
The Hewlett-Packard board is back to doing what it does best: shooting itself in the foot. By filing an embarrassing lawsuit against the company’s former chief executive, Mark V. Hurd, this week — a suit that unwittingly highlights the mistakes it made in the way it let Mr. Hurd go — the H.P. board can now lay claim, officially, to the title of the Most Inept Board in America….
I’m not qualified to judge HP’s Board from a strict governance point of view. But the governance experts quoted by Nocera seem convinced that the Board is, shall we say, not exactly doing a bang-up job. What should we say about that from the point of view of ethics?
To begin, we should note that ineptness itself is not generally considered unethical. We generally are not to blame for our own weaknesses. If you’re physically clumsy, then it’s not your fault that you’re not good at juggling. If you have no mind for numbers, then it’s not your fault that you don’t excel in math.
But there are exceptions to that general rule.
In fact, there are at least two factors that can allow us to hold an individual or group responsible for ineptness. One of those is the fact of having voluntarily taken on a job that you knew would require certain talents and aptitudes. If you know you’re prone to clumsiness, you shouldn’t take a job requiring dextrous manipulation of, say, dangerous chemicals. Likewise, you shouldn’t take a position on the Board of Directors of a major corporation if you don’t have the wisdom and strategic skills such a position demands. Unfortunately, with things like wisdom there’s a difficult catch-22: some people aren’t clever enough to realize that they’re not clever enough to be on a corporate Board. (Note that I’m not accusing anyone on HP’s Board of lacking the requisite talent; I’m merely outlining the ways in which one can be held responsible for incompetence.)
A second factor that can justify holding someone responsible for their own level of competence is the availability of relevant training. If they have reason to think their skills are not what they could be, and if relevant training is available, and if they have not availed themselves of it, then they are culpable for the resulting deficits. Now, being on a modern corporate Board is no trivial task. Corporate Boards are no longer the window dressing they once were. Business today is increasingly complex, and so being on a Board today requires a lot of knowledge (about business and law and regulations and so on and so on). So, there are organizations out there that are set up to provide training. (In Canada, we have this and this, for example.) Now, it’s not clear that Board training would have helped HP’s Board avoid the errors it apparently made in dealing with Hurd. Again, I’m merely trying to outline the conditions under which a lack of skill (something others have accused them of) becomes something ethically problematic.
In the end, the point is this. Modern Boards face enormous challenges. And while we most often think of corporate governance as a legal matter and as a matter of interest to shareholders, in the end it is really about making sure that the right decisions get made by the right people for the right reasons. Add to that the fact that executive decisions have the potential to have enormous impact — financial and otherwise — on people both inside and outside the corporation, and it becomes easy to see why governance must be considered an ethical issue as well.
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Note: edited on Sept 17, 2010 to correct 2 places where I had accidentally typed “BP” instead of “HP”.
The Business Ethics Blog 
WOW Professor MacDonald
In my opinion, this is by far the best business ethics article which I have read to date on The Business Ethics Blog. It brings out many of the numerous issues and challenges requiring the application of sound business ethics as well as a crisp and clear commentary of how in a real life example they all interact and play out with one another in the corporate environment setting.
Kudos go out to you to a superbly written article!
In my opinion, the Boards’ duties and the agency problems are the biggest ethical dilemma in business right now. There are 4 major areas I think have compromised ethical duties of Boards to their shareholders:
1) It is near impossible to replace more than a single member of a board at a time, let alone the voting blocs that naturally occur. It has only been recently changed that the SEC allows a shareholder owning 3% or more to nominate board members directly; yet that shareholder can still only submit nominations for only a quarter of the board. So it takes at least 3 years for activist shareholders to wrestle control away. At least this is a step in the right direction, as all other jurisdictions generally follow the SEC’s lead.
2) The common practice of CEOs to be appointed to the Board. All 5 of the major Canadian banks have the sitting CEO as a member of their board. There is a basic conflict of interest of having a CEO serve on the board that I have never seen adequately explained away: how can a truly independent board, representing shareholders and holding management to account have the current CEO sitting on it? How can they decide on a fair compensation package when the CEO gets a vote? How can they fire him without goodbye kiss like Mark Hurd got?
3) The ethics of boards when there exists multiple classes of voting shares with differential voting rights, allowing disproportionate vote control by one person or group. The most egregious recent example of this is the Magna board, stacked by Stronach through his massively disproportionate voting rights compare to his ownership, and the ridiculous payment they authorized to finally get rid of him.
4) Related to #3, other pyramids of control that aren’t tied to voting rights, such as Li Ka-shing’s control of the Hutchison Whampoa empire and all it’s partially owned subsidiaries. Li owns about 1/4 of Hutchison Whampoa, whose board he controls. This holding company owns dozens of companies throughout the Pacific Rim, including Canada’s Husky Energy. HW buys companies, takes them private private, stacks the board with HW personnel, and then issues IPOs. Nothing out of hand so far, but the problem with this is Board loyalty after the IPO. For example, HW now only owns about 1/3 of Husky, and yet every single board member still has ties back to HW. Effectively, one very minority shareholder runs the company without voting control, because as per #1 it’s impossible to wholesale replace a board. Who represents the other 90%+ of shareholders?
[…] start, see above. Quality governance is itself an ethical issue. (See also my recent blog entry on board competence.) So a board’s Nominating Committee has an ethical duty to recruit talented people. Is there […]
Just a quick point on the CEO – he (and yes, it is usually he…) does not sit on the Compensation Committee of a Board – which makes the final decisions on the structure and amount of the compensation package. As a shareholder you have to do a LOT of digging into the public documents to a) understand how the organization is governed, to then b)align your values with how the organization governs itself in the industry it participates. Who amongst the ‘regular joe’ investor does that homework??
Think about the cultural influence that a Board has in an organization – how it structures itself, its role in policy decision-making, and the rigour with which it holds executives to account. It goes beyond nominating the right folks to the job, but enforcing policy and holding them accountable. I’ve face-face interacted with a number of Boards and can tell you that the Chair sets a very clear tone – both ‘good’ and ‘bad’.
Just read an interesting article on ‘interlocking directors’ – aka ‘old boys network’ (but that term is no longer likely to be politically correct is it?).
http://tcbblogs.org/governance/2010/09/14/guest-contributor-dodd-frank-act-should-address-interlocking-directors/
I’d take a CEO on the Board anyday as long as the ‘independence’ of directors was set by corporate policy to be defined as those without conflicting interlocking relationships…. but the reality is the pool of Directors is pretty darn shallow and getting shallower daily it seems with the headlines of future Directors (current execs) getting caught conducting unethical practices.
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