Archive for the ‘boards’ Category
Should Boards Monitor CEO Morality?
Filed under: accountability, boards, CEOs, character, crime, decision-making, employees, governance, leadership, privacy |
Leave a Comment A Board of Directors is responsible for overseeing the management and direction of a company, and that task includes monitoring the full range of risks to which a company might be subject. But what if the company’s CEO is one of those risks? What should a board do when a CEO’s off-the-job behaviour raises concerns? The IMF’s Dominique Strauss-Kahn is a case in point. Long before his recent arrest, Strauss-Kahn’s behaviour towards women raised eyebrows. Should it also have spurred the IMF’s Board to act?
See this story, by Janet McFarland, in the Globe and Mail: When and how to confront a wayward leader
Most corporate directors find it hard enough to confront a respected CEO about work-related poor performance, but it is even harder to tip-toe into the minefield of rumours about problems in an executive’s personal life.
(I’ve blogged before about whether ‘private’ vice is a business issue. I’ve also written about whether a CEO’s divorce is a purely personal matter or not.)
McFarland quotes me in her story, but let me give a slightly fuller version of my comments here.
To start, it’s worth making a distinction. There are personal vices that are strictly personal (including most of what goes on between consenting adults behind closed doors.) And there are personal vices that are very likely to impinge upon the workplace or on performance at work. A tendency to engage in sexual harassment is an obvious example, as is heavy drug use.) But, when you’re a CEO of a name-brand organization, that distinction tends to break down. High profile means that personal vices can turn public very quickly, and affect the organization.
Also, bad behaviour on the part of those in the public eye can easily lead to blackmail, which can result in misuse of position and other kinds of bad decision-making. This is another example of why great power brings great responsibility.
On the other hand, there are lines boards should be hesitant to cross, on principled grounds. A CEO’s sexual orientation, for example, should be off-limits. This is obviously less of an issue in 2011 than it would have been in 1951, but even today a gay CEO might be seen as a risk factor (especially for an organization with a conservative customer base) but boards should take a principled stand against taking an interest in their CEO’s sexuality. The board has fiduciary duties to protect the company, but even fiduciary duties have their limits.
The last point I want to make here is that, when faced with a CEO’s bad behaviour, a Board faces more than a yes-or-no question. The ethical question here is not just a matter of whether to confront the CEO, but how to do it. A Board in such a situation needs to formulate a plan — a method of proceeding, including answers to questions like:
- Will the Chair of the Board approach the CEO solo, or should an ad hoc committee do it?
- Should they raise the issue explicitly, or obliquely?
- Should they give the CEO an ultimatum, or ask his or her suggestions for how things might improve?
- Given various anticipated responses by the CEO, how will the Board/Chair plan to react in turn?
Governance, Both Political and Corporate
Filed under: boards, conflict of interest, corporations, governance, government, politics |
Comments (4) The word “governance” (as in, “corporate governance”) is obviously quite similar to the word “government.” And just as obviously, that’s no coincidence. The two words share the same roots. In the abstract, the word “governance” just refers to the act of governing something. But it’s not just the meaning of the words that overlaps — it’s the people doing the work. At the highest levels, people often move from the world of business into the world of politics, and vice versa.
A few quick points about this.
1) The fact that there’s some flow back-and-forth between government and the corporate world is not at all surprising. After all, there’s considerable overlap in the skill-sets required in leadership positions in both domains. For example, I recently heard a top expert on corporate governance say that ex-politicians actually make very good corporate directors (and that was said based entirely on their skill-set — not, as you might guess, based on their political connections).
2) Some people do question the extent to which one world is good training for the other. See, for example, this recent story about former EBay CEO, Meg Whitman, who is currently in the running to become governor of California: Is EBay a proper primer for a governor? (by Stuart Pfeifer for the LA Times). Here’s one relevant bit:
Some former employees and Silicon Valley observers question whether a forceful corporate executive used to getting her way would be capable of the compromise needed in government.
“You certainly have many more freedoms as a CEO than you do as an elected official,” said Larry Gerston, a political science professor at San Jose State. “We don’t elect kings.”
3) It’s also noteworthy when a major politician acts in a way more common in the corporate world. In this regard, see the review (by Jordan Timm) in this week’s Canadian Business magazine (unfortunately not online yet) of Lawrence Martin’s Harperland, a book about Canadian Prime Minister, Stephen Harper. According to the review,
…this Prime Minister’s office has enjoyed privilege and authority more in the style of the corporate C-suite than the executive branch of a traditional Westminster government. That approach has been responsible for many of the Harper government’s successes, but it has also been at fault for many of its blunders and setbacks. And though the business and political worlds feature very different rules and accountabilities, executives can learn many lessons, both constructive and cautionary from Stephen Harper’s Ottawa.
4) In both kinds of governance (political and corporate) the main challenge lies in turning the will (and values) of the many (votes in one case, shareholders in the other) into decisions by a few (politicians in one case, executives and directors in the other) to be implemented by an in-between number (of civil servants in one case, and of corporate employees in the other). And in both cases, effective leadership seems to require that the leader engage in a combination of a) listening to their constituents, and b) exercising independent judgment.
I don’t have a grand point to make on this topic. But can anyone recommend essential reading on the intersection between corporate and political governance and/or leadership?
Is a Board Position a Conflict of Interest?
Filed under: accountability, boards, conflict of interest, corporations, employees, governance, professionalism |
Comments (2) Here’s an story (in which I was quoted) by Paul Turenne, in the Winnipeg Sun: Gerrard slams WRHA manager’s ‘moonlighting’.
The story is basically about a senior executive (Brock Wright) at the Winnipeg Regional Health Authority (the public body responsible for administering hospitals in and around that city) who took a position on the Board of Directors of a small American medical technology company. Critics (like Opposition leader Gerard, named in the headline) called that a Conflict of Interest.
Now, a conflict of interest is basically any situation in which a person has a private or personal interest sufficient to appear to influence the objective exercise of judgment in his or her official duties.
So, to figure out whether there’s a problem here, a few elements need to be considered.
1) Does taking a Board position constitute an “personal interest” in the relevant sense? The one that’s usually (but not always) at stake is an interest in money. Well, And corporate board membership isn’t typically volunteer work. It involves a significant stipend, along with a good deal of personal prestige.
2) What bits of judgment might Wright need to exercise on behalf of WRHA that might be jeopardized by his board membership? The most obvious one is his involvement in purchasing decisions for the WRHA. In that regard, a spokesperson for the WRHA says:
This is a company the WRHA has no business relationship with. We have not purchased anything from them. If at any time they were to try to sell us something, Dr. Wright would of course remind us of his relationship with them and recuse himself from any discussions. Having said that, he’s not in a position to make decisions like that. We have a very strict policy about the tendering process
The bigger issue (though perhaps not insurmountable) is the judgment that Wright (or any employee) needs to exercise with regard to his own time management. Being a member of a corporate board isn’t an honourary thing: it comes with real responsibilities, and can take considerable time. So the question I would want to ask, if I where the WRHA, is how Wright plans to satisfy his duties as a member of the TearLab board (including possibly several trips a year to attend meetings in California) without diminishing the quality of his work in Winnipeg. If there’s reasonable plan to make that happen,
3) Finally, it’s worth noting (again and again) that being in a Conflict of Interest isn’t automatically unethical. (So it’s not, contrary to the headline used in another newspaper’s story about this issue, an accusation.) It is possible to end up in a Conflict of Interest through no fault of your own. And, finding yourself in a COI, what matters is what you do about it. Disclosing the COI to the person or organization relying on your judgment is usually considered step 1, and removing yourself from key decisions, if possible, is another standard move. But COI is at least sometimes worth tolerating, if managed appropriately. That does mean, though, that we should all be expected to think carefully, before putting ourselves into a Conflict of Interest, whether the risks are manageable, and whether in the end those risks are sufficient to constitute a disservice to those who rely upon our judgment.
Corporate Governance and Ethics
Filed under: accountability, boards, corporations, CSR, governance, shareholders |
Comments (7) 
“Corporate governance” is the term used to refer to the policies and processes by which a corporation (or other large, complex institution) is controlled and directed. It refers especially to the way power and accountability flow between shareholders, boards of directors, CEOs, and senior managers.
For most corporations, the basic governance structure is this: shareholders vote for, and hence empower, a board of directors, who then have a fiduciary responsibility to look out for shareholders’ interests. The board hires a CEO, who is accountable to the board. The CEO (sometimes with input from the board) hires a management team, and so on. At each step, there is a flow of power down the chain (from shareholders through to front-line employees), and a flow of accountability back up that chain. And there are all sorts of rules — including various policies and principles of good governance — that establish how that power and accountability is to be implemented. There will be internal rules, for example (partly determined by relevant corporate law), about how board elections are to be carried out. There are also governance principles that apply to things like the inclusion of external, “independent” directors on the board.
In case it’s not obvious, I’ll say it explicitly: corporate governance is out-and-out a matter of ethics. It is about who is responsible to whom, and for what, and under what conditions.
Now, to an investor, governance might look first and foremost like a matter of economics: no one particularly wants to invest in a poorly-governed company. And governance is also legal matter (for example, the Sarbanes-Oxley Act of 2002 includes a number of requirements about corporate governance). Governance is properly a legal matter because (at least arguably) shareholders need protection from unscrupulous or merely lazy boards of directors and executives, and because the public interest is at stake when large companies are mis-governed. Enron used to be the prime example of poor governance practices having a devastating effect on shareholders and the broader public. These days we could probably look to a few major financial institutions for object lessons in the ill effects of bad governance.
But even where the law is silent, governance remains important: regardless of whether you think in terms of a narrow, shareholder-driven, profits-first perspective, or instead in terms of a broader ‘stakeholder’ approach, you simply have to agree that the way decisions get made, and the interests that corporate policies tell decision-makers to serve, are ethically important matters.
My mind is on governance a lot lately, not least because I’m currently a Visiting Scholar at the Clarkson Centre for Business Ethics and Board Effectiveness (at the University of Toronto’s Rotman School of Management).
While I’m at Clarkson, I’m helping out with the CCBE blog. The blog is focused primarily on governance and board effectiveness, but in most cases the ethical implications of those issues are pretty clear. Today, for instance, the blog features a posting about changes in the way boards of directors are elected — and how at last some companies (including one Canadian company, Linamar Corp.) have been slow to catch on. Here’s the blog entry: Trend Watch: How are Directors Elected?
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Corporate Governance books currently on my bookshelf:
- What Directors Need to Know: Corporate Governance, by Carol Hansell (the focus of this book is on Canada, but much of it is generally applicable)
- Harvard Business Review on Corporate Governance
Wall Street (1987) — “Greed is Good”
Filed under: boards, competition, corporations, finance, governance, management, pay, profits, shareholders, stakeholders |
Comments (9) 
I just re-watched the original 1987 film, Wall Street. (The sequel, Wall Street: Money Never Sleeps, is in theatres now, and apparently doing very well.)
In the original Wall Street, Michael Douglas’s character, Gordon Gekko, is a corporate raider — essentially, he buys up underperforming companies, breaks them up and sells their parts at a healthy profit. What drives him? Greed, pure and simple. In one scene, Gekko appears at the annual shareholders’ meeting being held by Teldar Paper. Gekko owns shares, but wants more. He wants control of the company, though his motives for doing so are hidden. It is there that he delivers the speech that includes the movie’s most famous line. “Greed,” he tells the shareholders of Teldar, “is good.”
That line is the only thing a lot of people alive in the 80′s remember about Wall Street. And that’s a shame.
Here’s Gordon Gekko’s famous “Greed is good” speech, in its entirety:
Teldar Paper, Mr. Cromwell, Teldar Paper has 33 different vice presidents each earning over 200 thousand dollars a year. Now, I have spent the last two months analyzing what all these guys do, and I still can’t figure it out. One thing I do know is that our paper company lost 110 million dollars last year, and I’ll bet that half of that was spent in all the paperwork going back and forth between all these vice presidents. The new law of evolution in corporate America seems to be survival of the unfittest. Well, in my book you either do it right or you get eliminated. In the last seven deals that I’ve been involved with, there were 2.5 million stockholders who have made a pretax profit of 12 billion dollars. Thank you. I am not a destroyer of companies. I am a liberator of them! The point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind. And greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA. Thank you very much.
The first thing to note about this speech is how little of it is actually about greed — roughly the last third of the speech. The first two thirds is a critique (disingenuous, as it happens, but not therefore off-target) of the complacency of overpaid corporate executives. Gekko is advising Teldar’s shareholders that the people responsible for protecting their interests — Teldar’s executives and Board — have been doing a bad job.
How does that first part relate to the final third of the speech, the part about greed being good? Well, it’s worth noting that when Gekko first uses the word “greed,” he does so “for lack of a better word.” And Gekko, one-dimensional character that he is, probably does lack a better word for it. For him, it really is greed — the unseemly and excessive love of money. But Teldar’s shareholders don’t need personally to embrace greed in the Gordon Gekko sense. All they need to do is to see that their interests are not being served well, and to understand that Gekko’s own greed is likely to serve them better: he wants to make a killing on the Teldar deal, and if they let him do so, they’ll all make a little money themselves, along the way. His greed is good for them.
Is Gekko’s greed a good thing over all? Well, Gekko says nothing, in his speech, about the interests of other stakeholders in Teldar Paper, stakeholders such as the company’s employees for example. If Gekko breaks up the company, shareholders may benefit but employees will lose jobs. That’s a bad thing, but it’s also sometimes inevitable. Not all companies should stay in business.
No, greed is not good. But the point — the grain of truth in Gordon Gekko’s Machiavellian speech — is that if shareholders allow executives and Boards to operate inefficiently, rather than using what little power they have to improve their lot, then they are suckers, being taken for a ride. And there’s no particular virtue in that.
Like this:
Symantec Directors: $250,000/Year Not Enough to Log in to Annual Meeting
Filed under: accountability, boards, corporations, governance, profits, shareholders |
Comments (2) 
The shareholders of a public company are sometimes said to own the company. That’s not literally true, for lots of reasons. (See: Do Toyota’s Shareholders Own the Company?) What shareholders really own is the right to part of a company’s profits (if any) after all of its other expenses are paid. At any rate, the fact remains that shareholders are crucially important, and they are in many ways vulnerable. The legal rights of shareholders are relatively few, and relatively weak. That’s what makes corporate governance so important. Shareholders elect the Board of Directors, and the Board of Directors is responsible for hiring the CEO and helping set the overall strategic directo of the firm. For most shareholders, there are precious few ways to interact with, let alone influence, the Board of Directors. The Annual Shareholder Meeting is critical, in that regard.
That’s what makes it so striking when any company degrades its Annual Shareholder Meeting in the way Symantic did this year by switching to an all-virtual, audio-only meeting. See this opinion piece, by Gretchen Morgenson, for the NYT: Questions, and Directors, Lost in the Ether. Check out this juicy bit:
…because the Webcast provided no video, shareholders may not have realized that several directors had not bothered to attend the meeting, even virtually. When asked about directors’ attendance, [Symantec spokeswoman] Ms. Haldeman said 8 of the 11 showed up.
Attending annual meetings seems a pretty basic requirement of a director, don’t you think? Sure, such gatherings may seem a corporate equivalent of root-canal therapy, but a duty is a duty. Directors are paid for their service, after all, sometimes very handsomely. According to Symantec’s most recent proxy materials, directors get around $250,000 a year in cash and stock.
So which directors had neither the time nor the inclination to log on to their computers last Monday to hear from the shareholders they have an obligation to represent? Ms. Haldeman refused to identify those who were AWOL.
Now, it’s worth pointing out that the 3 directors who didn’t “show up” could well have had very good reasons. But if that’s true, Symantic’s shareholders deserve to know it. The little power shareholders have can only be exercised effectively if boards of directors take their duty of accountability seriously.
Directors of Failed Companies
Filed under: accountability, boards, corporations, governance |
Comments (3) 
Question: What does one do after losing a position on the Board of Directors of a failed company?
Answer: Why, join another Board of Directors, of course!
At least, that’s the case for a number of former Directors of companies like A.I.G., Bear Stearns and Lehman Brothers — companies at the heart of the financial crisis. See this story from the NYT: Companies May Fail, but Directors Are in Demand.
Does this make any sense?
The first issue to consider is whether it’s prudent for other companies to recruit directors from failed companies. After all, they were members of the teams that were supposed to be steering those ships juuuust before they hit those icebergs. But failure doesn’t imply that every member of the team was a dud, and any director who has been through a company’s collapse has arguably learned from the experience. At least one expert quoted in the NYT thinks that’s plausible:
“Directors of these financial institutions may or may not have been asleep at the switch, and if they were, they had a lot of company,” said Michael Klausner, a corporate law professor at Stanford. “Leaving that question aside, they may well have gained valuable experience that will make them good directors today.”
It’s also worth pointing out that there’s no clearly-established, strong connection between board effectiveness and corporate success. (Consider: even a well-governed company will die if its products suck or if the market for its product turns sour.) So it’s plausible that a failed company can have a good board. But in the cases we’re concerned with here, there seems to be consensus that boards didn’t do terribly well. But still, a board might be made up of a dozen directors, and there’s only so much one great director can do if surrounded by turkeys. So it’s certainly plausible, at least, that there may have been individual gems on even the worst boards among those governing failed companies. In terms of talent, each deserves to be considered on his or her own merits.
What about ethically? Is there any ethical reason not to draft the former directors of the likes of A.I.G., Bear Stearns and Lehman? Well, to 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 any ethical reason not to recruit those talented people? Although I suspect many people’s intuitions will say there is a problem, there, I’m not so sure. Blacklisting even the talented directors of failed companies could only be punitive in intent — and punishment needs to be case-by-case. The onus then is on Nominating Committees to do their due diligence, and to satisfy themselves — and their shareholders — that this particular former director of a failed company behaved neither incompetently nor immorally. How many of the directors named in the NYT story could pass that test? I could not begin to guess.
Competence, Ethics & HP’s Board
Filed under: accountability, boards, corporations, governance, management, shareholders |
Comments (5) 
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”.
