Directors of Failed Companies

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.

3 comments so far

  1. Lalitha on

    Yes, the post on the ethical issue of appointment of directors of failed companies by other companies is crisp and objective in its analysis. True, the only life belt available for these sleazy directors is to adopt the policy of “I-scratch-my-back; You-scratch-my-back” to keep themselves from dropping into oblivion and the consequent economic disadvantages. However, as you have so neatly pointed out there IS an ethical duty cast upon the Nominating Committee to take care to bring in only talented directors and not the talented AND tainted or only the tainted! Your concluding thought speaks it all!

  2. Nadeem Moghal on

    You are absolutely right when you say, “[a] board’s Nominating Committee has an ethical duty to recruit talented people.” Let’s be certain about this fact, as we start debating the list of other attributes that should be on their must-have lists.

    A board does not just have an ethical duty to serve the interest of the corporation that has hired it; it has a fiduciary responsibility, and if they are found deficient in this pursuit, there may be a price to pay.

    That said, we also need to acknowledge that most of the boards these days, specially those of publicly traded entities, comprise of individuals that act as window-dressing. They are there to provide an out-of-the-box view, without being inundated by the day to day operational issues. They are there for the size of their rolodexes. They are also there to add diversity to the team and the message. And they are also there to ensure that the company continues to play the role of a conscientious global player.

    I believe it is for this specific function where you pose a very relevant question: if this is truly one of the duties assigned to the board, then how important is ethics (or, to be more precise, lack thereof) displayed by the candidates.

    This blog entry has adequately covered this topic. The only point I’d add is the notion that when people err, it is often the environment that may bear some of the responsibility. Plucking this person from that board and placing him or her somewhere else may certainly yield different results. So, the fact that one has a blemish on the record may not necessarily be a deterrant; the lessons one has learnt from the often humiliating public ordeal may be a better indicator of one’s potential culpability.

    Thanks.

  3. Chris MacDonald on

    Nadeem:

    I agree about fiduciary responsibility — I was being vague when I cited ethical duties. Fiduciary responsibilities are a species of ethical duty (unless you intended to refer to the Board’s legal responsibilities, which are also fiduciary in nature).

    I think it would clearly be unethical for a Board to recruit a candidate who they thought to be unethical. But then, that may be advice that Board’s just don’t need. After all, if you think someone is unethical, then you likely won’t want them as a colleague, and you wouldn’t need to be told not to recruit them. I guess the harder case is where a candidate has displayed tendencies that, from the Board’s point of view, are socially (or even legally) controversial but not inconsistent with a “tough” business mind-set.

    Actually, Mark Hurd (former CEO of Hewlett-Packard) might be a good example, of a different kind. There are rumours of sexual impropriety, and there was some low-level wrongdoing with regard to his expense account. So (for sake of argument) let’s say he’s acted unethically. Should a Board still want to recruit him? The Board at Oracle certainly thought so! In this case, it’s not at all clear that his ethical lapses reflect on his talents (or even, frankly, on his character overall).

    Chris.


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