Conclusions, the American Board in Crisis

We see now that The American Board in Crisis – Enron 2002 is not really a case study, but an expansion on the lessons of corporate failures in the late 1990s. The implication from the recent conduct of many directors is that they just don’t care.

Appearance or reality?

Ever since HBS Professor Myles Mace's epic book on directors who do not direct, the question must be asked - is there a real commitment to a board of directors that approximates what the statute writers have contemplated? Indeed, the majority of American boards appear to be yet another department of the corporation to be administered by the CEO, or an extension of the office of the CEO. The board as corporate department has its own meaning for words like "independent," "elect," and “monitor.” They reflect the board as a dotter of i’s and a crosser of t’s – the game player, reliably providing quantitative evidence of performance like other corporate departments, even though the criteria are quite different.
 
A real board requires commitment. It requires a CEO who wants the potential enrichment of challenge and who believes that independent questioning will improve both his and the corporation's performance. There are such. When one of the authors of this book met the legendary Jack Welch, he stuck out his forefinger and pointed at her saying, "If there is anything wrong with my company, I want you to come to me about it." The commitment involves precious resources – the time and focus of senior management.

What are some of the indicators of a Real Board?

The American board needs a commitment to asking the right questions. We have structural solutions, especially since Congress put everything it could think of, including accounting, into the Sarbanes-Oxley Bill 2002. The structural characteristics of boards can be, relatively easily, evaluated by “box ticking” – tick off all the boxes (yes/no) to obtain a score. The firm may get a good score, but the board still doesn’t work as we’d like it to.

In the current enthusiasm for box-ticking, are we asking the wrong questions and solving the wrong problem? Do we know what the problem is? Some suggestions deal with board assignments, others, government statute or regulation, still others, listing requirements, guidelines, or individualized corporate goals. We can improve our conclusions if we understand better how the board functions. The video of the Enron Hearings provides a unique opportunity to see for ourselves.

We have to conclude, with Levin, that the Enron board didn’t function. Like most boards, they made their own rules and were self-perpetuating. Their scheduled meetings and annual evaluation resulted in: “loyalty within the group.” It was a congenial group. The board was functioning, but in a vacuum. Most of the directors had served for a long time. They knew how to do it. Have meetings. Carefully document the decisions and required procedures. They followed the rules and didn’t ask questions.

The directors did not expect or require common sense of themselves. It didn’t occur to them.They were not willing to suspend disbelief. They forgot to consider themselves as responsible individuals, with the inner quality of ethics that is available to each person.

Apparently the Enron directors (and other boards in trouble in 2003?) are to be left off the hook. (On March 12, 2003, Federal District Court Judge Melinda Harmon dismissed charges of fraud against the Enron directors, but permitted the counts based on negligence to continue to be litigated.) The Enron board hired experts for advice, kept legalistic minutes, suggested controls to management, and had the necessary number of meetings. We have seen that in action and we should no longer be satisfied with it. We know the potential results.

As is our custom, we present our final conclusions in the form of questions to ponder.

Consider leadership. Can a board function in the absence of a competent individual to lead them, an individual whose entire responsibility is the staffing and functioning of the board?

Can a board function without serious evaluation of (a) its own operations, (b) the functioning of committees, and (c) the commitment of individuals?

Without some responsible and empowered person or body “in charge,” can there be any confidence that the right questions, in contrast to questions that appear to be the right question, will be asked?

We also need consideration of a mode of conduct for individual board members – some internal, self-regulating method of keeping them all on the right track.

What about an internal committee to manage the corporate governance of the firm?

Does that sound like just another committee? What would you suggest?

For the future, the ultimate questions that must be considered about corporate governance are:

Does law and practice in the United States contemplate an Apparent Board of Directors or a Real Board?

Can our corporations survive in an orderly fashion with only the appearance of a board?

Can the present practice of self-perpetuation of the board survive? Or will shareholders insist on the reform of direct nominations?

If an Apparent Board will not suffice, what other changes in current practice will be necessary?

The CEOs are going to challenge us: will a Real Board inhibit management’s principal responsibility – the pursuit of optimized long-term value for shareholders?