VIEWPOINTS : The Buck Ought to Be Stopping in Board Room

With the devastation of one U.S. industry after another, serious questions have been raised about the competence of American management.

The auto industry, for example, had to lose 20% to 30% of its market share before realizing that the style and quality of its products were unacceptable. Perhaps management was too busy making profits to make quality products. But what excuse is there for the boards of directors?

Likewise, the decline of the steel industry, which has seen its work force dwindle dramatically, also can in large part be attributed to questionable management decisions. Managers approved spending millions for an oil company but little for capital investment in modern steel plants. But where were the boards of directors?

The plight of the thrift industry since deregulation has certainly been caused as much by managers’ questionable diversification decisions as by the decline of the energy, real estate and agriculture segments of the economy. Again, where were the boards?

Boards Not Called to Task

Evidence indicates that management deserves much of the abuse it has received from the press, the courts and government regulators. However, I submit that boards of directors have not been called to task to the degree that they are legally and ethically responsible.

There have been exceptions, notably the landmark 1985 Trans Union Corp. decision, in which directors were found financially liable for failing to seek independent counsel on management’s recommendation to sell the company. But from 1960 to 1980 there were few instances where the board replaced a chief executive for poor performance or voted against the diversification and acquisition plans of management.

In recent years, boards of directors have been more active in exercising their primary responsibility of evaluating the performance of chief executives. The ouster of the top executives of CBS and Allegis were particularly noteworthy. There has been little analysis, however, of the responsibility that boards have in such corporate governance issues as the use of “poison pill” takeover defenses and “golden parachute” severance packages.

Board members are chosen more often by the Old Boy Network to fulfill legal requirements than for their potential contribution to the company. Board members are expected to be passive and not inquisitive. Of course there are exceptions, but all too often, an active board member is considered a deviant.

Effectiveness Lies With CEO

Regardless of the legal responsibility of a board, its ultimate effectiveness lies with the CEO. Does the CEO look upon a board as a resource or a requirement?

Is the board member who disagrees with an agenda item considered nonsupportive by the CEO? Too often, dissent is taken for disloyalty.

The CEO does have the right to expect the board to be a friend, not an adversary. The board should know and respect the difference between policy issues and administrative decisions. However, the board must recognize its accountability or the courts soon will make it all too clear, as has been reflected in the skyrocketing cost of directors’ and officers’ insurance--if such liability protection can be obtained at all.

When there is an abrupt replacement of a CEO, such as with CBS and Allegis, isn’t the board also answerable?

The Congress and the public are increasingly distrustful of business. This is reflected not only in polls, but in the plethora of bills introduced in Congress.

If boards of directors do not take more responsibility for the performance of corporations, both economically and socially, we can expect and we will deserve a straitjacket of government regulations.