A Corporate Board’s First Duty Should Be That of a Watchdog

Corporate boards are like fire departments. When the alarm bell sounds, they respond to put out the fire. If no alarm sounds, they rarely move into action. Unfortunately, by the time the alarm sounds--as it finally did with Enron--the fire may be so out of control that little can be done.

There are steps that could help. Perhaps the single most important is to have a chairman who is independent of management. This practice, which is common in Britain, would ensure that the board can set its own agenda.

Also, there must be a way for board directors to receive direct and confidential information from concerned employees, including a post office box, an e-mail address and a phone number.

Another safeguard would be to have three-fourths of the board members be independent of the existing management.

They should not be employees or have a consulting relationship with the corporation or with any member of senior management. There should be nothing that compromises their ability and willingness to act independently of the wishes of senior management.

Independent members of the board should meet several times each year without the CEO or members of management present. In these sessions, the directors should review the performance of management and the organization and establish the critical issues they think the board should address.

Finally, board members should not be paid exclusively in stock options. Board members need to have a long-term ownership position in the corporation. Thus, if they receive options, the options should have vesting periods of at least five years and should be combined with stock ownership requirements.

Enron had a distinguished board, but it employed few of these practices. As a result, it was not in a good position to detect and react to corporate mismanagement.

This is a clear warning to other boards.