Free Up Boards of Directors
Repeated instances of corporate irregularities, fraud and greed have sent the markets on a roller-coaster ride, caused some to question the continued viability of capitalism and led our politicians to dust off every available soapbox. Yet by simply adding another layer of federal regulation to address the problem, Congress and President Bush are missing the boat.
What must be done is to change the culture of boards of directors in the United States.
Specifically, we must take a more critical look at what constitutes “independence” in an outside director and empower those directors to do their jobs more effectively.
Traditionally, the label “independent director” signified that an individual was not a member of corporate management. That test is no longer enough.
“Independent” from now on must mean capable directors who have neither business nor personal entanglements with their company’s management.
Long-term friends of the chief executive should no longer be considered independent; neither should law partners of the outside general counsel to the corporation.
Further, boards of directors should no longer include members who provide extensive consulting services to the corporation or those whose compensation is largely through the grant of options.
At one time, it was thought that compensating outside directors through grants of options would align their interests with those of the shareholders. However, recent events suggest that it’s better to pay directors primarily cash compensation.
Yet these basic steps, while helpful, cannot overcome a fundamental trait of human nature. That is, no one sitting on a board of directors wishes to appear adversarial to other directors.
The motivation to “get along” is a particularly strong one, and directors must walk a fine line between polite questioning and intrusive probing.
One thing that would help is if key board committees, such as audit committees, and outside directors generally retained independent counsel and independent auditing experts to assist them in discharging their duties.
These outside professionals would be able to ask the hard questions on tough issues that may be required and not accept at face value prepackaged answers on complex topics.
The cost of adding these independent experts would be small compared with the benefits that could be derived from better governance and from avoiding potential liabilities.
Indeed, a management team that might consider engaging in an irregular or improper activity might be deterred simply by knowing that its conduct would be reviewed by trained professionals whose loyalty was exclusively to truly independent directors.
In the long run, a cultural change of this kind would be far more effective in curbing corporate fraud and self-dealing than adding yet another layer of federal law and regulation to our corporate environment.
