Who Will Watch the Watchdogs?

Many corporate board members survive damage to their reputations without any penalty, according to The Wall Street Journal.  “A surprising number of embattled CEOs, forced out for poor performance or legal problems, find a warm reception from outside corporate boards on which they sit.”

Why?  Information about their ethical or legal problems could lead their colleagues on other boards to worry about their ethical standards, their integrity, or – at the very least – their judgment.  You might think that other board members would be concerned that the reputation of their own boards could be tainted by the public failings of such colleagues.

But “many governance watchers and veteran directors say boards rarely accept a resignation after a member loses a CEO spot—no matter the reason.”

Eleanor Bloxham, president of Corporate Governance Alliance, says “It’s part of the ‘not giving up on your friends’ kind of thing. (See, “Staying on Boards After Humble Exit.”)

They have significant bonds with each other.  Many board members are drawn from similar backgrounds.  Moreover, they often maintain outside relationships through other corporate boards as well as country clubs, charities, and national associations.  As Michael Useem, professor at Wharton, noted in his classic study of interlocking boards, The Inner Circle (1986), board members collectively form a kind of national community, with strong mutual interests and identities.

In addition, the small group environment of most corporate boards fosters “groupthink.”  Board members have a chairman, often also CEO, they have selected and want to support.  They receive limited information about the corporation.  Operating in secrecy, they are prone to the unconscious motives of maintaining cohesiveness and preserving their established business identities and their common sense of self-esteem.

As a result, they will often collude in ignoring disturbing information, in accepting excuses, stifling criticism.  Or – sometimes worse — they will overreact to crises and search for outside saviors when they are forced to face the fact that the CEO they chose is not performing to expectation.  Given the pressure to maintain inner cohesion, it is easy for them to discount information about each other – until it is too late.

But it is their job to monitor standards of performance as well as adherence to ethical principles.  If they don’t do it, no one else will.  No one else can.  And if they collude in ignoring or discounting information about each other, it is inevitable that they will let standards slip and slide.  It just won’t seem so important.

Technically board members are there to serve shareholders and protect their interests.  Technically they are elected.  But the reality is that they thoroughly control the process of their own selection and, as The Wall Street Journal article suggests, they can be virtually immune to “failure.”

There is growing interest today among boards in evaluating their own performance.  That’s not the same as accountability, but it is a step in the right direction.