UNACCOUNTABLE BOARDS

For Whom Do They Work?

“You might think that board members overseeing businesses that cratered in the credit crisis would be disqualified from serving as directors at other public companies,” writes Gretchen Morgenson in last Thursday’s New York Times.  (See, “What Iceberg? Just Glide to the Next Boardroom.”)

She has a point.  Board members have a legal and moral responsibility to serve the interests of shareholders, those who actually own the companies they serve.  Their duty is to ensure that their companies are run soundly and profitably.  But recent experience suggests that there is, in fact, little if any accountability.

She quotes Paul Hodgson, senior research associate at the Corporate Library, a corporate governance research firm:  “None of these directors have stood up and said, ‘We made a mistake here by not calling management to account.’”  He adds, “They have certainly avoided the limelight as far as blame is concerned.  Moreover, they continue to get work as directors at other companies.”

One reason for this is that it the rules governing the selection and retention of board members are stacked in their favor.  It takes a massive effort to challenge an official slate of board members.  And there seems to be no interest within boards themselves to establish accountability – for several reasons.

It is generally in their interest to go along with management and continue receiving the perks they enjoy.  Morgenson offers an amusing quote from Frederick E. Rowe, president of Investors for Director Accountability: “Here’s a conversation you’ll never hear: ‘Yes, I get paid $475,000 a year. I play golf with the C.E.O.; he’s a personal friend. I go to interesting places for board meetings, I am around interesting people, and I would never say one word that would jeopardize my position on the board.’”

But there is a group culture as well that instills conformity.  Board members are often drawn from similar backgrounds and maintain outside relationships with each other through other corporate boards as well as country clubs, charities, and national associations.  Collectively they form a kind of national community, with strong common interests and identities, a point that was established by Michael Useem’s research at Wharton 25 years ago.

Moreover, it is easy for “groupthink” to flourish among board members. Usually small in size, operating in secrecy, they receive limited information, and are prone to maintaining cohesiveness and preserving their established business identities along with their self-esteem. They want to support the CEO they selected as long as they can.  As a result, they will often collude in ignoring disturbing information, in accepting excuses, stifling criticism.  Certainly, they have little motivation to blame each other – or themselves.

John Gillespie, co-author with David Zweig, of “Money for Nothing,” a forthcoming book on board failures, notes that the culture of boards “doesn’t allow directors to do an effective job even if they wanted to.”

They are intelligent, experienced and accomplished people so there can be little doubt that they know about their responsibilities as board members, even if they don’t always know they know it.  In this case, they don’t seem to want to know about their failure to ask tough questions and provide strict oversight.

As we are thinking about reforming the financial industry, is there anyway to get them to take their jobs more seriously?