Oversight is supposed to be the primary purpose of a board of directors, but I don’t know if that’s really what they’re doing. From Boeing’s terrible blunder with their new 737, to fraud at Wells Fargo, to tragic incompetence at Yahoo (and so many other companies), directors seem to be failing their shareholders. What’s going on?
Boards are often stocked with luminaries from government, academia, and other business sectors. Their combined talent is meant to guide and oversee executive teams. In reality, too many of these big name directors are probably there for reasons other than oversight.
What are they doing? Many corporate boards use big name directors to give credibility to the company. This would explain why nobody raised an eyebrow when Theranos, the fraudulent biotech company, loaded its board with political leaders like Henry Kissinger and Bill Frist. Everybody understood that ex-US Senators and Secretaries of State are not there for their business expertise, but for their credibility and connections.
There are other hidden agendas that lead to unhelpful directors sitting on important boards. Often, new CEOs negotiate to place allies on the board, who’s only real purpose is to protect their patrons. Factional fighting among investor blocks can lead to boards that are consumed by political maneuvering, to the detriment of their shareholders. The once mighty and now humble Hewlett-Packard offers a great example of how boardroom infighting can ruin a great company.
There’s no question, corporate governance could be working a whole lot better. A recent analysis showed that over 60% of public company directors sit on multiple different boards. How focused can they be on serving a company when they have other board seats and maybe other jobs? It looks to me like too many directors are collecting hefty paychecks without delivering value to shareholders.
As an investor, I want to see boards serve as a reservoir of leadership, creativity, and strategic insight. CEOs are often mired in the details of running their complex businesses, and they could use real guidance from experienced and focused boards. Directors have more space to look at high level strategy and long term implications. Their distance from the day-to-day can reveal important things that executives miss.
Corporate boards look a little bit hollow these days, but I’m optimistic that things are already changing for the better. Asset management giants Vanguard and Blackrock are starting to take stands against over-extended board members and bloated executive pay packages. With their enormous clout (and voting rights), this is a great start. Hopefully, we’re seeing the start of a renaissance in corporate governance that will refocus companies on creating long-term value.