There’s a good article in the New Yorker this week called “Board Stiff.” The writer, James Surowiecki, argues that corporate boards are still not doing a good job of guarding the shareholders’ shop. Despite “reforms” such as increasing the number of outside directors and increasing the ethnic diversity of corporate boards, he argues, publicly traded company boards are still not effective in anticipating trouble or preventing business collapses. The main reason, he cites, is that board members still trust their CEOs for information. There is no clear autonomy or ability to challenge CEO thinking.
One reason is that CEOs of publicly traded companies still play the largest role in selecting directors, resulting in a loyalty system that makes it difficult to change course. Directors don’t have enough power or time to really direct; instead, they typically see their most important job as selecting the CEO. It’s not until there’s a crisis of confidence in the CEO that the Board steps in, and by then it’s too late.
I have worked extensively with corporate boards. I have also worked extensively with the boards of many other types of organizations: nonprofits, public agencies, universities, and cooperatives. One thing stands out: The CEO is usually not on those boards. This gives it some clear advantages:
First, it is much easier to clarify the roles of the board and the CEO when there is a clear separation of powers.
Second, it allows the Board to structure its work so that it truly understands the company’s issues and can set overall direction and policy.
Third, it forces the Board to account. You can’t use the excuse that “we trust the CEO.”
That is a powerful case. But the implementation of a CEOless board runs up against a counterforce: the ability of CEOs, under the current system, to control their boards and not be governed by them. That, fundamentally, is what stands in the way of fixing corporate boards.