This article originally appeared in Corporate Board Member.
Like Heisenberg’s Uncertainty Principle in physics, the tools intended to measure governance are often confused with the phenomena of good governance itself. Governance training programs emphasize legal issues, committee responsibilities, and compliance. The metrics of proxy rating firms consider skill sets, experience, legal compliance, independence, board composition, and other such qualities. These elements are easy to identify and measure, but sadly have very little predictive value and are not preventive for avoiding misconduct.
The marquee names on star-studded but failed boards, such as those of Enron, WorldCom, and HealthSouth, included prominent CEOs, accounting wizards, former regulators, and industry experts. Yet, those boards failed to prevent corruption, cronyism, and incompetence. These troubled boards earned sterling rankings from proxy rating firms just before collapsing from massive overt scandals.
Neither the mortgage-backed securities expertise of those serving on Freddie Mac’s board nor the derivatives savvy of those on the MF Global board provided air cover or appropriate risk management. The legal, cybersecurity, and data expertise on Equifax’s board did little to ensure that the firm was ready to respond to a massive data breach. Given the difficulty of gauging board competence, how can you avoid joining a board bound for disaster? Start by asking yourself these questions.
- Is it a celebrity showcase? Often the bigger the names, the bigger the hidden problems. Consider Theranos founder Elizabeth Holmes, who hid behind the celebrated reputations of the scandalized company’s board of directors, which included Secretaries of State Henry Kissinger and George Shultz, Secretary of Defense James Mattis and former Secretary of Defense William Perry.
- Is dissent equated with disloyalty? One prominent CEO recruited to a board was told that new directors should say little during their first year on the board. That executive demurred, saying, “Call me in a year, and if I can talk, I will consider your board.” Boards that are leery of dissent or populated with beholden directors are more likely to fall into Groupthink or failure to vet decisions by raising questions. As investor Ken Langone once complained, “Too often directors, fearful of losing a treasured board seat, are afraid to be the skunk in the lawn party.”
- How do directors know the truth? Do board members rely solely on the voice of a single executive, the CEO? Or do they have regular access to other directors and members of the executive team? How well informed are they? At Home Depot, directors get firsthand experience by serving as mystery shoppers in stores outside their home state on a monthly basis.
- How does the board stay current? Business developments do not just neatly materialize in time for quarterly meetings. As CEO of JCPenney, Mike Ullman held regular Sunday morning exchanges with directors about whatever was on his mind that week.
- What data does the board receive? Sometimes directors find themselves buried in voluminous data-dump reports just ahead of the quarterly board meeting—with every chart showing upward momentum. Instead, directors should receive information that provides useful yardsticks to inform strategic decision-making, business performance, and enterprise integrity. Is the information actionable? What does it say regarding magnitude, scale, impact, directions, expectations?
- Does the board suffer from Balkanized factions? Lack of alignment around collective goals is a common byproduct of boards riddled with representatives from venture capital, private equity, activist hedge fund, or public interest groups. This type of board tends to operate like a dysfunctional city council plagued with constituent advocacy rather than a cohesive team collaborating on addressing collective concerns. Similarly, the unfulfilled career agendas of young, retired directors can undermine management confidence. Director time is wasted passively watching PowerPoint presentations that could have been sent in advance.
To exercise duties of care and loyalty properly, there must be both time and a culture that embraces open, informed, discussion. This is not measurable by standard governance yardsticks. It takes common sense.