The idea behind having independent outside directors on a company's Board is primarily the expert third party advice that they can potentially provide. Ofcourse, 'potentially' is a key word here. Just nominating a few senior executives from other companies to your board is not enough. The 'potential' needs to evolve into an active and interested director. This transformation from 'potential' to 'actual' happens when these directors are regulars at Board meetings and devote time that is needed to provide advisory services to these public companies.
Unfortunately, another by-product of the financial crisis has been the spate of director resignations at financially troubled companies.
The WSJ recently reported on the growing number of such Board resignations at public companies. This should come as no surprise when you consider the number of boards that each of these "outside experts" are sitting on.
As an example consider the number of public company boards that some Citigroup directors are sitting on: As per the company's proxy statement issued in 2008, the final tally of directors who sat on more than 2 public company boards looked like this:
(The numbers in brackets show the total number of public company boards that these directors sit on.)
Sir Winfried Bischoff (4),Kenneth T. Derr(3),John M. Deutch(4), Anne M. Mulcahy (3),Dr. Judith Rodin (3), Robert L. Ryan(5- He retired from one in June'08)
Goldman Sachs looks like this:
William W.George (3), James A Johnson (3), Lois Juliber (3), Rajat Gupta (4) Laxmi Mittal (4)
Besides this, 3 out 13 board members at CITI are CEO's of other public companies. At Bank of America 2 board members are CEO's of public companies.
With directors sitting on multiple Boards, how can shareholders expect a focused and attentive Board? For those that sit on 3 or more Boards, they could even be getting mixed up in the issues and concerns at different companies. It wouldn't be a stretch to imagine getting mixed up while juggling meeting dates, agendas and decisions when you are managing compensation, audit, risk review etc at multiple public companies, not to mention the non profits that also vie for your attention.
image: mcglinch.com
Here's what the New York Times has to say about Citibank "The bank’s downfall was years in the making and involved many in its hierarchy, particularly Mr. Prince and Robert E. Rubin, an influential director and senior adviser." Rubin was instrumental in getting what was a solid solvent bank, involved in a massive investment in CDOs in order to keep pace with the likes of Goldman and Morgan and the rest is history.
ReplyDeleteUsed to be a time when the role of a Director on the board was one of genuine focus on the company. Typically retired CEOs or top Shareholders who actually cared about the company, sat on the board. They knew the business inside out and know what risks an organization was going into right up front.
These days the only requisite for Directors is a network. You need to be on the board of at least 5 top companies, or you're a nobody. What that means is that your sole purpose is to network and promote dialog between companies - often at conflicts with the business model of a particular one, and certainly at the expense of John Q. Public.
I for one am happy to see Directors whose sole purpose is to take an 80,000 feet view with no inclination to study that day-to-day operations of a company take a back seat in influence. Bring back to the board the Sales Managers who've served 40 years building your network and who know every single agent/dealer by name and can speak to their opportunities and challenges!