Advice: Responsibility and accountability

Q My board is getting involved in areas that clearly stray into business operations. It has involved itself in hiring decisions other than the CEO office and is convinced this falls under its remit. Any advice on how to rein this in?

A Generally, it’s all about strategy and oversight. A recent McKinsey survey notes that 27 percent of company directors call their understanding of the current strategy of the firms on whose boards they sit ‘limited’. Only 11 percent claim a full understanding of strategy. 

In a speech to the Directors’ Education Institute, SEC chairman William Donaldson used this data as a rallying call for boards to ‘roll up their sleeves and inject new candor into boardroom discussions’ as a precursor to their ability to set an appropriate tone at the top, asking tough questions and demanding clear answers.

Donaldson’s suggestions are designed to ensure that directors provide strategic direction and oversight, without creating a culture where fear and a compliance mentality disable the board and management’s ability to take appropriate risks. 

Donaldson specifically warned boards against losing themselves in the forest for all those trees, acting as operating committees with the net effect of mitigating their own role in providing strategy and oversight, as well as mitigating management’s ability to do its operational jobs. He also reminded directors that there is no silver bullet or checklist solution for developing good governance practices.   

Q WorldCom and Enron director settlements have created a lot of noise around changes in officer and director liability. Any new trends I should be aware of?

An article in the latest issue of Business Lawyer argues that neither existing case law nor policy arguments provide support for extending to officers the same broad protections of the business judgment rule that are afforded to directors. The argument, in brief, is that courts should examine whether officers met or violated their duty of care lest their affording of business judgment protections to corporate officers undermine the governance role of directors in overseeing management. 

However, US CEOs ousted for underperformance are removed after an average of 5.2 years, compared with a 4.5-year global average and 3.9 years for European issuers. Charles Lucifer, author of a Booz Allen survey on CEO tenure, says the US is far more tolerant of non-performing CEOs than the rest of the world, but suggests that the longer time frame afforded to US CEOs is appropriate as it generally takes four or five years for a CEO to shape strategy. One reason may be that the more concentrated shareholder bases typical in the UK and continental Europe find it easier to pressure an executive than more widely dispersed shareholder bases in the US.