Asleep At The Wheel? What Boards Can Do To Jolt Their Members

joltGiven that GE’s board was itself jolted by the under par performance of the company, how can other boards protect themselves from such surprises? For decades experts pointed to GE’s board as a model for others having members who were distinguished present and former CEOs and savvy professionals who were long-time business veterans.

Reports that the conglomerate is overhauling its board removing several long-serving members and nominating three outsiders including an accounting expert and former top executive from American Airlines and industrial conglomerate Danaher Corp, comes at a time when a new CEO, John Flannery is slashing GE’s dividend and promising to divest $20 billion in assets.

A number of directors reportedly told The Wall Street Journal that the entire board deserved to be fired. Critics charged that many were entirely too close to former CEO Jeff Immelt whose projections for future growth and earnings have proved wide of the mark. Last year GE’s stock dropped 45 percent even as the broader market hit new highs. Flannery aims to slim the board from 18 to 12 members which is in line with the average size of most S&P boards. Three of the four members of GE’s board who are stepping aside have been on the board for 10 or more years. John Brennan, former chief of Vanguard Group will step down next year as lead director.

“it can be very intimidating to question a forceful leader, particularly one as charismatic as Jeff Immelt.”

The shake-up signals that no board, no matter how professional it thinks it is, is invulnerable and should take steps to ensure that it is not asleep at the wheel.  Close observers point to at least three steps any board—even those following best governance practices—should take.

First, says John Trentacoste, partner, Farient Advisors, an independent compensation and corporate governance firm, is never rely exclusively on management’s analysis of performance. “All boards should retain an outside advisor to offer applicable trend analysis and track market activity to help benchmark a company’s performance,” he says. “This includes social media tracking to learn how the firm’s reputation is changing.” This is not to suggest that management is guilty of misrepresentation or misfeasance. It is human nature to interpret one’s results in a favorable way. But balance requires outside perspectives.

Directors should also gain access to direct sources to employee engagement surveys, talent and culture changes so that they can gauge how subtle changes in attitude may affect overall company performance. With this mind, boards should familiarize themselves with independent evaluations such as EVA (Economic Value Analysis) and MVA (Market value Analysis) or similar systems that measure whether real economic value is being created. EVA measures profit after deducting a full  weighted average cost of capital interest charge on the net assets used in the business. It’s a useful tool for directors because it’s the only profit measure that fully and correctly increases when managers turn assets faster and develop leaner business models, thereby giving directors a cleaner view of the actual value being created.

Thirdly, good governance also calls on companies to refresh their boards from time to time so that members reflect knowledge and experiences that align with present requirements as opposed to what may have been necessary years ago.

Lastly, it can be very intimidating to question a forceful leader, particularly one as charismatic as Jeff Immelt. “This is where a strong lead director proves his or worth,” adds Trentecoste. “No one director should be a lightning rod, but if he/she has the respect of the CEO but a good lead director can be a gentle reality check to management’s tendency to assume optimistic outcomes.”