Anyone who has spent time in the boardroom recognizes that the description “potted plants” has little to do with horticulture. The media uses the term to illustrate its bias that board directors will rubberstamp anything put forth by management.
Governance gurus believe this is the status quo, and they trot out these kinds of ex post facto accusations to blame directors for crises, even the unpredictable kind. The result is twofold: it provokes cynicism among business journalists who write for public consumption, and it also breeds mistrustfulness into the board-management relationship.
Unfortunately, society hears a dog whistle that every wrong turn or hiccup is because the C-Suite is out of control. The Enron debacle activated a virulent strain of corporate governance, and, after the unanimous passage of the
Sarbanes-Oxley Act of 2002 (SOX), there was no one willing to fight against the tide of increased regulation. Less than six years later, the collapse of Lehman Brothers led to the conclusion that SOX wasn’t enough, and the government prescribed Dodd-Frank, an overwrought 1,000 pages of regulation.
Lost on the voting public was the fact that the Lehman board was not culpable. The reason the company fell into bankruptcy was government negligence, according to records analyzed by Laurence Ball, chair of the Johns Hopkins economics department, and author of The Fed and Lehman Brothers. “The Fed could have rescued Lehman but chose not to because of political pressures,” says Ball. And so it collapsed, bringing world financial markets down with it.
A level of intrusion is going to be with us for the foreseeable future, but the question remains, how much and when? Should board directors really get proactive and start meeting with rank-and-file employees to see if the CEO is well-liked? Or phone shareholder activists to make sure the company’s strategy is on target? It would be helpful to have some “Big Data” on how effective these measures really are so that directors have a bright line. After examining the facts, as inferior as a rubberstamp mentality may be, it is not nearly as detrimental as a board that positions itself as a counterweight to management by taking a regulatory mindset. The result will be stifling innovation and turning the CEO into a compliance-driven machine.
We do have a modern case study. Throughout its history, GE set the Ivy League standard for board directors. Even today, its board includes such luminaries as the former CEOs of American Airlines, Loews, ConocoPhillips and the FASB. Each of the directors know GE’s business nearly as well as their own. Yet, for most of GE’s history, they didn’t intrude in the affairs of management. One quote that may have inspired a change in personality—after the Welch era—was when a new director asked, “What is the role of a GE board member?” An older director volunteered: “Applause.”
After Enron and Lehman, boards began second-guessing management on strategic issues, and GE was no exception. The timing turned out to be dreadful.
As The Wall Street Journal reported, former JPMorgan CEO Sandy Warner was enamored with another GE executive, but CEO Jeff Immelt felt he wasn’t ready to be named his successor. So Warner instigated a move to jumpstart the succession. In the ensuing battle, management became distracted and, ultimately, Immelt resigned, as everyone knows. During two subsequent succession plans, Warner’s fair-haired boy was not offered the job nor did he move on to another CEO role somewhere else. It turned out, Immelt knew who was ready to be a boss better than the board.
GE’s market value decline was over $500 billion, more than the combined losses from “potted plant” boards: Enron in 2001 ($65 billion), WorldCom 2002 ($103 billion) and GM 2009 ($91 billion). Board intrusion into management’s domain may make governance gurus delirious, but it isn’t so good for the shareholder.