June marked the passing of Bill Donaldson, former chair of the SEC, the longest-reigning head of the New York Stock Exchange and founding dean of the Yale School of Management. Among his many achievements, Donaldson served as Henry Kissinger’s Undersecretary of State, created the investment bank Donaldson, Lufkin & Jenrette as an entrepreneurial financier and led the turnaround of Aetna as its chairman and CEO. Working with him for almost 40 years, I was inspired by his appreciation of the social or cultural side of governance, which went far beyond check-the-box legal, accounting, economic and structural oversight.
Models of Governance
The photo at the top shows Donaldson at a Yale CEO Summit alongside two peers, Vanguard founder Jack Bogle and John Whitehead, former chair of Goldman Sachs and a stentorian pillar of Wall Street. In honor of Donaldson’s passing, I’d like to share an excerpt from a 1999 Summit program in which he offered insights on governance and the board’s role.
“On the subject of board governance… corporate governance has become a cottage industry with lots of opportunists, and there’s some very superficial thought out there about what a board really is.
“To me, there’s at least two or three different models of what a board is.
“One extreme model is the function of a board is to strictly come to meetings and ask whether the CEO is doing a good job, and if the answer is ‘yes,’ then the next question is ‘when’s lunch.’
“The other model is the corporate board as a public board where there are warring constituencies. You have all sorts of people on the board, as you have with public institutions or in politics, who represent different viewpoints and different constituencies, and they fight like mad to represent their viewpoint. There’s no spirit of cooperation at all, in fact, it is just the opposite.
“My view is the board has a number of different functions. Clearly, the hiring and firing of the CEO, but that’s just one function. My view is it also has the function of support for the CEO. I think the CEO at times needs the support of the board. The board is the final authority, the group that when you’re faced with a tough decision as CEO, you say, ‘I have to take it to my board,’ and when you take a tough decision, the board supports you.
“Thirdly, I think the board’s role is to insulate the CEO from short-term considerations. The board does have a responsibility, in my view, which goes beyond next quarter’s earnings and beyond next year’s earnings. And it has a responsibility, although you can’t shout this from the pages of the Wall Street Journal, to serve something more than just the profit motives of the shareholders. I think the board provides an insulated jacket for that.
“But the least examined is that it is a social entity. It has human beings on it. And those human beings start to enter into alliances. They start to act like human beings do in any other organization. And the longer they’re there, the more allies they have, the more dislikes they have, the more irrational they become in terms of personal conflict. Nobody talks much about that. Everybody says, ‘Oh, you ought to have certain people on the audit committee because they’ll be independent, etc., etc.’
“There hasn’t been nearly enough work done on the social contract on the board and the recognition of what is really going on on that board. And a lot of times, what’s really going on bears the seeds of horror stories. Perhaps there’s a group that’s aligned improperly, and that group dominates either through tenure on the board or whatever and allows bad things to go on because nobody really recognizes what those interpersonal relationships are.”
Timeless insights on oversight from an inspirational colleague.
