Spotlight on Corporate Boards
By Jan Masaoka
When something goes deeply wrong in a corporation-whether a Fortune 500 company like Enron or WorldCom, or a nonprofit-the question arises: Where was the board? Over the past few months we've learned more about the hidden world of corporate boards than has ever been exposed before-whether the inside stories of the HP board discussing its merger with Compaq, or how WorldCom's board audit committee worked with its auditors (Andersen), or how Enron's board leveraged its political connections for the benefit of Enron (and the detriment of Enron's shareholders, employees, and customers, and in disregard of the law).
The truth is that dismay over the effectiveness of corporate boards is nothing new. For years there have been increasingly despairing voices calling for corporate governance reform: standards of behavior that build in better protections-that may not guarantee, but can at least encourage, boards of directors that hold the corporation responsible to its constituents, and that ensure that the corporation's total interests are kept ahead of the individual benefits to its top paid staff.
To understand the recommendations for corporate board reform, note that Enron's board members were paid $350,000 per year for serving on the board (more than twice the average for comparable corporations), and waived the conflict-of-interest rule for the chief financial officer (CFO). Although the board claimed they had been kept in the dark, the Senate Subcommittee ruled that they had "ignored more than a dozen red flags," such as the CFO (a board member) being paid "tens of millions of dollars in exchange for keeping hundreds of millions of dollars in Enron debt off the company's books." [Pete Yost, The Associated Press, July 7, 2002] If disagreeing with the CEO meant losing a $350,000 / year job, some of us might have been quiet, too!
The National Association of Corporate Directors (NACD) has made several recommendations to the stock exchanges, the SEC and Congress ("Recommendations from the NACD", May 3, 2002, abbreviated here; available in full at www.nacdonline.org)
- Boards should be comprised of a substantial majority of 'independent' directors* . . . Boards should formulate and adhere to clear conflict of interest policies applicable to all board members.
- Boards should require that key committees [audit, compensation, nominating] be composed entirely of independent directors*.
- Each key committee should have a . . . written charter detailing its duties.
- Boards should consider formally designating an independent director* as chairman.
- Boards should regularly and formally evaluate the performance of the CEO and other senior managers, the board as a whole, and individual directors.
- Boards should review the adequacy of their companies' compliance and reporting system at least annually.
- Boards should adopt a policy of holding periodic sessions of independent directors* only . . . to provide board and committee members the opportunity to react to management proposals and/or actions in an environment free from formal or informal constraints.
- Audit committees should meet independently with the auditors.
- Boards should be constructively engaged with management.
- Boards should provide new directors with a director orientation program to familiarize them with their companies' business, industry trends, and recommended governance practices. Boards should also ensure that directors are continually updated on these matters.
"Independent director" means a board member who is NOT paid staff, nor a family member of paid staff.
Over the last decade the nonprofit sector has wrestled with governance issues, and thousands of boards have engaged in board education and development activities . . . and most of these recommendations are now standard practice in nonprofits (although many boards don't get around to each one every year). The overwhelming majority of nonprofit board members do their work with no compensation; they do it without conflicts of interest and with a great deal of diligence. While it's easy to bemoan the weaknesses of nonprofit boards, Peter Drucker and other business thinkers have noted that the nonprofit sector provides leadership in responsible, ethical, and strategically sound governance. These corporate principles may be a good starting point for a discussion on your board on its role and its own effectiveness.
Original publication date: 08/22/2002
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