Achieving Business Success
By Robert L. Bailey
A not-so-funny thing happened on the way to the meeting of the board of directors. Members of the board became nervous and squeamish; overly concerned about their liability; less confident that their advice and counsel are valuable; and more and more inclined to relegate their responsibilities to outsiders, usually consultants, a group I call the "sons of a board."
More and more critical business decisions are made, not by experienced members of management with their actions confirmed by a competent board with business experience, but by the "sons of a board" – outside advisers who are called in to give advice.
But I'm getting ahead of my story.
Every business wants to be successful. To achieve that objective there must be a competent management team. Maybe a successful business can have incompetent managers for a short while, but based on my observation of businesses over some 40 years, I can nearly guarantee that over the long pull successful businesses and competent managers are joined at the hip.
But any capable manager needs to test an idea now and then – to get a new perspective of a problem – to evaluate a direction or strategy. For the small family owned business, a "master mind group" often fills the bill, folks in different non-competing businesses who have respect for one another's business insight and judgment and who can discuss one another's problems in complete harmony and in confidence.
With public ownership, this process is formalized with boards of directors. Although members of the board are sometimes friends of the CEO, the board members are always respected for their business judgment and insight. The process is similar to that of the "master mind group" and works pretty well. This, in my view, is the ideal board arrangement for a successful well-run business and a competent management team.
What if the company is not so successful and the management team not so competent? The board must then assume a new role of providing "adult supervision," or checks and balances. If the management team can't take the company in an appropriate direction and get desired results, the board's responsibility is to get the CEO back on track, if possible, or hire a new CEO. It's not the directors' responsibility to "run" the company. The board is not qualified to do so. Nor does time permit with, say, four to six board meetings a year. A successful management team must have years and years of experience in a specific industry and a sterling track record of getting results. This is not a 40-hour a week job. This job demands attention nearly 24/7.
So far the picture is pretty clear. Enter institutional investors, government agencies and others who consider it evil to have inside directors; or directors who are friends of the CEO; or directors who work with management in harmony.
Long ago I vowed that I would resign rather than work with a board in a hostile atmosphere. If I can't produce results, they should fire me (or I should resign if I can't deliver the goods). But the head person in any organization carries enough burdens and has enough stress without continual conflict with the group that should be giving advice and counsel.
Although the efforts are undoubtedly well intentioned, a number of outside pressures are contributing to board incompetence. For instance, the SEC, in an effort to make public corporations more accountable to shareholders, is considering a proposal to permit shareholders to nominate board candidates, without regard to the candidate's ability to contribute to the company's success. This would likely give control to organized groups who have a special interest to advance – such as labor unions, or institutional investors interested in a fast buck but with no interest in building a foundation for long-term success. Conflicts of interest will become rampant.
The SEC has already mandated that every mutual fund must have an independent chairman – an outsider with no ownership in the fund's management company. I'm unable to understand how a person with no ownership interest, and perhaps only cursory knowledge of the industry, can somehow prevent abuses and protect interests of owners. It's interesting to note that some of the worst offenders in the mutual fund industry, with the highest fees and worst performance, had independent chairmen and a preponderance of independent outside directors.
Stockholders already have a way of being heard. They can – and do – sell their stock when management can't produce good results. In the mutual fund industry there are some 8,000 funds competing for your business. Performance poor? Fees too high? Select another one.
The passage of Sarbanes-Oxley on July 30, 2002 (often called SOX – so named because it has scared the socks off management and directors) was intended to prevent the accounting shenanigans that have made headlines for some high profile companies. Compliance is time consuming and costly, paperwork is onerous, and the law is complex. Thus, there's another reason to bring in a stream of outside lawyers, consultants and other "sons of the board," most of whom have a primary interest in protecting themselves from liability and building an ongoing stream of personal income. In the meantime, if a decision is questioned, management and the board can answer, "Don't blame us. We hired a consultant."
It's an honorable goal to have board "independence." But this objective should not be diluted by selecting directors who are so skittish about their liability that they can't give sound advice and counsel; directors who are more interested in their own perks and pay than in the interests of stockholders; or directors with no sound business experience and no track record of business success.
Which brings us full circle, back to the "master mind group" or "independent" board that consists of folks in different non-competing businesses who have respect for one another's business insight and judgment and who can discuss problems in complete harmony and confidence.
I know, this isn't a popular view right now. But in my judgment that's the ideal board. "Sons of a board" are seldom necessary.