Integrity
Matters
October 18, 2003
Good
Character makes a good director
Question: (E-072)
Dear
Jim:
Richard
Grasso, former chairman of the New York Stock Exchange,
is history. Poor, or perhaps I should say rich, Mr. Grasso
was guilty of cashing large checks and stacking his board
of directors -- and so he is out.
There
was never any question about his effectiveness in managing
the NYSE or any malfeasance in office - only the problem
that his board of directors paid him a lot more than other
regulators.
While
Grasso may be guilty of helping design an overly generous
compensation program for himself at the expense of his
member companies and therefore shareholders, including
widows and orphans and pension funds, it seems like the
real culprits are the directors who knowingly or maybe
even worse, unknowingly, approved the plans.
There
was a time when serving on a prestigious board meant showing
up for meetings, staying awake through presentations and
enjoying good meals. That seems to have changed today.
What
do you think makes a good director for a good board at
a good company?
Response:
You have asked for answers to three questions
about what makes for a good director, a good board and
a good company. As you would expect, given the title of
our column, each answer will revolve around integrity-centered
leadership behaviors.
First, good directors are effective based
upon their insight, impact, and integrity. Good directors
understand the company (its products, services, markets
and financial health); respond to the needs of all stakeholders;
and exhibit courage even in the face of strong opposition.
Good
directors are curious and work diligently to understand
the enterprise they have been called upon to guide. They
set policies they understand and can interpret. They hire
and fire chief executives and determine compensation packages
because they know what is occurring in the enterprises
they have consented to advise. They earn their compensation
because they arrive prepared and informed for meetings
they attend and committees on which they serve.
Good
directors are committed and work continuously to strengthen
their own effectiveness.
They will wrestle difficult issues to
the ground and not rest until they've been properly
resolved. Good directors seldom plead ignorance.
There
is nothing profound or magic in these good director characteristics.
They are basic to being effective.
If
you think about a few recent high-profile cases we have
seen, the directors failed on one or more these attributes.
For
example in the case of Enron, the outside directors were
guilty of being interested but not curious. I am sure
they read the board materials and attended the meetings.
They
didn't dig deeply enough to understand and question the
complex financial structures that were created and the
risks associated with them.
In
the case of the NYSE there may have been an integrity
issue because the companies that the NYSE and Grasso were
charged with regulating employed many of the board members.
However, we cannot know for certain. If the directors
did not know what Grasso's package entailed, then they
certainly failed on curiosity and commitment.
In
the cases of WorldCom and Tyco, the directors apparently
knew about the loans to Ebbers and excesses by Kozloski
and lacked the courage to stand up to something that they
knew was wrong. In the case of the founder of Imclone
and Martha Stewart, it does appear that integrity was
very much being ignored.
What
is so striking about these headline cases of impropriety,
misbehavior or possibly malfeasance is their similarity
to the description of the five progressive stages of drunkenness,
or more properly, intoxication: At stage one, having consumed
a few drinks, one becomes clever. At stage two, as the
booze continues to flow, the drinker may feel amorous,
the great and charming lover.
Stage
three, with even more alcoholic consumption, the drinker
becomes invisible, and no one can see even the most ridiculous
behaviors. Stage four, as the alcohol level rises, the
partaker is now convinced that he or she is bullet proof,
rougher and tougher and immune to the rules that apply
to others.
Stage
five, as the lights begin to go out and the behavior spirals
out of control, the abuser, the person who ignores the
need for self-regulations, well, the result can lead to
incarceration, in a cell, doing time.
Some of the so-called self-selected "elite"
behaviors, reported in scandals, seem to parallel the
intoxicating atmosphere, reflecting that power can corrupt
or at least delude those who attain it. Unless individuals
and institutions regulate themselves, governments will.
What determines whether someone is a strong,
effective and good director is the degree to which their
character, values, insight and knowledge create positive
and purposeful influence with colleagues on the board.
Second,
good boards are quite easy to describe. Strong boards
exhibit and encourage independence, interdependence, directness
(confrontation) and relationships built upon mutual trust
and respect.
Outsiders
Independence means that about 75 percent of the board
members should be outsiders. Boards ought not be composed
of any member who is so captivated by the organization's
influence, whether as supplier or customer, that alignment
with the needs of shareholders and other stakeholders
might be compromised. Good boards want and need oversight,
never rubber stamps for powerful executives and their
teams.
This
professional independence does not mean that a bank's
board member might not have an account at the bank, or
that a board member of General Electric might not have
been using GE light bulbs or watching NBC television stations.
Nor does this independence imply any need for an adversarial
board atmosphere. Independence means providing the environment
for confronting potential conflicts openly, all the time.
Interdependence is also a hallmark of
good boards. Being a strategic partner with management
is important. According to Ken Lewis, chairman, chief
executive office and president of Bank of America, in
the September/October issue of The Corporate Board, "No
one disputes the legitimate oversight role of the board.
Yet this exclusive focus on oversight neglects the board's
other critical role, that of strategic partner."
Lewis then goes on to say, "An ‘excessively
independent' director is one who lacks a meaningful
relationship with the company, or with the CEO."
To be a source of ideas, which a good board is, then the
relationships must be built in such a way that allows
for give and take.
Diverse backgrounds of good boards can
be tapped by management for creativity, connections, cultural
and market insight, advice, and counsel. Similarly, good
boards are not afraid to tackle tough issues, openly.
Debate, which implies differing positions, is essential,
not optional.
It is important to remember that our college
and university students are being taught by their professors
and from their text books that "the board of directors
is a group of elected individuals whose primary responsibility
is to act in the owners' interests by formally monitoring
and controlling the corporation's top-level executives."
(from p. 319 of "Strategic Management, 2003"
by Hitt, Ireland and Hoskinson) A NYSE board member, H.
Carl McCall, who resigned on Thursday, September 25, 2003,
is quoted from a letter he sent to the new interim chairman,
John Reed, with these words, saying that he hoped the
exchange could "move forward without being encumbered
by the past."
Hopefully, he meant that the board should
very much be encumbered (that is, burdened with duty,
financial obligations, etc.) and not simply experience
obstructions by an extremely upset group of stakeholders.
Board members need to learn lessons from mistakes.
Attract,
retain
Good boards attract and retain individuals who are able
to get along, enjoy one another, even in the midst of
strongly differing positions, sustaining substantive relationships
built upon mutual respect and trust. Good boards communicate
their own healthy culture of integrity that includes how
they work together, through tough issues, in a climate
that combines fiduciary responsibility and stakeholder
sensitivity. Good boards insist upon adherence to the
mission of the enterprise, as it is fulfilled in all activities
of the organization.
Third, a good company is one that does
what it says, and says what it does, seven days a week
and fifty-two weeks a year. Of course, we think that good
companies have eight attributes, without which the enterprise
is a lesser social and economic entity. The good company
is integrity-centered and exhibits behaviors that enable
its stakeholders to answer yes to the questions that reflect
the eight attributes of an integrity-centered company
developed by the Bracher Center:
- CHARACTER:
consistency between word and deed.
· Do the leaders of your organization exhibit congruence
between what they say and what they do, as well as what
they say about what they did?
- HONESTY:
truthful communication.
· Do you have confidence that your leaders would never
engage in or sanction misrepresentation?
- OPENNESS:
operational transparency.
· Is appropriate information about your organization
readily available?
- AUTHORITY:
employee encouragement.
· Are you able to correct a customer problem? Do you
have confidence that your actions will be supported
- PARTNERSHIP:
honor obligations.
· Does your organization pride itself on the timely
fulfillment of all commitments?
- PERFORMANCE:
accountability throughout the organization.
· When individuals, including senior executives, under-perform
repeatedly, are they given due process and then, if
necessary, replaced?
- CHARITY:
generous community stewardship.
· Does your organization reach out to those in need?
- GRACIOUSNESS:
respect and discipline.
· Does your organization demonstrate care and concern
for all stakeholders?
When
you find an organization, a good company, that exhibits
these attributes, there is a good chance, quite probable
in fact, that they will have a good board and good directors.
