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?


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.

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:

  1. 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?
  2. HONESTY: truthful communication.
    · Do you have confidence that your leaders would never engage in or sanction misrepresentation?
  3. OPENNESS: operational transparency.
    · Is appropriate information about your organization readily available?
  4. AUTHORITY: employee encouragement.
    · Are you able to correct a customer problem? Do you have confidence that your actions will be supported
  5. PARTNERSHIP: honor obligations.
    · Does your organization pride itself on the timely fulfillment of all commitments?
  6. PERFORMANCE: accountability throughout the organization.
    · When individuals, including senior executives, under-perform repeatedly, are they given due process and then, if necessary, replaced?
  7. CHARITY: generous community stewardship.
    · Does your organization reach out to those in need?
  8. 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.

Home Page | About Us | Ask Bracher | Services | Resources | Contact Us

©Bracher Center for Integrity in Leadership and Dimension Five Consultants, Inc. All Rights Reserved.
P.O. Box 22467, Carmel, California 93922