Boards don’t just anoint an emperor CEO and remain a hapless bystander of events. Their job is to assess and oversee issues of risk, as well as the CEO’s performance.
First it was Warren Spector, co-president of Bear Stearns. Next it was Merrill Lynch’s E. Stanley O’Neal. Yesterday it was Charles O. Prince of Citigoup. In the space of a few months, the subprime meltdown that is producing calamitous losses in the banking and financial services sectors is also producing suddenly-empty corner offices. More will doubtless follow. But isn’t there an idea that maybe boards have some role in helping to prevent these disasters, too? They don’t just anoint an emperor CEO for a period of time and remain a hapless bystander of events. Their job is to assess and oversee issues of risk as well as the CEO’s performance. It seems too many boards have been a little slow to adjust to that heightened level of responsibility.
We have always taken the position that neither success nor failure is a one-man product in today’s multibillion dollar global corporation. Of course, it is harder to excuse a CEO who is making stupid mistakes or issuing comments that are so at odds with reality that it becomes impossible to have confidence in his sense of vision and judgment. This was the case with Mr. O’Neal’s previous pronouncements that things were looking OK with the subprime situation at Merrill Lynch. And we expect it will also be the case with Bear Stearns’s Jimmy Cayne, who rode out that company’s summer hedge fund storm in the calm of a golfing and bridge tournament vacation and who may yet learn that, in the department of CEO appearance, a corporate crisis always trumps a card game. Others will surely fall before the latest turmoil is quelled and the surprise-o-meter is likely to get quite a workout when all is said and done. And though he still clings to power, Countrywide Financial’s CEO has much to answer for in regard to that company’s huge losses. I recently made some observations about Countrywide’s dubious boardroom practices in a guest column in the corporate governance blog of Harvard Law School.
What Citigroup, Merrill Lynch and Countrywide also have in common, on top of their staggering reversals of fortune, is that their CEOs head —or headed— the board. That, I submit, can be taken as further evidence that the positions of CEO and chair need to be separated if boards are to be truly empowered and independent in fulfilling their governance duties. The Centre for Corporate & Public Governance has been advancing the principle that boards should be chaired by an outside director for more than a decade and a half before legislators, regulators and among investors.
The notion that a so-called lead director can fill that need, as suggested recently by Yale School of Management’s Jeffrey A. Sonnenfeld in connection with Merrill Lynch, runs counter to both the reality of the modern boardroom and its past. The lessons of history and of business demonstrate convincingly that whenever other people’s interests or money are involved, a strong discipline of accountability is paramount. Checks and balances on power are always an indispensable feature in the governance of corporations as well as in nations. Their absence has been associated with untold tragedies and follies in both institutions. The reason the business titan wants to hold the combined positions of CEO and board chair is because he wants power concentrated in his hands for all meaningful purposes. He is not about to turn over any significant role to a lead director, which is a position a little like the runner-up in the Miss America contest. Its importance is always greatest at the time of its awarding and thereafter seldom amounts to anything—except in the unlikely event that fate and catastrophe choose to embrace. At least in the case of Miss America, the runner-up typically has no role in bringing about the disaster, which is not always the situation with the lead director and his colleagues in the boardroom.
We know that these parting CEOs will be treated very nicely and will leave, in some cases, with more than $100 million for their trouble. Less certain is whether directors are really on top of the huge risks these companies are assuming and whether boardrooms were really flying on autopilot for the past several years when things were looking so good. And autopilots have been known to have had a rather sleep inducing effect on more than a few occasions.
You can hear the story that boards are now awakening to their duties only so often before you get the feeling that there must be a lot of sleeping going on most of the time.