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Best Practice Corporate Governance: Who Runs the Company?

Paul P. Brountas, senior counsel at Hale and Dorr LLP (Boston)


Portions of this article will appear in the second edition of Paul P. Brountas' book, "Boardroom Excellence: A common sense perspective on corporate governance." The book will be published In the fall of 2004. Email boardroom.excellence@haledorr.com to receive an email alert when Paul's updated book becomes available.

Let's be honest and admit that many CEOs don't welcome oversight and don't particularly like independent directors, especially those who are noisily independent or contentious. While CEOs welcome the support of their board members, they do not react well to disagreement, skepticism or probing questions. They believe that, as CEOs, they have been charged with running the company, and they are accustomed to hand selecting their board members. Running the company, they submit, is a fulltime job that cannot be performed by parttime fiduciaries.

But while it is true that CEOs are charged with managing day-to-day operations, the board is charged with overseeing management of the company. The role of the directors is to provide good corporate governance, which essentially is oversight of the company's management. Directors are fiduciaries, and as such have the high obligation of trustees to assure that management is effective, honest and dedicated to managing the company for the benefit of its shareholders and to enhance shareholder value. The board's principal oversight responsibilities include:

  • providing assistance and advice to the CEO
  • selecting, evaluating and compensating the CEO and senior executives, and replacing the CEO when appropriate,
  • reviewing, approving and monitoring management's strategic plan and the company's strategic direction, and
  • overseeing the company's financial performance and accounting, and reviewing and approving management's financial plans, commitments of significant corporate resources and material transactions.

Executives, directors and shareholders need to keep these principles in mind and not be misled by the myth attributing recent corporate scandals to either the board's failure to manage the company properly or the board's interference with management's purported exclusive right to run the company-neither of which is true. The scandals occurred because executives ran the companies primarily for their own benefit and not that of the company's shareholders, and the directors not only failed to perform their independent oversight responsibility, but repeatedly rewarded managerial ineptitude with exorbitant pay packages.

In fulfilling their responsibilities, fiduciaries must understand that oversight means more than observing and commenting. It involves a relationship in which they serve as informed and challenging advisors, conscientious overseers, insightful critics and thoughtful advocates-whose first question, when asked to consider a significant proposal by management, is "How does this help the shareholders?"

The Five I's

There is no formula that can be applied to create the perfect board. An excellent board needs independent, well-informed, ethical, proactive directors who possess business and financial savvy and the ability to create a boardroom environment in which collegiality, honesty, trust and respect prevail-attributes that I categorize as the "Five I's."

Independence

A majority (some say a substantial majority) of the board should be independent, which means no business, financial or family ties with the company. With independence comes the ability and courage to challenge management and fellow directors in an environment that encourages constructive skepticism as well as free and open differences of opinion. A board cannot be effective unless its members have the courage to "rock the boat" and say no to management when it proposes actions that subordinate the interests of shareholders to those of management. But directors must remember that they can disagree without being disagreeable.

Integrity

Successful companies insist on integrity even at the risk of restraining entrepreneurship, a concept that often is difficult to sell. The CEO, with the advice and consent of the directors, is responsible for setting the tone at the top and creating a corporate culture that censures extravagance, greed, dishonesty and self-dealing, and extols decency, integrity and ethical behavior.

Informed

A director may be independent and possess integrity, but what good is a director if he or she is not informed? Uninformed directors make bad decisions and consume valuable management and board time. Preparation for meetings is essential to the director's oversight responsibilities, including understanding what keeps the CEO awake at night, maintaining a level of business savvy that permits the director to contribute to the development of the company's strategy, and maintaining a level of financial literacy required to evaluate the company's financial performance.

Involved

Each director must devote the time required to understand the company's strategy, strengths and limitations. Effective oversight of management requires availability, commitment and dedication of the time needed to discharge the director's fiduciary duties responsibly, which in turn requires that directors limit the number of boards on which they serve.

Initiative

A director must be proactive, ask questions, insist on answers, participate in the preparation of agendas for board meetings and be enthusiastic about service on the board. Effective directors are not afraid of being bold.

Excellent corporations stay excellent by regularly challenging themselves. The CEO must create a board environment that encourages skepticism and enables directors to disagree constructively. However, even if the directors achieve the Five I's, boardroom excellence will be absent unless the directors trust, respect and listen to each other.