A Fox In The Hen House

Gene Writes:
August 1st, 2002

[This article is the opinion of Gene Royer and does not necessarily reflect the opinion of The Tocquvillian or of others whose ideas contributed to the formation of the author's own opinion]

In John Carver's paper, "The Opportunity for Re-inventing Corporate Governance in Joint Venture Companies" he opines that the descriptive title of Jay Lorsch's 1989 book, Pawns or Potentates (Boston: Harvard Business School) paints an apt word picture of the dilemma facing corporate board directors.

"Directors are theoretically and legally powerful, yet in practice often merely the politically and socially acceptable front for a chief executive who is really in charge," writes Dr. Carver.

In theory, corporate CEOs work for the board of directors which ostensibly is charged with the benevolent task of governing the organization and directing its ethical and financial progress. The board, therefore, is expected be the corporation's moral conscience in order to ensure that the rights of shareholders are adequately monitored. With that principle in mind, "The Buck Stops Here" should hang on every boardroom door.

That clever motto, however, would be an empty and boastful reality check in many cases because the directors are frequently chosen by and often chaired by the CEO. One does not need much experience in life to see the opportunities for malfeasance by a wily-fox CEO who is not only in charge of the henhouse, but holds sway over the monitors as well.

In recent months we have seen the failure of corporations, which until mere days before the hammers-of-hard-facts fell were cornerstones of trust. Names such as Enron, Dynergy, Worldcom, Arthur Anderson, Global Crossing, (and others surely to be named) maintained reputations for growth and prestige unchallenged by investors both large and small.

After the fall, the media and the public in general have been quick to indict top-level management. Congressional hearings sprang to life faster than desert flora after a good rain. Heads rolled albeit many through timely resignation and new faces appeared at the top. But how can investors be certain that these new faces are not wearing the same old fox suit?

The solution proposed by conventional wisdom is a call for more legislation and/or governmental oversight and if that is a bona fide need, then it should certainly be explored. However, conservatism does not espouse such action when there are already laws on the books by which these corporate thieves and liars can be prosecuted.

A more basic question is: Where were the directors when these companies were stretching the elastic bands of their financial slingshots prior to a disastrous misfire? Where was this protection of investors? rights the board is supposed to ensure? Where was the board when the fox strolled unchallenged from the hen house, his arms full of squawking bags?

The corporate board environment--with all the pomp and prestige that goes with it--is often a worthless entity to the shareholders whom it purports to represent. This is a nappy way of saying that boards fail to govern, as directors are just as likely to see themselves as the CEO's advisors—or worse, as CEO cheerleaders--as they are as his or her superiors.

So, the dilemma is extended when boards find themselves being jolted from something not un-akin to being a corporate lackey to a sudden and awkward position of authority, as Dr. Carver points out:

"Shareholders could well complain that the one organ that protects their interests is normally ineffectual and takes action impulsively when it is almost too late." In recent months we can comfortably take Carver's statement further and say that the board is ineffectual and takes action when it is already too late.

This article is not aimed at management malfeasance as that is a no-brainer--but at the negligence of those men and women whom we call The Board. And it is undeniable that boards overseeing these failed companies have been negligent—at the least. Giving directors the benefit of the doubt, there is no other word to define it. Whether that negligence is born of ignorance of their obligation to the shareholders or merely asleep at the wheel, its consequences are the same.

It is time for corporate shareholders, who have seen their stock portfolios plummet from double digit value, to hold their governing boards accountable for the mishandling and, in some cases, the downright sleaze of their CEOs. Let the hammer of accountability fall where the Buck stops.

How does one accomplish this? Writes Carver, "directors are needed who can scrupulously distinguish governing from managing. This is easier said than done because the history of corporate governance is not given to such a clean distinction.

Imagine, CEO and board--both knowing exactly what their relative roles are. Isn't that a novel idea? Oddly, it is novel and an idea missing from traditional corporate leadership where, as Carver puts it, "Boards pretend to govern, and CEOs pretend to work for them."