Time to Rethink Board of Dirctors?

Boards of Directors are supposed to be a resource for the CEO to discuss potential strategies and tactics for a company as well as providing a check and balance for investors to ensure that the company's senior management are being responsive.  When companies get into trouble often the management is turned over but how often do we look at the board's role and what mechanisms are there to hold them accountable?

Let me relate to you a story of a couple of cases.  The first was a moderate sized public company.  The senior leadership team that took the company through a long period of steady growth and had a falling out.  The board sided with the CEO and allowed him to go forward with his risky plan.  There was a split in management that resulted in one senior manager forming what ultimately became a very successful company and the CEO ultimately making a series of errors that caused serious damage.  The end result was a very painful bankruptcy in which the investors, creditors and management fought a protracted battle for control.

Clearly in this case the CEO should have either voluntarily stepped down or, been forced to resign by the board.  This didn't happen and ultimately the company exited from bankruptcy and were able to make the effect the necessary changes.  In this case, the board clearly failed to represent the investors and creditors interests which is a breach of their responsibilities.  In the end they were not immediately held accountable for their actions which leaves one to wonder how are boards held accountable for their actions. 

I recently ran across another example that left me shaking my head where a privately held company had a board that was "hand picked" by the CEO.  The company was not achieving its objectives and the board was a board in name only because the CEO was clearly driving in the ship towards the beach.   As an outsider it was clear that as bright as the CEO is, he needs some outside supervision and more importantly some outside influence.

Where I have seen boards function well is where there is diverse mix of people from both inside and outside the industry people that have history with the CEO and others that don't.  This provides a group of people that will not only provide a check and balance to the potential monolithic thinking of a CEO but also a life line.  The other key aspects is that they must be independent and courageous enough to speak up and when necessary to tell the emperor that he in fact, has no clothes.  Finally, they must be decisive.  They don't have to necessarily be of like mind but they need to reach a lasting consensus and follow through with timely actions.

So how do we motivate companies to do better with their boards?  The surest way is to make sure that boards are properly incentivized to do well if the company does well and should suffer consequences when companies don't do well.  In fact, the whole concept of directors and officers (D&O) insurance serves to insulate boards from consequences of not effectively carrying out their responsibilities.  Perhaps putting in term limits or requirements to re-evaluate the board on a periodic basis are things that should be considered.  Even putting in requirements that call for a percentage of board seats to be turned over in the event of non-performance.  I throw these things out there because I think something needs to change because we are facing increased competition on all fronts and we need to take a fresh look at our old ways.