The director's dilemma

I n his report on .the . problems . at . WorldCom, .Richard . Breeden . observed, .“Perhaps . more .than . speeches . from .lawyers, . every board can use a curmudgeon or two ” .(my . em- phasis). .He . went . on .to .note, .“ . Someone . on . the . board . has .to .be . prepared . to .ob - ject . if .management . does .not .observe . the . rules . of .good . behavior, .if .manage - ment . seeks .excessive . compensation, .or . if .management . is .creating . unacceptable . risks.” .Others . have .stressed . the .value . of . having . a .“pilot . fish” .on . the . board, .who . is .unafraid .to .swim .upstream. I .remember . well .how . much . I .benefit - ed, .when .I .was .president .of .Princeton, . from .having .to .respond .to .pointed .ques - tions .from .independent-minded .trust - ees .such .as .Michael .Blumenthal .and . Paul .Volcker .about .the .cost .structure .of . the .university .and .tuition .policies. .It .is . critically .important, .however, .to .have . the .right .kind .of .curmudgeon. . Both .Blumenthal .and .Volcker .were . strongly .supportive .of .the .university, . and .of .its .leadership, .at .the .same .time . that .they .vigorously .debated .the .wis - dom .of .one .decision .or .another. .In .the . words .of .the .late .John .Gardner, .distin - guished .public .servant .and .former .head . of .Common .Cause, .institutions .need .to . be .spared .both .“uncritical .lovers .and . unloving .critics.” .Collegiality .and .mu - t u a l .re s p e c t .c a n n o t .b e .s a c r i f i ce d .i n . order .to .include .questioning, .if .not .dis - senting, .voices .in .the .conversation. Let .me .now .advance .one .other .prop - osition .in .which .I .have .come .to .believe . strongly: .In .the .corporate .world .in .par - ticular, . courage and the w ill to act are often the attributes in scarc- est supply. In .my .experience, . after .some .amount .of .time . and .discussion (to .be .sure, . f re qu en t ly .to o .mu ch .t i m e . and .too .much .discussion), . it .usually .becomes .fairly .ob - vious .what .should .be .done. . The .trick .is .marshalling .the . . e n e r g y, .a n d .e s p e c i a l l y .t h e . courage, .to .act. .It .is .so .much . easier .simply .to .wait .a .little . longer .for .events .to .unfold. Unfortunately, .the .problem . is . deeper . than .merely . finding . the .individuals .with .the .requi - site . backbone . — .though . that . is, .I .suspect, .the .most .impor - tant .thing. .The .less .tractable . aspect .of .the .problem .reflects . what .one .experienced .board . member .has .described .as .the . “director’s .dilemma”: “Executive .management . must .be .left .free .to .run .the . company .uninhibited .by .ex - cessive .interference .by .the . board. .The .issue, .of .course, .is . what .is .excessive .interference? . I .find .that .most .conscientious .directors . are .overly .shy .about .being .perceived .as . rocking .the .boat. .This .leads .to .a .broader . question. .Can .directors .be .more .than .a . purely .reactive .force? .The .Catch-22 .is .that . the .reluctance .to .be .perceived .as .interfer - ing .makes .for .passive .rather .than .active . board .participants. .The .importance .of . not .engaging .or .interfering .in .short-term . management .frequently .causes .directors . to .abdicate .their .responsibility .for .long- 64 directors & boards endnote The director’s dilemma It is hard to know when simply raising questions, and eyebrows, has become insufficient. By William G. Bowen William G. Bowen (pictured during his presidency of Princeton): “I remember well how much I benefited from hav- ing to respond to pointed questions from independent-minded trustees such as Michael Blumenthal and Paul Volcker.” Pr In Ceton Un IVers Ity William G. Bowen served as president of the Andrew W. Mellon Foundation from 1988-2006 and president of Princeton University from 1972-1988, where he also was Professor of econom - ics and Public Affairs. He serves on the boards of Merck & Co. and tIAA-CreF and is a former director of American express Co. this article is excerpted from his new book, The Board Book: An Insider’s Guide for Directors and Trustees, copyright 2008 by William G. Bowen. reprint- ed with permission of the publisher, W.W. norton & Co. Inc. (www.wwnorton.com). Continued on page 63 second Quarter 2008 63 endnote Advertiser index APCO Worldwide www.apcoworldwide.com . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .page 21 Daylight Forensic & Advisory LLC www.daylightforensic.com . . . . . . . . . . . . . . . . . . . . . . . . . . . . .page 15 The Dilenschneider Group Inc. www.thedilenschneidergroup.com. . . . . . . . . . . . . . . . . . .page 17 Dolmat Connell & Partners www.dolmatconnell.com . . . . . . . . . . . . . . . . . . . . . . . . .back cover Drinker Biddle & Reath LLP www.drinkerbiddle.com.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .page 3 FTI Consulting www.fticonsulting.com. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .page 9 GDES www.gdes.org . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .page 7 Heidrick & Struggles www.heidrick.com . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .page 5 KPMG www.kpmg.com . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .page 11 Navigators Pro www.navg.com. . . . . . . . . . . . . . . . . . . . . . . . . . .inside back cover Semler Brossy Consulting Group LLC www.semlerbrossy.com. . . . . . . . . . . . . . . .inside front cover term .direction. .The .‘director’s .dilemma’ . is .a .difficult .one; .I .suspect .you .may .have . felt .it .acutely .at .times.” Another .commentator, .who .exceeds . any .normal .standard .of .conscientious - ness .and .courage, .is .David .Culver, .chair - man .of .CAI .Capital .Corp., .retired .chair - man .of .Alcan .Aluminum, .and .a .former . colleague .of .mine .on .the .American .Ex - press .board. .Culver .starts .from .what .he . calls, .“General .Doriot’s .definition .of .an . organization .as .a .group .of .individuals . helping .one .person .do .a .job.” .In .his .view, . directors .are .there .to .help .the .CEO .do . a .most .difficult .job, .and .therein .lies .the . problem. .Culver .observes: “There .is .no .problem .as .long .as .the . organization .is .‘on .a .roll.’ .But .then .along . comes .the .day .when .the .CEO, .barely .dis - guising .his .adrenalin, .proposes .a .big .bold . move. .He .has .done .his .best .to .keep .his . board .informed. .He .has .made .it .abun - dantly .clear .to .the .other .party .— .and . to .his .staff .— .that .the .matter .is .subject . to .board .approval, .etc., .etc. .As .a .direc - tor, .you . don’t . like .it. .It . doesn’t . feel .right. . However, .it .is .a .fast-moving .world, .and . if .I .say, .“No .way,” .I .am .pulling .the .rug . out .from .under .the .feet .of .the .person .I . am . trying . to .help . ‘do .a .job.’ .Thus . the .di - rector .finds .himself .making .comments . about .the .proposed .deal .— .knowing . that . it .is . too . late . to .stop . it .from . happen - ing .(the .other .80 .percent .of .the .board . is .not .going .to .do .any thing!) .— .and . yet .hoping .to .have .an .influence .on .the . CEO’s . next .idea, .not . knowing . what .that . next .idea .could .possibly .be! .It’s .the .es - sence .of .indirect .influence .— .not .easy . to .do, .and .not .much .fun.” This .kind .of .thing .can .go .on .only .so . long. .Eventually .the .conscientious .direc - tor .has .to .overrule .General .Doriot .and . conclude .that .new .leadership .is .manda - tory. It .is .hard .to .know .when .simply .raising . questions, .and .eyebrows, .has .become .in - sufficient. .Culver .is .right .that .being .ef - fective, .without . prematurely . pulling .the . rug .out, .requires .artistry .of .a .high .order. . Realistically, .all .that .we .can .hope .to .ac - complish .in .building .boards .is .to .in - crease . the .chances . that .such . artistry . will . be .present .and .exercised. .In .addition .to . electing .wise .individuals .who .will .have . the .will .to .act, .boards .need .to .create .a . climate, .and .set .up .structures, .that .will . facilitate . rather .than .inhibit . courageous . decision .making. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ■ Director’s dilemma Continued from page 64 reprints from directors & Boards A reprint or licensed .pdf file is a professional way to educate your board or your customers on a key corporate governance issue. Call Barbara Wenger at 215-405-6072 or email bwenger@directorsandboards.com.
 


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