I first published the term “prudential judgment” in Directors & Boards in 1987. And I have not used the term in the journal since. Until now.
On page 59 you will find a piece titled, “The Exercise of Prudential Judgment.” Let me give you the backstory to this. This new article is an In Memoriam tribute to Rev. Theodore Hesburgh, the legendary former president of the University of Notre Dame, who died earlier this year. At the risk of repeating what I say in the introduction to the article, it is a reprise of that 1987 article in which “prudential judgment” made its first appearance in our pages.
In the original article, Father Ted talked about his experience as a board member of Chase Manhattan Corp. He reflected on the occasions when big questions — with a moral dimension — would come before the board, and how Chase Bank Chairman David Rockefeller would turn to the board and say, “We've got somebody here who does this for a living, so let's see what Father Ted has to say.” And what would Father Ted say? “My basic principle,” he stated in his article, “is that you don't make decisions because they are easy, you don't make them because they're cheap, you don't make them because they're popular; you make them because they are right. Not distinguishing between rightness and wrongness is where administrations get into trouble.” Doing that, according to Father Ted, is “exercising what's called prudential judgment.”
When all is said and done, isn't that what being a board member comes down to — the exercise of prudential judgment?
But there is more to the “prudential” story. As I mentioned at the top of this column, not only have I not used the term since 1987 but I have not even seen the term used in any of the corporate governance material that has come across my desk in the intervening decades — until just a few weeks ago.
In April of this year we conducted the latest in a series of roundtable discussions that Directors & Boards hosts with Debevoise & Plimpton. Our law firm colleagues chose as the theme of this discussion, “Director Excellence and Guarding Against Legal and Prudential Risk.”
Well, there it was again — the long-dormant term. Such serendipitous use of “prudential” crystalized for me that something is happening here. It is time to bring forward into the governance lexicon a little-used term to describe the essential ingredient of a board member —prudential judgment.
In the following pages you will find articles on such topics as the oversight of technology, sustainability, CEO development, talent management and strategy, board leadership, director recruitment . . . and even how to determine the adequacy of your D&O insurance coverage. Important matters, for sure, and worthy of our close coverage. But it does not take much of a mental leap to realize that in these and other issues that come before the board, what happens next is what Father Ted identified: It is up to the board members to do the right thing — for the enterprise, for the management, for the shareholders and stakeholders . . . and, ultimately, for themselves. Corporate governance, done right, is the power and the exercise of prudential judgment.