The 21st Century Corporate Board
Mr. Ward’s enthusiastic style, pervasive sense of humour, and extensive research engage the reader in a subject that at the hands of a lesser writer could become mind numbing.
To ease into the subject, the problems and near death experiences at G.M. in 1984, and again in 1991, are used as a case history and blueprint that traces the evolution of the corporate board role in large U.S. corporations.
The author writes that the modern era of corporate governance came into its own in the years after 1945 even if the board remained a subsidiary of management, with inside directors constituting a majority on board memberships until the 1970s. These were the boom years when corporations flourished and a corporate board that served as a thin buffer between quiet shareholders and the managers who ran the show was not considered inappropriate to the times. Board service had symbolic status, token compensation, and women or minorities were seldom included.
Ward states that all this changed with the inflation, stagflation, and mounting U.S. trade deficit of the 1970s. There was a cynicism with most major institutions that also extended to business which was considered to have been “asleep at the switch while the Japanese ate our lunch.” He states that by the 1980s corporate boards found themselves ripe for restructuring as investigations into a few spectacular failures and near failures highlighted board deficiencies. A trend toward greater legal responsibility for directors emerged, as boards were being sued for neglecting their duty of care; such as failing to ask questions of management, not keeping shareholders informed, and letting the stock price crash; and for laxity in due diligence.
During this same period some women and minorities were being named to board seats: by 1982, 23% of major corporations had at least one minority board member, and 27% had female directors. These were unlikely yes-men/women and therefore had an impact on board agendas and focus. As well, by the early 1980s, 60% of the Fortune 1000 board directors were outsiders.
The author contends that the final spur for outside directors as a majority of board members was the rise of committees, initially the audit committee, pushed by the SEC, AICPA, NYSE, and investor groups because of the scandals of the 1970s. Nominating committees were recommended by the SEC as the best way to improve the talent and independence of board directors, and by the beginning of the 1980s corporations were having to explain to shareholders what they were doing to select better directors. Compensation committees came about internally; initially as a way to legitimize CEO compensation packages, then as an attempt to tie compensation to performance.
The structures for boardroom reform were starting to take shape by the time the Reagan years put things on hold, until the raiders showed up, and over ten thousand ownership transactions took place in the U.S. in the years 1982 to 1988. This was when boards had to decide in a hurry where the real shareholder interests lay, and many of the big 1980s buyouts left directors compromised by acting as if their first concern was maintaining the current management team, as well as maintaining their own board status.
The author selects two 1985 precedent setting Delaware Supreme Court decisions as examples of how the modern board’s role was being interpreted by the courts: In Smith v. Van Gorkom a shareholder group had sued, alleging damages from an inadequate sale price and inadequate care by the directors, the essence of the ruling being that the final outcome of the board’s decision was not the issue but that the board’s decision process was. In the second case, of Boone Pickens’ attempt to take over Unocal with a two-tiered offer, the court held that the board must thoroughly and objectively examine the bid when it judges whether it will really harm the shareholders’ long-term interests and if it does judge the bid harmful, the board is to oppose it. The board must then prove that its takeover precautions are reasonable. This was something of a watershed as in the cases cited the board was sued because it did something, whereas previously suits resulted because it didn’t do something. Ward notes that the takeover decade and its liability fallout had shown boards that their decision making processes must be lined up in a row and active, and that the board must be able to show independent judgment.
The author looks at the attempts of the huge institutional funds to influence corporations (particularly for short-term gain to their funds), noting that by 1990 the holdings of institutional investors in the 1,000 largest corporations approached 50%, and pension funds alone owned almost one-third of the market. They may be big owners, but he questions whether they are the real owners.
The issues of remuneration of the board; director stock ownership; board recruitment; director training; board committees; are all examined in the context of and in response to federal and state legislation.
Boards are not the cozy enclaves they used to be.
Boards are getting tough with CEOs these days.
Boards face much greater pressure from the public, the government, and shareholders.
Boards are asking tough questions and demanding answers of management.The good news, he states, is that most of the turmoil coincided with economic slowdown, whereas the current quiet process of board change is occurring during a time of economic growth, signifying that it is for real. Ward sees as signs of greater board professionalism the growth in shareholder value, good supervision, and active involvement with management to get results. And he draws attention to the changes in board composition in a 1995 survey that revealed 2% of directors were blacks, and 7% were female (10% by 1996); inside directors had declined from 38% in 1973 to 25% in 1995, and the average board size has declined to 12.
Ward sees an urgent need for boards to have one or more of its directors with expertise in the following areas:
Telecommunications and technology: because all companies are becoming high-tech.
Marketing: particularly in directions where the company plans to go.
International markets: because the world is going global.
Top-level finance: the next derivatives panics should not catch them napping.
Restructuring: it has cured nothing in most cases and needs to be done right.
Entrepreneurial skills: if corporations really want to become nimble, creative, and fast thinking.
Service industries: to match the economy’s shift from traditional manufacturing fields to the service sector.
This book will appeal to CEOs and all those interested in the workings of management boards because of its down-to-earth and creative approaches to the current and emerging issues facing major corporations in the U.S., and beyond.
Ralph Ward offers the first comprehensive look at how corporate boards have evolved in the 1990’s from a legal nicety to become the single strongest force reshaping 21st Century corporate America. Lively, irreverent, authoritative, The 21st Century Corporate Board is destined to become the standard text on the future role of corporate boards.
The 21st Century Corporate Board, by Ralph D. Ward, John Wiley & Sons, Inc., New York.
More articles in Corporate Boards in The CEO Refresher Archives