Why Corporate Boards Are Mostly Useless

Now that Merrill Lynch is in trouble, having written down $8bn plus and fired President E. Stanley O'Neal at a cost of $150 million more, questions are being asked about what the Board should have known and done.

The easy, and right, answer is: Not much. No one outside the daily operations of a complex firm actually knows what's going on unless he or she has spies on the inside. This, of course, would be great fun for the spies and the Board member, but a disaster for the company.

What's a mere Board member to do? In an era of imperial CEOs who get paid a king's ransom (never has this term been more apt), a Board member is closer to a court hanger-on than a Metternich or Rasputin.

Try to imagine as Merrill Lynch was having its great run one of its Board members starting a ruckus about risk, about sub-prime loans and the ethically questionable tactics used to sell such loans. This astute Board member would have had to go up against a CEO with piles and piles of data determined to show that he was right and the Board member simply a well-intentioned bumpkin. We can even imagine the CEO in a moment of false modesty offering to resign if the Board voted against him, taking his $150 million in exit fees with him.

I have, personally, watched two Boards self-destruct as they fought over the company's strategy and drove the CEO first nuts and, then, out of the company. In both cases, the Board successfully demonstrated that its greatest power is to destroy value and tear a company apart.

I have also seen Boards in which there is debate, though the conclusion is nearly always pre-ordaiined. When I was but 21 years old and personal assistant to a CEO, he taught me how a CEO sets up a Board meeting, gets his people "on board", and assures that his agenda is the company's agenda.

In sum, a CEO who has the Board behind him has no guarantee of success, but a CEO with a divided Board sabotaging him has no chance of success. When a Board appoints a CEO it ought to be because it trusts him: In the best of all possible worlds, the Board may advise and find that from time to time its advice is accepted. The Board can never lead. This every serious writer on management, starting with Chester Barnard, has known. I am afraid that in most companies the Board has two standard activities. Firstly, the "Independent" Board members run the compensation committee and help legitimate the outrageous salaries CEOs get. Secondly, the Board scrutinzes the firm's charitable foundation. Boards, it would seem, don't do very much.

And yet, Boards are indepensible. In a case like Merrill Lynch, the Board's responsibility is to fire the CEO when things go bad and hire a new one. That is it. Of course, then the Board members could take the next big step. If they truly believed in the role of Boards they would resign, shamed to have been part of such a humongous failure. Of course, the Board of Merrill Lynch did not resign, confirming to themselves and to the rest of the world that they had nothing to do with what happened and that the Merill Lynch Board, like most Boards, was mostly, most of the time, useless.

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Comments

[Manuel Rincon]

David,
You made me laugh with this post! It is so real and so true... Congratulations for your obstinacy and stubbornness to write freely your blog.
Manuel.