A friend who serves on the boards of a few large public companies recently told me about a frustrating boardroom debate in which one of his colleagues said “if we approve this, it may be good for the company but you can bet ISS will tell our shareholders to withhold votes.”
Shortly after this conversation I read an article describing “Six Ways to Tell if You Have a Bad Board.” According to Roger Martin, dean of the University of Toronto’s B-school, here are the tell-tale signs:
- They complain about how hard Sarbanes-Oxley has made it to be a director. (Hasn’t it gotten harder for auditors, regulators, analysts and investors?)
- They complain about how the fees for being a director aren’t high enough to compensate for the onerous work involved.
- They’re paid in the top third of peer boards.
- They’re excessively proud of being on the board. (Prestige isn’t an incentive for effectiveness.)
- They’re enamored of the enjoyable social atmosphere of the board. (Ditto.)
- They’re enthusiastic about the personal growth opportunities the board provides. (Ditto again.)
My friend told me his story in the context of his growing concern about weak directors damaging boards. Roger Martin’s signs of a bad board are actually signs that it has bad directors.
Each board has its own culture which, like any organization’s, is key to its effectiveness. In some cases that culture is clearly breaking down. An attitude like that of the director my friend quoted or one who fits Martin’s list is corrosive to a culture – and also doesn’t serve the interests of the company, its shareholders or anyone else. Kirkland and Ellis Partner James Sprayregen believes that board culture is a driver of company performance. According to him, bad board culture can lead to a long process of decline caused by non-feasance (as opposed to malfeasance) or by failure to address problems because the corrective action required is unpleasant.
The ramp up in regulations directors have faced in recent years can’t solve the cultural problem (which it exacerbated) because you can’t regulate culture. That’s the work of the chairman and the directors themselves.