Very little is really known by most managers and investors about how Boards of Directors operate. There is knowledge that Boards are the investor representatives, and that they have some legal authority to oversee management. But what a Board actually does, and how it operates, is largely unknown by the vast majority of us. But, every once in a while a glimpse is offered – usually through a lawsuit.
And that has been true of the Board at Hollinger International (now called the Sun Times Group). The Chairman/CEO and his CFO were sued for creating self-dealing agreements that looted the company of money, at shareholder expense. The suit took years to get to trial in Chicago, but now it is up (see article here). And testimony has been revealing about just how little a Board of Directors actully oversees management. Caught in the crossfire has been the former very popular governor of Illinois, Jim Thompson, who was on the Hollinger Board and chairman of its audit committee.
Testimony in this case, as in Tyco, Enron and WorldCom, has revealed that Boards are one of the more Locked-in work groups in business. Often, the Chairman invites people onto the Board not because they bring particular insight to the most critical issues of the company – but rather as a personal relationship or based upon fame. And rarely are Board members given all the information in the company. Rather, it is a management selected subset intended to aid the Chairman and CEO in achieving agreement to their desires. As a result, members, such as Governor Thompson, end up with lofty titles and responsibilities but little more than a rubber stamp to use in wielding their power. As a result, when the wrong things are happening the Board members, such as Governor Thompson, don’t ask sufficient questions, don’t know enough about what is happening, and agree to management actions which are unethical – and in Hollinger’s case – illegal. The bad news is that investors suffer. And, as in Governor Thompson’s case, a huge credibility loss for the Board member with a possible loss of his legal license and the balance of his career.
Congress passed the Sarbanes-Oxley act in an effort to Disrupt these Board work groups. The goal was, and remains, to change what happens on Boards, and between Boards and management, in order to improve the oversight given by Boards. Of course, management has had a thunderous negative reaction. Television programs, such as on the business channel CNBC, bring on executive after executive complaining that the effort and cost to implement SarbOx (as it is nicknamed) are hurting their business. Some even complain that SarbOx is driving them to delist as a public company and consider going private.
These complaints are not really about the cost of SarbOx. Rather, they are complaints about changing the Success Formula of Boards of Directors – something that the majority of CEOs do not want. There is no doubt that the SarbOx Disruption is good for holding Directors accountable to investors. As a result, SarbOx has resulted in more and better transparency into business finances and decisions. It has not hampered competitiveness, and the argument can well be made that competitiveness has improved due to better Board involvement.
Just as companies become Locked-in, so do work groups. Boards are no exceptions. Locked-in groups do not find it easy, or often desirable, to change. Yet, new Success Formulas for groups can lead to far better performance. And that is true for corporate Boards. New Success Formulas for work groups, as for companies, require Disruptions. And that is the role of SarbOx. Once more Chairmen and CEOs take these Disruptions to heart, and begin opening up White Space for their Boards to develop a new Success Formula, we will have far more valuable and productive Boards – leading to more valuable and productive management teams – and eventually more effective companies.