CEO: Here Come the Directors
Board members are becoming more plugged in to the companies they
serve. It makes for better oversight -- and potentially strained
relations with management.
By Kaja Whitehouse
The Wall Street Journal
Monday, October 9, 2006
The boardroom walls are coming down.
By tradition, outside corporate directors long stayed away from
the nuts and bolts of the companies they served. Almost
everything they knew about the business came from management,
and they rarely went into the trenches to talk to investors or
employees. Many were passive in the face of strong CEOs -- who
saw the board as a rubber stamp.
Now the old way of doing business is beginning to crumble.
Directors are mingling with employees to get the lowdown on
simmering problems. They're opening channels of communication
with investors to hear their complaints. They're hiring their
own advisers to double-check management's decisions. And
they're even taking over responsibilities that once belonged to
the CEO -- such as nominating new board members.
"Directors are a lot closer to internal controls than they've
ever been," says Paul Lapides, co-founder and director of
Kennesaw State University's Corporate Governance Center in
Kennesaw, Ga. "A good number of directors are waking up to the
fact that asking tough questions" about a company is difficult
if management filters all the information.
To some extent, boards have little choice in becoming more
aggressive. New rules and regulations guiding director duties
are forcing major changes. The Sarbanes-Oxley Act of 2002, for
instance, requires corporate boards to establish nominating
committees made up entirely of independent directors.
But directors also seem to be embracing the new level of
responsibility. Today's higher standards are allowing some
directors to enforce practices they've long supported but had
little power to implement.
Most governance experts applaud these developments as a way to
create more-effective checks and balances. But they warn that
boards shouldn't overstep their bounds and try to make company
"A board's responsibility is oversight, not management," says
Allan J. Reich, a corporate lawyer with the law firm Seyfarth
Shaw in Chicago and a board member of mutual-fund company
Oakmark Funds. "Today, what you see is boards coming right up
to the line" between management and oversight. This is good,
"as long as they don't cross the line," he adds.
GOING THEIR OWN WAY
The percentage of surveyed directors saying their board has
• 75% - An
independent director who provides leadership to the board (e.g.,
lead director, presiding director)
• 61% -
Separate staff or consultants for the board
• 51% - A
requirement that outside directors visit company operations
during the year
• 30% - A
nonexecutive chairman or chairwoman who is not a present or
former employee of the company
Sources: Center for
Effective Organizations, Marshall School of Business, University
of Southern California; Heidrick & Struggles
Here's a look at some of the ways directors are moving beyond
the boardroom -- and the impact that's having on their
relationship with management.
TALKING TO SHAREHOLDERS
In the past, directors had minimal contact with shareholders,
even big ones. Management was the official voice of the
company, and rarely gave investors a way to contact board
members other than through the chairman and CEO. Warren L.
Batts, an adjunct professor of management at the University of
Chicago, recalls serving on the board of one public company
where shareholders resorted to getting in touch with directors
by looking up their home numbers in the phone book.
Yet hearing views outside of management is an integral part of
being a good director, says Charles Elson, head of the
University of Delaware business school's John L. Weinberg Center
for Corporate Governance. He also serves on three
"What if politicians said, 'I don't talk to the voters'?" Mr.
Elson asks. Among other things, lack of contact means directors
are insulated from outside complaints -- and investors have no
access to the only people who can challenge management's
decisions and hold executives accountable.
Now, the situation is beginning to change. In 2003, the New
York Stock Exchange began requiring listed companies to tell
"interested parties" how they can reach nonmanagement
directors. Mostly, this amounts to simple measures such as
posting contact information for a corporate secretary in public
filings and on Web sites. The corporate secretary monitors the
letters received and decides what should be forwarded to the
Even at this stage, though, there are some significant signs of
progress. If correspondents make enough noise, or represent a
big enough block of shares, some directors will accommodate
them. The AFL-CIO, for example, recently secured a meeting with
Home Depot Inc. director Bonnie Hill, who heads the board's
compensation committee, to discuss a controversy over
stock-option grants to company executives. Funds affiliated
with the union hold more than 6.4 million shares of Home Depot
After some correspondence between the AFL-CIO and Home Depot's
corporate secretary, Ms. Hill agreed to meet with the union in
early September. Daniel Pedrotty, a counsel with the union,
won't disclose the outcome of the meeting, but says it was
Still, he says, union officials would have preferred to meet Ms.
Hill without management representatives in the room. These
kinds of discussions would probably be a lot franker -- between
both parties -- without management listening in, Mr. Pedrotty
But many directors, including Ms. Hill, feel it's necessary to
have management representation during these meetings so that
their comments aren't misconstrued by shareholders. Moreover,
says Mr. Elson, the last thing a director wants is to be seen as
sharing information with select investors; a corporate
secretary or general counsel can make sure the director doesn't
disclose any critical information inadvertently.
Besides, Ms. Hill says she didn't feel inhibited by the presence
of management. "Anyone who knows me knows that that is just not
the case," she says. "I say precisely what I think and what I
LISTENING TO EMPLOYEES
It isn't just investors who are getting more access to
directors. Employees are, too. Increasingly, directors are
trying to get a closer look at the companies they serve by
talking to rank-and-file workers. The board might make site
visits to a company's plants or stores, for example, or meet
with teams of workers one-on-one, without any hand-holding from
the CEO or another top executive.
These days, directors won't join a board if they don't have open
access to employees, especially those who work directly for top
management, says Steve Mader, a vice chairman of
executive-search firm Christian & Timbers in Boston. "They want
to know they can pick up the phone and call anybody they want to
without interference and objection," he says.
This helps directors not only get a better grasp of the
company's operations but also pick up on any problems in the
company. Mr. Mader recalls a situation where the board of an $8
billion electronics company he counseled discovered a big
behind-the-scenes conflict by talking to employees.
The board had put a new CEO in place a few months earlier, and
thought it wise for the exiting CEO to remain as chairman. But
as the directors spent time with the executive-team members,
they learned something troubling: The former CEO and sitting
CEO were engaged in a power struggle.
Some of the new CEO's staff sided with the former CEO. The
directors learned of the staff's distrust for the new boss's
leadership and vision during talks about regular business
matters. Directors ended up removing both executives, Mr. Mader
says. Without regular and unfiltered access to employees, he
adds, the problem may have taken a lot longer to discover.
NO MORE RUBBER STAMP
In the old days, directors might approve a business plan within
hours of hearing it. They saw themselves as sounding boards,
not overseers -- which often amounted to rubber-stamping
management's proposals after a few routine questions.
Now directors are becoming more-aggressive watchdogs. They're
being more forward about questioning management's proposals, and
following up on those plans to see how they're progressing.
One of Mr. Reich's corporate clients recently presented a
significant business proposal to the board. Once the directors
finally approved the project, they didn't just let it drop.
Instead, they took steps to keep on top of it. The first move:
The nonexecutive chairman made plans to attend a meeting of the
project team so he could see how the initiative was developing.
"Five years ago, it's unlikely you would find a member of the
board attending a meeting of this nature," says Mr. Reich.
Boards are even bringing in outside consultants to help them
digest complex business plans -- and, in some cases, amend
them. Janet M. Clarke, a director of some well-known companies,
including computer maker Gateway Inc., says directors have
little choice, given the increased liability they face if they
neglect their fiduciary duty.
"At the end of the day, the buck is stopping with the board,"
says Ms. Clarke, who says she has brought in outside experts to
review management's plans.
Still, it's an area of some sensitivity, say directors and
corporate lawyers. Unless the board is very careful, managers
will think that they're being second-guessed or even that the
board doesn't trust them.
Gordon S. Kaiser Jr., a corporate lawyer with Squire Sanders &
Dempsey in Cleveland, has seen the tensions this new practice
can cause. In one instance, top management of a company he
advises went to the board with a proposal for executive
bonuses. The directors sent it back and hired their own pay
consultants to help them restructure it, says Mr. Kaiser. Among
other things, the board wasn't sure the incentives in the plan
were rewarding the right kind of performance.
The result: "There was some sense that the board was
overstepping its lines," says Mr. Kaiser. "Management often
feels, 'If they really trust us, they shouldn't have to do
Indeed, board members have to be careful not to abuse their
access and step into management's shoes. With more board
members taking an active role, the line between governance and
management can seem fuzzier, consultants and some directors
say. Mr. Reich recalls a situation where a board member, who
had a lot of accounting knowledge, began questioning the CFO's
decisions with the CFO's staff and openly criticizing the CFO's
decisions. "The individual was using his knowledge or beliefs
to supplant the authority of the CFO," says Mr. Reich.
This can undermine the executives' credibility and disrupt their
ability to perform their job, says Mr. Batts. "Having been CEO
of four companies, I'll tell you, that's a hard job. You don't
need someone guiding your hand," he says.
There's also a cost issue if outside consultants get involved.
"When management has already gone through that [checking]
process, they see it as an unnecessary intrusion and an
unnecessary expense for the board to spend money to go through
the same process," says Mr. Kaiser.
TAKING BACK THE BOARD
Directors are asserting their independence in another crucial
way: taking control of the operations of the board itself.
In the past, directors were generally hand-picked by the CEO,
creating cozy relationships and potential conflicts of
interest. And CEOs, who often also were board chairmen,
generally dominated the board's proceedings -- from scheduling
meetings to showing up at every gathering, which hindered
independent directors from talking freely.
Today, regulators are forcing big changes in these areas.
Sarbanes-Oxley calls for independent nominating committees for
directors. And the Big Board now requires listed companies to
hold regular meetings without management, known as executive
There's a distinct link between the way a board is structured
and its ability to operate effectively, says Warren Neel, an
experienced director and executive director of the University of
Tennessee's Corporate Governance Center in Knoxville. When a
CEO "controls the boardroom, it's his attempt to control the
organization," he says.
Mr. Neel experienced this kind of power struggle many years ago
as a director. The CEO of the company refused to let the board
set the meeting agenda. "He wanted all the committees to meet
when he could meet," says Mr. Neel. If the board said it wanted
to hold an executive session, "he would either say no, or he
would arrange it such that you couldn't. You would be forced to
meet in front of him."
If the board pressed the issue, the CEO would act offended at
the notion that the board wanted to meet without him. "It was a
very pronounced struggle," says Mr. Neel.
With the new rules, "we have repositioned the fulcrum of power,"
he says. "The board can't simply give away its responsibility."
--Ms. Whitehouse is a
reporter for Dow Jones Newswires in Jersey City, N.J.
Write to Kaja Whitehouse at