These Blurred Lines:
Whether it's a partnership, joint venture, or any business enterprise, one thing seems clear: people work better together when they have clear, defined responsibilities and roles. This seems especially true in corporations: executives in finance, administration, legal, operations, IT, etc., don't generally cross roles. In fact, per accounting and auditing standards, segregation of duties is a key management control and bulwark against fraud and inefficiencies. So the more I think about it, the more puzzled I become about why there is so much acceptance, and so little debate, over some of the "blurred lines" typical of American boards and governance today. These three "generally accepted" practices bother me most.
The first practice is boards combining CEO/Chairman duties. Let's see: The Chairman is supposed to lead and oversee various board functions including acting as a nexus between the CEO and board members, while also mentoring and advising the CEO. On the other side, the CEO leads and manages the business. Seems fairly clear cut, dry, and logical. So much so that numerous overseas stock exchanges and countries have mandated these duties be vested in separate people. However, here in the U.S. many companies combine the jobs. Combining (that is, blurring) roles is not only acceptable for many, it is vigorously rationalized. The biggest argument in favor of combination is that there is no compelling evidence of an economic benefit from separating the roles. Of course, this same argument could bolster the idea that, if it's all the same, why NOT separate them? Always thought this was a rather weak argument. Then again, if you 're a sitting CEO/Chairman, you may likely back any justification to keep this rather convenient arrangement. At this point, I'm glad to see that the debate among investors and regulators on this practice is far from over.
The second is the board member/CEO role. Directors provide oversight and guidance to Management, while Management run the business in accordance with board-driven policies for the best interests of stakeholders. Directors shouldn't manage companies (we hear this all the time), and it seems to be overwhelmingly accepted. However, it's different if you're the CEO - where, in the corporate world, you are not just the top manager, you also sit on the board, and participate essentially as an equal. These "blurred" roles raise questions both as to how effectively board members can supervise a CEO and how well they can evaluate a "peer." There is also concern over too much CEO influence on board decisions and other conflicts of interest. Of course, others argue that a non-board member CEO has less authority, standing, and credibility with the board, organization, and outsiders, and that the position becomes less attractive to higher caliber candidates. In some ways these last arguments actually support keeping a CEO off the board. I'm willing to bet that most CEOs, if mandated to choose, would prefer being CEO over being a board member (unless close to retirement). While this is the overwhelmingly prevalent practice in the corporate world, it is not the norm with other organizations, such as non-profits and trusts.
The third conundrum is equity pay and independence. For public company boards, the SEC and listing agencies mandate that a number of directors on the board be independent." However, they define independence differently from trending definitions. Look up "independent directors” on Wikipedia which states: independent directors do not own stock in the company. Interesting? Once again, common practice is to compensate directors with stock, often through grants, or by encouraging set ownership goals. This is seen by many as important to “align directors with shareholders’ interests.” Of course, what is not said is that shareholders have varied, often divergent, interests. In addition, I’m convinced that shareholders generally are far more interested in how their investments in a company advance their personal short or long term wealth, than in the welfare of the company. Isn’t the responsibility of the director to ensure the long-term health of the company, first and above one’s personal interests? Many shareholders would be perfectly happy to see a company taken apart, if it nets them more than holding onto the stock for a few years. Is that what we want directors to align to? As for forcing a long-term interest, that may be valid, but when a director can vest “restricted” stock, how tempting does it become to approve processes that can quickly manipulate share prices? (Say, a stock buyback?). Again, a blurring of roles appears to occur when you make a director into a shareholder – sometimes becoming one with substantial investment, and personal self-interest, in the company. I’ve also heard it justified that equity ownership gives directors “skin in the game.” Granted, this is just a saying, but nonetheless, sort of trivializes one’s responsibilities, don’t you think?
I’m sure many will dismiss all this as naïve or out-of- touch with today’s business world and the state of governance as it now exists. After all, things aren’t black and white, but shades of grey; no one rule should fit all; all companies and boards are different; there’s no evidence performance is impacted on; yada, yada, yada.
Just because things are being done the way they are, doesn’t mean they can’t be done better. Maybe changes should be instituted, or maybe these are all merely distractions not worth the effort and “risk” to try. That’s where vigorous debate and bold experimentation come in to play.
Unfortunately governance wonks and pundits may occasionally bring forward the CEO/Chair combination as an issue, especial- ly if it plays into some juicy corporate abuse or fraud story. But, the ideas about CEOs as board members, and moving away from equity pay do not get much, if any, coverage or support. In fact, these practices are so pervasive in the corporate world that vigorous debate does not appear to be anywhere on the horizon. That’s a shame. Blurriness seems to be OK for many otherwise highly intelligent and analytically astute business professionals. As for me, blurred lines give me headaches. Where are my glasses?
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