Profiles in Director Courage

Bank Director suggested that since I am on several corporate boards, I would be well placed to use my experience to relate some examples of corporate directors carrying out their duties courageously.

I must admit if I were to write a book titled, Profiles in Corporate Directors’ Courage, it would be a very, very thin volume. Historically, examples of great courageous corporate leadership have been hard to find. Not because directors are cowards by nature, but because the system rewards “devout cowardice.”

Two reasons for this come to mind. First, used to be, the “good-old-boy” network was alive and well. Directors were not inclined to find fault with their friends’ performance, no matter how bad it was. With issues like executive compensation, for instance, I can’t remember one board memberu00e2u20ac”including yours trulyu00e2u20ac”that made any waves. (Though I must say, for the boards on which I served, executive compensation was generally lower than average.)

A second reason for passivity was this: The CEO generally controlled the nomination of directors; thus directors who “caused trouble” found themselves off the board at the next annual meeting. In reality, an actual firing usually wasn’t necessaryu00e2u20ac”the threat of dismissal was enough to get the job done.

Bank directors, however, have had more courage than most. In banking, the directors have always had regulators looking over their performance and backing them up during examinations. For example, I remember the first bank board on which I served when I was a business school dean. At the initial meeting, one of the directors criticized management for the type of real estate lending that the bank was approving. The director not only voted against approving the loans, but further stated that if significant policy changes weren’t made, new management would be needed. I must say, I was shocked to hear this kind of talk from a fellow director! Only later did I realize that, in part, the speech was for another audienceu00e2u20ac”the regulators. But the bottom line was that this director’s leadership gave courage to other board members. The result was that the bank’s policy was changed (and just in time, as the real estate market took a dive shortly thereafter).

The plaintiffs’ bar has often been cited as a force for pushing directors to take more courageous stands. My experience has been that most directors have feared the plaintiffs’ bar only when they are afraid fraud exists, but not in matters of business judgment, or on things such as excessive management perks.

I suppose if a book on directors’ courage is written in the post Sarbanes-Oxley age, there will be many more examples of directors moving aggressively to correct what they believe to be management errors or overreaching. Like the bank regulators, Sarbanes-Oxley has empowered directors to act more independently of management. Certainly it has made all directors more alert to their responsibility to protect the shareholders’ interests.

Are directors today acting more courageously than in the past? Yesu00e2u20ac”but only because the system has changed.

Independent directorsu00e2u20ac”not the CEOu00e2u20ac”now control who is elected to the board, and the audit committee has been given much greater authority, and responsibility, over sensitive accounting issues. But as I’ve said before, the real test of whether courage is the new norm will be whether directors will be able to restrict and control the level of top executives’ compensation (which exploded in the 90s). Keep an eye on that one to evaluate how courageous today’s directors have really become.

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