Anyone who has spent time in the boardroom recognizes that the description “potted plants” has little to do with horticulture. The media calls these ‘rubber stamp’ boards, and Google shows nearly 30 million results for this term. It’s a big problem, but not what you may be thinking.
Governance gurus believe complacent boards are the status quo. They trot out ex post facto accusations to blame directors for crises, even the unpredictable nature. The result is twofold: it provokes cynicism among business journalists who write for public consumption, but it also breeds mistrustfulness into the board/management relationship.
Unfortunately, society hears a dog whistle that every wrong turn or hiccup is a sign the C-Suite is out of control. The Enron debacle of 2001 activated a virulent strain of more intrusive corporate governance and, after the unanimous passage of the Sarbanes-Oxley Act of 2002 (SOX), there was no one willing to fight against the tide of increased regulation. Less than six years later, the collapse of Lehman Brothers led to the conclusion that SOX wasn’t enough, and the government prescribed Dodd-Frank, an overwrought 1,000 pages of regulation. Lost on the voting public was the fact that the Lehman board was not guilty. The reason the company fell into bankruptcy was government negligence, according to records analyzed by Lawrence Ball, chair of the Johns Hopkins Economics department, and author of The Fed and Lehman Brothers. Ball states: “the Fed could have rescued Lehman but chose not to because of political pressures.” And so it collapsed, bringing world financial markets down with it.
A higher than ‘good for us’ level of intrusion is going to be around for the foreseeable future. But the question remains, how much and when? Should board directors start meeting with rank-and-file employees to see if the CEO is popular? Or call up shareholder activists to make sure the company’s strategy is on target? It would be helpful to have some “big data” on how effective these measures are so that directors have a bright line they can follow.
After examining the facts, as inferior as a rubber stamp mentality may be, it is not nearly as detrimental as a board that sees itself as a counterweight to management by taking a regulatory mindset. The result of that will be stifling innovation and turning the CEO into a compliance-driven machine.
We do have a modern case study.
Throughout its history, GE set the Ivy League standard for board directors. Even today, its board includes such luminaries as the former CEOs of American Airlines, Loews, ConocoPhillips, and the FDIC. Each of the directors knows GE’s business nearly as well as their own. For most of GE’s history, they didn’t intrude in the affairs of management. According to the Wall Street Journal, the quote that inspired a change in personality was when a new director asked, “What is the role of a GE board member?” An older director volunteered: “Applause.”
He may as well have said, “Potted plant.”
After Enron and Lehman, boards began second-guessing management on strategic issues, and GE was no exception. The timing turned out to be dreadful. Former JPMorgan CEO Sandy Warner was enamored with a GE executive. But the current CEO, Jeff Immelt, felt he wasn’t ready to be his successor. So Warner instigated a move to jumpstart the succession. In the ensuing battle, management became distracted, and ultimately, Immelt resigned. During two subsequent succession plans, Warner’s fair-haired boy was not offered the job by the GE board, even with Immelt out of the way, nor did he move onto another CEO role somewhere else. It turned out, Immelt knew who was ready to be a boss better than the board.
GE’s market value decline during this period was over $500 billion, more than the combined losses from “potted plant” boards: Enron in 2001 ($65 billion), WorldCom 2002 ($103 billion) and GM 2009 ($91 billion). Board intrusion into management’s domain may make satisfy governance gurus, but it isn’t so good for the shareholder.