Aubyn Hill
THERE ARE three kinds of corporate boards on which directors are called to serve. All are viewed through the owner-manager prism. The legal responsibility is the same in all three but the ability to effect change is quite different in each. Over the years Warren Buffet of Berkshire Hathaway has written extensively on each in his now famous extensive Chairman's Report to his shareholders.
COMPANIES THAT HAVE NO CONTROLLING SHAREHOLDER
This first type of company is the plain vanilla case that we are used to. It has a broad shareholding and no single shareholder has the controlling interest. Companies such as General Electric in the United States, Exxon or GraceKennedy in Jamaica fit the bill.
These kinds of companies' directors need to behave as if there is a single absentee shareholder. Probably the best example is found in the parable of the 10 talents told by Jesus in St. Matthew Chapter 25. Excellent directors are obliged to adopt the role of the two good investment managers to whom the Master gave five and two talents each, and who doubled his investments by the time he returned. It is useful to note that even in this ancient story investors took the long view (the owner-investor went away for a long time).
On the other hand, bad directors without integrity or independence can do great violence to shareholders' interests in a fashion similar to the investment manager that received one talent in Jesus' parable. Quite astonishingly, however, bad directors will still claim that they have done well for their shareholders and their company even when wealth has been destroyed.
Good directors on well-functioning boards that govern companies with wide shareholding have the clear responsibility to change a mediocre (or worse) management. Directors must also be alert to slap the hands of greedy or over-reaching managers, while ensuring that great managers are compensated well. When a director sees something in a company that he or she does not like, that director is obliged to speak up and try to persuade other directors. Successful persuasion will lead to appropriate change.
In those instances when a director fails to persuade his fellow directors, he or she should go directly to the shareholders. This hardly ever happens! Two behaviour patterns will tend to balance or limit this kind of dissenting activity in a company without a dominant shareholder. First, directors' natural mindset to conform and be 'collegial' in a board. After all, they are generally chosen because of this quality that they are perceived to possess. Second, complaining directors can expect a vigorous rebuttal from unpersuaded directors. These two behaviour patterns will serve to limit dissent based on trivia or non-rational causes. When reasonable and reasoned dissent fails, the dissenting director should resign. Obviously, each disagreement cannot be a reason for resignation, but on a crucial and important issue, or an issue of germane principle when a dissenting director fails to persuade his or her colleagues, it is obviously time for him or her to go.
CONTROLLING OWNER AS MANAGER
Warren Buffet uses himself and the case at his company - Berkshire Hathaway - as the best example of this case. In this second kind of board, the super tycoon owns a big business with other shareholders but has the controlling interest and runs the business himself. Unlike the first case, in this instance the board does not act as an agent between the owner and the managers. Directors should be totally aware that they can effect change only by persuasion and nothing else. When the owner-manager is mediocre or worse, or is over-reaching, directors can only object - and they better do so rather politely! Most times, Mr. Buffet says, such objections will have no effect on the owner-manager (tycoon) whatsoever. In effect, directors have to reconcile themselves to the hard fact they are little more than 'rubber stamps' on such a board.
On this kind or any other board, there will be times when directors, especially outside ones, may seek reasonable change. If such reasonable change is refused on sufficiently serious issues, outside directors should resign. Warren Buffet claims rather clearly that such resignations will signal doubts about management by the owner-manager and that no outsider can correct the owner-manager's shortcomings. Regrettably, this resignation approach rarely happens because directors love their fees, positions and the association they have with powerful and prominent individuals. This no-resignation approach is practised by directors on all three types of boards and companies discussed in this article.
CONTROLLING OWNER NOT INVOLVED IN MANAGEMENT
Well-known companies that fall under this third example include Hershey Foods, Dow Jones - the company that owns the Wall Street Journal and Warren Buffet's Berkshire Hathaway after his death. In this case outside directors are in a potentially very useful position to carry out their duties with effectiveness and speed. If the management of the company for which they are responsible lack the competence or have lost their integrity, board members can make decisions that lead to quick change. Directors can go to a single, presumably interested, owner to persuade for the case of change. In the case of Berkshire Hathaway, it would be the foundation controlled by Mr. Buffet's close family after his death. In this case, as with the others, if change is not effected on a critical matter, directors should resign.
The rubber-stamping syndrome that many directors adopt, especially after they have been on a particular board for a long time and they have become a part of the 'old boys' club' is a very human approach to things, but is quite unhealthy. In addition to business savvy, integrity and professional skill and experience, good directors need to possess a very strong sense of independence in order to carry out their corporate governance responsibilities. When personal independence is impaired (and one is speaking primarily of intellectual and moral independence) then the ability to ward off the 'sameness' and the adoption of the 'going-along approach' that many board members adopt is obliterated over time. Board members who are chosen for their business savvy and independence, as well as integrity and skill, are generally chosen by very capable, confident and far-sighted chairmen and CEOs. The other types seek rubber stamps.
Aubyn Hill is managing partner of Corporate Strategies Limited, a restructuring and financial advisory firm. Respond to: writerhill@gmail.com.
