Governing boards should heed recent actions of the Obama administration apparently calling for a new era of director-centric governance for at least publicly-held companies, financial institutions and, perhaps eventually, tax-exempt entities.
Director-centric governance is in contrast to the strong-CEO paradigm described by Alan Greenspan before New York University’s Stern School of Business on March 26, 2002 and advocated by John and Miriam Carver in their “policy form of governance.” Director-centric governance is the underlying principle of Sarbanes-Oxley: The best defense against mismanagement, fraud and greed is oversight by independent directors with counsel of independent advisers and holding management accountable for providing necessary information.
The Obama administration appears to be taking director-centric governance to the next level: That the best line of “good governance” is governance by independent directors having the expertise necessary to oversee business decisions of management.
Evidence of this new era is Treasury Secretary Timothy Geithner’s March 26, 2009 statement before the Committee on Financial Services of the US House. Geithner states that “[i]nnovation and complexity overwhelmed the checks and balances of the system,” which must include the check and balance to have been provided by the boards of these institutions; “[c]ompensation practices rewarded short-term profits over long-term return,” which indicts these boards’ oversight of the executive compensation of these institutions; and “firms encouraged people to take unwise risks on complicated products . . . [that] outmatched the risk-management capabilities of even the most sophisticated financial institutions,” which second-guesses the these boards’ expertise to oversee the products and their related risks.
Further evidence of the new era includes statements buried beneath the headlines “White House ousts GM chief Rick Wagoner” (March 31, 2009, Los Angeles Times), “U.S. Plays Key Role in Naming GM Board” (April 1, 2009, Washington Post), and “GM Will Replace at Least Six Others on Board” (April 1, 2009, Wall Street Journal). While the media has focused on the removal of Wagoner as CEO, the more substantive change is apparently Wagoner’s removal as Chairperson of the board and the appointment of Kent Kresa, a current GM board member and former CEO of Northrop Grumman Corporation. This had to require approval of GM’s board because the Vice Chairperson who would have otherwise succeeded Mr. Wagoner was Frederick A. Henderson, who instead became CEO.
Despite the conspiracy theories to the contrary, Obama apparently means what he said on March 30, 2009 that his administration has "no intention" of running GM. Instead, the administration wants a better GM board.
According to the Wall Street Journal, at least six, or a majority, of the board is to change. GM’s board has been criticized as a “pedigree” board: Members selected for “who they are” rather than for their experience, skills, and expertise. Most telling is the statement in the Washington Post by new GM Chairman, Kent Kresa, that the GM board needs “new directors with additional skills and experience.”
Boards of organizations that are regulated through federal securities and tax laws, such as publicly-held companies and tax-exempt entities, and boards of major banks, investment banks, insurance companies, and other financial institutions that are likely to become subject to Geithner’s proposed regulatory system, should heed the new direction toward director-centric governance apparently being advocated by the administration:
- The best line of good governance is governance by independent directors having the expertise necessary to oversee business decisions of management; and
- Boards should review their composition in terms of experience, skills, and other expertise, and add new directors where needed experience, skill or other expertise is missing.