The thoroughness of the board’s understanding of the company” is viewed by directors as one of the misfeasances by board that contributed to the current Great Recession, according to a paper written by Jay Lorsch that was based upon a survey of directors conducted in 2009 by the Harvard Business School as part of its Corporate Governance Initiative.
One director is quoted as saying, “I don’t think independence is anywhere near as important as we thought it was.”
Congress reacted to the dot.com burst by enacting Sarbanes-Oxley and requiring greater independence of members of audit committees. Quasi-government organizations such as the New York Stock Exchange and Nasdaq expanded the independence requirements from audit committees to other oversight committees, such as compensation and nominating, and to the board itself. Regulators such as the SEC, IRS and the Treasury, as well as banking and insurance regulators, expanded the independence requirements from publicly-held companies to tax-exempt organizations and financial institutions.
The result has been that management members of the board who understood the business model and strategic direction of their organizations are being replaced with independent members not having such understanding. This loss of understanding is now being realized by the independent directors. The trend toward independence probably should not be reversed. Independent directors, especially those who are selected on the basis of the expertise, experience and knowledge they contribute to the board as a whole, add value to the board and the organization.
However, if the loss cited by the directors surveyed by Harvard is true, then this loss should be mitigated by inviting key management in addition to the CEO to serve as resources to the board at board meetings.
In any event, a good practice is for boards and their oversight committees to meet regularly with key management. Benefits of regular meetings with key management are that:
- It opens communication channels between the board and key management;
- Doing so regularly usually does not offend CEO;
- It facilitates the board’s federal and state obligations not to impede whistle blowing by encouraging communication both from employees to the board, hopefully without anonymity, and from the board to employees; and
- Board and management will each learn from the other.
Generally, familiarity of management with the board and vice versa will not breed contempt, but will foster trust and eliminate contempt.