Going into the new decade, there is a need to review the role that the Board of Directors plays in the modern corporation as things move faster and as scale increases.Going into the new decade, there is a need to review the role that the Board of Directors plays in the modern corporation as things move faster and as scale increases.
Recent examples have shown that when CEOs focus too much on short-term results and fail to provide a culture of openness and transparency, things can fall apart in the longer-run.
Lower-cost, index-tracking funds, due to their growth over the past decade, are in a position to exert greater influence on boards and can help bring more oversight into corporate management.
There needs to be a change in corporate boardrooms. Over the past couple of years, we have seen three corporate situations where a stronger role on the part of the company’s board of directors could have made a major difference.
All three organizations have gone through crisis periods in recent years, followed by changes in top management, and all three organizations have been criticized for having boards of directors that failed to provide sufficient oversight.
In all three cases, the management has been criticized for focusing too much on short-term performance goals, and not paying enough attention to longer-term objectives. The specific criticism has been that the CEOs focused on maximizing short-term shareholder wealth.
As a consequence, although each company performed well in the short run and the stock price of each company rose, the decisions made to accomplish these short-run outcomes meant that the companies failed to address issues that could sustain the organization over time.
Eventually, the emphasis on the short-run caught up with the companies and each is now in a period of turn-around struggling to find new cultures that correct their performance.
This is why a current article in the Wall Street Journal caught my eye. The title of the article, “State Street CEO Takes the Long View on Shareholder Activism.” Justin Baer, the author of the article, writes,
“As CEO of State Street Corp. (NYSE: STT), Ronald O’Hanley is on the front lines of shareholders’ push to bring change to corporate boardrooms.”
“State Street…has amassed significant governance power in recent years as investors shifted more money into the lower-cost, index-tracking funds it helped popularize—and away from actively managed funds.”
Mr. O’Hanley has spent time at McKinsey & Co., Bank of New York Mellon and Fidelity Investments before becoming head of State Street’s investment business in 2015. Elevated to CEO last January, “he also oversees the firm’s core business: managing accounting and administrative functions for many of the world’s biggest investment firms.”
In his interview with the Wall Street Journal, Mr. O’Hanley says that one of the management lessons he learned from the 2008 financial crisis was about communications.
“You have to be honest and transparent with your team. If you lie to them, they’re going to know it right away. You also have the role of building and instilling confidence in them. That’s a fine line to travel.’
Communications were a problem within the Boeing organization. As I just argued last week, “The study of the openness and transparency of a company is a crucial test of the culture that exists within a company. It cannot be avoided.”
“We have seen sufficient shortfalls in this area in recent years to call for change in how businesses operate.”
“The CEO, in my mind, should want to operate in the most open and transparent atmosphere possible.”
“If the CEO has some doubts about this, the board of directors should straighten the CEO out.“
The CEO faces the greatest pressure to focus on the short-run. A CEO wants to look good, look like they are in command of things, and look as if they know what they are doing.
Doing well and doing it early is a way to get the board and the shareholders off your back and to gain as much control as you can.
The greatest pressure is always to focus on the short-run.
This is why the board of directors must be wise enough and strong enough to step in when the CEO’s focus becomes too myopic. This is where a weak board falls. But, it is also where even a good board can become complacent when the short-run returns are good and appear to have enough momentum to stay good.
This is where the boards of the future must change. Boards must be strong and they must have good leadership. I am not saying that the Chairman of the Board and the CEO need to be two different people. That is one way to attempt to assert the responsibility of the board. But, I believe that if the Chairman and the CEO are the same people, this puts more responsibility on the board to be able to stand up to this person.
Openness and transparency must be a mandatory requirement between the CEO and the board. This channel can also become lax when the short-term results are good. Good results can result in complacency. The board can let down its guard in requiring the information they need.
The other problem is that if the short-run results start to weaken, there is a tendency for openness and transparency to be pushed aside. In all the turnarounds I have been involved in, there came a time when the management began to be less open, to hold off telling the complete story because, after all, “things are going to get better and then it won’t matter.”
Boards have to be knowledgeable enough and strong enough so that the CEO keeps his or her focus on the longer-run objectives and continues to be open and transparent with the board. The board must fulfill this responsibility. It is what they are there for.
The last point from my recent post: “And, if the board is not functioning well, the shareholders should demand openness and transparency.”
This is where Mr. O’Hanley and State Street can play a role if it is needed. They must play a role. They must help to change things.
Lower-cost, index-tracking funds have become very popular over the past ten years, as the less volatile stock market has almost continuously hit new historical highs. They are in the center of things and putting pressure on boards when needed is a role they must be willing to play. If they don’t then they are letting down the people that have purchased their funds.
In this new decade, there must be a change in corporate boardrooms. Boards must help CEOs keep focused on the longer-run goals and objectives of the company and they must continue to be open and transparent with the boards… and with the shareholders.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.