The economic crisis of ‘08 has led to a sea change in how Americans think about business and the boardroom. For the board director, it has led to new and proposed regulations, changes in corporate governance processes, and a fundamental shift in attitude about the obligations that business has to the citizenry. The crisis has even caused some social commentators to question our nation’s willingness to accept the traditional business cycle in which a long period of uninterrupted growth is followed by an unforeseen retraction. These are short-term views to be sure, but directors need to be alert to their consequences as they bear directly on the most important role the board plays: the selection of appropriate strategies that keep risk and reward in an acceptable balance.
While a global systemic breakdown has been declared the culprit by most leading economists, including Federal Reserve Chairman Ben Bernanke, popular opinion and the media have focused on the failure of risk-management processes at our leading banking institutions, and the cascade effect that had on all companies. Thus, the scrutiny and criticism towards management and board directors has been more pointed than in previous declines. While directors are moving swiftly to restore confidence in their institutions’ corporate governance, there is an equally urgent need to set the record straight with regard to how most boards performed versus the few in the spotlight, as well as the significant contributions now being made towards recovery.
To embark on such a mission, directors need to know what people are thinking and saying, and why. To obtain these important insights, Directorship and Deloitte collaborated to study the matter in detail, and in conjunction with Korn/Ferry International, set out to determine how the broader community—defined as “Main Street”—views the boardroom. In the course of our research, the opinions of teachers, laborers, policy makers, doctors, students, academics, and community leaders were sought (see Methodology, opposite). To gauge and compare those data with inside-the-boardroom views, we also asked the opinion of the C-suite, which includes board directors, chairmen, CEOs, and members of management.
The objective of “What Society Thinks? (about boards and business)” was principally to establish a baseline that, reviewed over time, would record changes in perceptions and point to where education and reform are needed, in terms of public opinion. Independent directors, says Henry Ristuccia, Deloitte & Touche LLP partner and U.S. leader of Governance & Risk Management, need to step back and determine the motivating factors for this perception and to the extent that there is genuine longer-term reputational risk. “The reason we contributed to this study is because we sensed a shift in perception, but wanted to be able to point to the exact causes. How dramatic has the change been? That will be answered by the research and subsequent studies every six months. What matters most are the lessons we can learn. It’s the same old issue that, if you don’t address the problem, then the regulators and legislators will do it for you.”
While many studies have focused on the more obvious question of “what the boardroom thinks,” there was a growing sense on the part of Directorship’s editors that a new measurement could be used to inform boards of directors what others think about them. As the data was analyzed, it was clear the results were instructional and constructive for its implications to directors and the C-suite at large. “There are always lessons to be drawn from challenging times, and today is no exception,” says Ray Lewis, managing partner, Deloitte LLP’s Center for Corporate Governance. “There are areas that proactive boards will focus on improving, whether they are about processes, sensitivities, or simply risk vs. reward metrics. In reviewing the data, we cannot predict whether societal attitudes will change quickly upon recovery or whether this is a longer-term shift. But providing directors and CEOs with a deeper understanding of the environment in which we are working is an important step.”
The institutions and organizations that share a commitment to good corporate governance are well aware of a shift in the public’s perception about boards and business, and have already taken action to address the issue proactively. In the fall of 2008, for example, the National Association of Corporate Directors (co-publisher of NACD Directorship) released Key Agreed Principles to Strengthen Corporate Governance for U.S. Publicly Traded Companies to show that boards are “leading the way” in restoring public and investor confidence in American boardrooms and C-suites. The initiative has led to a series of white papers, peer-to-peer meetings and, most recently, a Blue Ribbon Commission on Risk Governance.
Directors should also be willing to engage in a role that helps shape public opinion, says Steve Mader, vice chairman and managing director, of Korn/Ferry, if for no other reason than it is good for business. “We spend all our time on shipwrecks. Few would dispute that based on results, a small number of boards did not perform for their shareholders and their companies,” Mader says. “But my point is everyone, and especially directors, should join in the fight to shape public opinion rather than allowing it to be shaped for them. In the capital markets, value goes up and down by trillions of dollars driven by simple sentiment. That’s a trillion-dollar capital-formation challenge every morning.”
Seeking Answers
The specific objective of “What Society Thinks?” was to distinguish the views of select groups on a variety of board-specific topics now the subject of intense debate, study, media attention, and regulation: for example, public opinion on issues ranging from accountability and transparency to environmental and social responsibility. Also examined was how well society understands the board’s role in dealing with issues such as corporate governance, compensation, labor, ethics, risk management, and the environment. How does society perceive the board’s role vs. the CEO? And how do the board and management see themselves in these contexts? These are the questions that the research set out to explore. “The intensity of negative publicity around American business, particularly in the automotive and financial-services sectors, has created a ripple effect at the corporate-governance level,” says Nels Olson, managing director of Korn/Ferry’s Eastern region and senior client partner in the CEO and Board Services practice. “On an annual basis, Korn/Ferry advises hundreds of boards on their composition and the selection of new directors. At the end of the day, consumers are the shareholders and we need to understand their perceptions, so we can properly guide our clients.”
The Directorship/Deloitte survey was organized into five broad categories: board duties and compensation, board responsibilities, opinion of board directors and CEOs, the economic crisis, and director and CEO compensation. In all, 39 questions were asked, including:
- How would you assess the credibility of board directors and CEOs today and how effective have they been during the economic crisis?
- Did CEOs and directors adhere to good corporate governance standards?
- How many hours do directors work and how much should they work?
- Is what directors and CEOs get paid fair?
- Should CEO compensation be capped and tied to company performance?
- How familiar are different constituencies with the responsibilities of a public-company board director?
- Should the role of the chairman and CEO be separated?
- What motivates CEO performance?
- Was criticism in the media of board directors during the economic crisis fair?
- Was criticism in the media of CEOs fair?
The survey of societal perceptions of board performance is an important assessment that exposes “glass half full/glass half empty” differences between Board/C Suite and Main Street perceptions. However, the research missed an opportunity to isolate the perceptions of corporate employees. (They appear to be included in the Main Street and Management cohorts, but it’s hard to tell to what extent.) This is a grave oversight of the survey because employees are a critical component of corporate performance.
Corporate employees are tasked with implementing the strategy set at the top, and measured on their ability to perform. The standards to which they are held, the resources they can use, and the specific issues on which they must focus are set for them by members of Boards and inhabitants of the C suite. So their perspective matters, but its invisibility in this study reflects its typical invisibility in too many companies.
It is ironic that those most involved with the operations and performance of a corporation are lost in the shuffle, but not surprising. The attention of Boards and C-suite inhabitants may be so drawn to strategic issues that they forget to lead and care about the people who work for them. Consequently, they are less likely to understand and appreciate the view from the middle or the bottom of an enterprise, where customers are served and work gets done.
Employees are a diverse group with multiple perspectives and interests. Employees may manage others, be professionals and union members, and sometimes both. They are more and less skilled, and more and less engaged in their work. Employees live on Main Street. They are customers and shareholders of the firms that employ them, and of other firms. And employees suffer directly the consequences of the poor strategic decisions made at the top. In today’s economic downturn, employees are paying a high price in layoffs, pay freezes, reductions in benefits and overall economic hardship. As directors face critical decisions that may determine their firm’s very survival, they need also to pay critical attention to “employee well-being”. Why? Because employees will make their decisions come to life. Unfortunately, most directors are detached from the challenges employees face daily.
Boards can improve their relationship with employees, and address their well-being, by refreshing themselves with new members who bring a different perspective. Not expansion through the blueblood or “blood brother” practices of the past. Boards can develop a “human capital” perspective by selecting directors with human resource expertise, so the effect of board decisions on the people who carry them out will always be considered. Human capital decisions are at least as important as capital investment decisions, even though they are not a line item on a balance sheet.
Poor employee relations and the failure to engage the workforce can be very costly, and damaging to a company’s reputation. Human capitalists on the boards can add value with a critical business perspective about the illusive link between people and corporate performance. As a result, the quality of corporate governance may improve, along with society’s view of corporations.
Michele M. Dunn
January 12, 2010
Wilton, CT, USA
MicheleDunn@MicheleDunn.com
Michele Dunn has 25 years of experience training more than 10,000 executives for major leading corporations throughout the world. She is an executive coach and expert in group dynamics, corporate culture and emotional intelligence.