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Boards of directors revisited
BERNARD
J.
BIENVENU
Boards of Directors Revisited 41
he most neglected tool of management
T is a common description of boards of directors. It is, therefore, no wonder that studies on directors should emphasize developing the board into a positive and forceful body. Making policy, checking results, overseeing operating management, ensuring the corporation's continued existence in a changing world, providing an independent outside point of view, and bridging the gap between the company on one side and the stockho]ders~ consttmers~ employees, Mr. Bienvenu heads the Department of Managemerit at the University o[ Southwestern Louisiana.
FALL, 196'2
and the public on the other are but some of the many responsibilities ascribed to directors. Theoretically, the board Should oversee the administration of the corporation, work on the organization's long-range problems, and act as trustee to ensure that the interests of stockholders, customers, and employees are kept in proper balance. Many students of the subject maintain that simply because boards of directors do exist, they should have more positive functions and broader responsibilities. THEORY VS REALITY
Ideally, perhaps, directors should perform these multifarious functions. The modem
BEIRNARD J. BIENVENU
theoretical approach to the functions of directors, however, does not take into consideration the conditions that usually prevail. An attempt to broaden the scope of operations of boards of directors can create serious problems and hinder the effective performance of the organization. The theorists tend to overlook the following factors: 1 The process by which directors are selected and the effects of that selection do not embrace such functions. 2 Directors do not accept their positions with such objectives in mind. 3 The structure of management-director relationships and the environmental conditions are not conducive to the board's becoming a more positive force.
42
THE SELECTION PROCESS What a board can do is directly related to the personal capacity, interest, and capability of the individual board members, and to their willingness to make an effective contribution to the organization. Surely, therefore, these qualifications should be the principal criteria for selection. But, even when management is interested in seeing the board assume broader responsibilities, directors are selected for what they represent rather than for what they can do. The major objective criteria are the prestige an individual can add to the corporation, his experience and success in a particular field, or the extent to which he may enhance the business opportunities of the organization. In many businesses, particularly financial institutions, the representation of geographical areas and of ethnic or religious groups is also given consideration. MANAGEMENT ACTUALLY SELECTS
Subjective criteria dominate the selection of directors, and a major role is played by the desire for management survival. Board members are, theoretically, elected by the stockholders, but it is well known that stock-
holders are usually apathetic unless a serious crisis develops-a decrease or an elimination of dividends, or a considerable drop in the market value of the stock-and their active participation in director election is the exception rather than the rule. Therefore, director selection, which is tantamount to election, is left to management and to the incumbent board members. Since the board is empowered to make changes in the executive group, it is in the interests of management to goveru director selection so as to ensure its own survival. The case of the Excelsior Corporation1 exemplifies the role played by management in the selection of directors. Whenever a vacancy exists on the board, the president of the Excelsior Corporation asks each director to suggest three candidates. Later, the new director is chosen from the top three nominees. Before the selection process begins, however, the president talks with the individual directors and determines who will make suitable board members. Consequently, the board's nominees are the ones whom the president wants. Once the nominees are known, the president confers with the board members again to make certain that they select the individual whom management desires to have on the board. In another case, the vice-president of a large business organization stated candidly: "Of course, one way that the executives do make use of the board is to ensure their reappointment. We encourage the election of directors who we know will be friendly to management, and will make our position more secure." This is not intended to suggest that there are unethical practices in director selection. It is natural that management should want on the board individuals who will make its position more secure. But the result is that management is likely to choose the type of person who will not assume an air of inde-
1 With the exception of Chrysler, the names of companies and individuals have been disguised.
BUSINESS HORYZON$
]3OAIIDS O F D I R E C T O t t S R E V I S I T E D
pendence or question seriously the plans and practices of management. Much lip service is paid to the necessity of having the board composed of independent thinkers. But, executives principally, though directors as well, prefer to select directors who will not constitute a "disturbing influence." This term is difficult to define, but it connotes the type of person who would probe into policies and activities and might introduce controversy into an atmosphere of peace and harmony. In fact, management and directors will rarely attempt to remove a director who is complacent and willing to go along with prevailing opinion; but they will exert special efforts to replace directors who ask too many questions.
didates whose income was not larger than the salaries paid to management. The motive was to have the board composed of men with high financial standards who would therefore be more likely to increase the salaries of management. Subterranean factors emphasize the tendency for the board to become a social group with the same restrictive qualifications for membership that exist in the most exclusive clubs. These factors not only restrict selection but they may become primary considerations and thus displace all rational criteria. Coupled with the predominant role played by management in director selection, these subterranean factors transform the board into an internal organ whose attitudes and ideas are the same as those of management. 43
SUBTERRANEAN FacrOltS
DIRECTOR ATTITUDE Consciously or unconsciously, subterranean factors are given considerable attention. Boards gradually tend to develop into exclusive clubs, and directors are then selected on superficial considerations such as personality, social or business status, family background, and specific income group. In one ease, the major criterion for selection was being a graduate of a certain university: for thirty-five years the board had been composed of its alumni. In another instance, the wife of a prospective director had to be acceptable to the other members and their wives. In Rayville City the oil industry and industrial expansion had brought about a population increase of 40,000 in fifteen years with the result that Rayville tripled in size. However, the boards of directors of the three local banks were still composed of members of old established families. The directors definitely attempted to retain their status and that of the old families by excluding the "nouveau riche" from membership. The management of the Johnson Company excluded from consideration all can-
FALL, 1962
In their pioneering book The Board of Directors and Business Management, ~ Copeland and Towl list the questions that, ideally, an individual should ask himself before accepting a directorship. These questions are in accord with the broad concepts of director responsibility. But to expect prospective directors to analyze their qualifications for their duties and responsibilities is to ignore the reasons that prompt many individuals to serve on a board. Examples of such reasons are the wish to form associations, the desire for prestige, and, in some cases, the hope for material benefits. The more important the corporation, the greater is the drawing power of its prestige. A directorship in one of the country's largest corporations is the capstone of a business career and the ultimate proof of success. It is to the businessman what an honorary doctorate bestowed by a great university is to
"~Melvin T. Copeland and Andrew R. Towl, The Board of Directors and Business Management ( Boston: Graduate School of Business Administration, Harvard University, 1947), chapter X.
B~RNAnD J. BIENVENU
a statesman or an educator; it is not a duty or a responsibility, but purely an honor.
MANAGEMENT-DIRECTOR RELATIONSHIPS
Although the capacity and interest of directors are strong factors in determining the status of the board in the corporation, management usually decides the role that the board will assume. It controls the data that can be presented to the board, and the executives know far more than the directors about the inner workings of the company and about the external forces affecting it. Their knowledge, moreover, must increase with experience, while such progress is not
44
necessarily the lot of the directors. Finally, in time, intelligent management becomes familiar with the personalities and attitudes of the directors and thus gains skill in manipulating the board. MANAGEMENT CONTROLS DATA
With the exception of such data as may be required by law, the control of the information that is presented to the board lies in the hands of management. For instance, the president of a Federal Reserve bank stated that the board of a bank should be presented with the operating figures of their own bank as well as those of other banks in the area. The decision to present such data rests with management, however, and if such a report is unfavorable, the natural inclination of management is to withhold the information. At one time during the history of the Moto Company, the president was no~ interested in learning the attitudes or ideas of the directors or in gaining their support for his actions and plans. The directors who, in the words of a later president, "had been trained not to ask questions" seldom asked for additional information and approved everything presented by management. Yet all of the board members were college graduates, highly respected, and quite successful in their own fields. DltlECTORS APATHETIC
Obviously, executives know the inner workings of the company better than the directors do. The board members have usually had no previous experience in the business of which they become directors. Moreover, this advantage, inherent in the executive position, increases with time. Being a board member is a part-time job and directors have little incentive to educate themselves about the business on their own time. They are usually content with the management controlled information they get at board meetings where the limitation of time pre-
BUSINESS HORIZONS
BOAI~DS OF DII~ECTOtlS IIEVINITIgD
vents a meaningful study of the company. To the executives, on the other hand, the running of the company is a full-time job and the acquisition of knowledge a basic necessity. MANAGEMENT REGULATES THE BOARD
With time, intelligent management becomes familiar with the personalities and attitudes of the directors and thus becomes increasingly able to cope with the board and to regulate its activities. When Mr. Bing came to the Western Company as its chief executive he quickly realized that the board members always asked for the possible alternatives to any of his proposals. Consequently, he presented an altenaative, either one he favored equally or his original proposal in different words. Although there might be numerous other alternatives, he was never questioned further by the directors since he now followed their pattern of thought by presenting two possible courses of action. Mr. Bing felt that, within reason, the board would approve any of his proposals owing to his greater knowledge of the business and to his ability to forecast the board's reactions.
BOARD INHERENTLY W E A K
Although, legally, the position of directors is a strong one vis-~t-vis management, that position is actually inherently weak. The typical director is out of touch with the day-to-day operations of the business, ttis position on the board is usually a very minor part of his business activities. His professional success has not necessarily given him the knowledge to make decisions concerning the management of another organization. Moreover, since he is selected because of his successful career, he is usually so busy pursuing this career that he has little time to study the affairs of the corporation and to devote to its business. The typical director attends no more than a monthly board meeting lasting an hour or two.
FALL, 1962
Even when the directors are dedicated and when management is sincerely interested in broadening the function of the board and selects its members primarily on the basis of merit, the limitations of time, the differences in background and experience, and the secondary place that a directorship takes in an individual's whole career make the development of the board into a positive force a formidable task. When management has attempted to broaden the functioa~ of the board according to present theoretical conceptions, disharmony, insecurity, and even despair have often been the results, and management, bewildered, has blamed the board for not assuming its responsibilities. On the other hand, when the board itself decides to exercise its socalled true function, it often ties the hands of the executives and makes management fear that the board does not know what it is doing and may make decisions that will not bo in the best interests of the business. Management has therefore learned to look upon the board mainly as a ratifying group. If executives seldom look upon the board as a source of assistance and advice, why does management often supply the board with a great deal of information and instigate discussions on past business, future plans, and the workings of the organization? This is difficult to answer, but observations suggest that management has five reasons, apart from its desire to maintain friendly relations with the board in order to perpetuate itself in office. First, management feels that some use has to be made of the board because it does exist. Second, the board is looked upon as a device to relieve management legally of its responsibility. Third, management wishes to make the board sufficiently active so that its members will feel that they are contributing to the success of the organization, even if, in the eyes of management, they are only a ratifying group. (As a corollary the executives attempt to guide the board's activity so as
45
BERNARD J. BIENVENU
to prevent it from interfering with the plans of management. ) Fourth, the board is kept informed because, if not consulted, it may perversely overrule executive decisions. Fifth, there is the desire to keep the board informed so that if a crisis does arise the directors will not be in a position to accuse management of neglecting its duty to the board. Otherwise, the board might attempt to seize full power, to the possible detriment of the position of the officers and of the operation of the business.
REALISTIC BOARD CONTRIBUTIONS
46
The study of actual conditions leads one to ask whether the board is a mere legal forreality or a group that can contribute to more effective business operations and administration. A closer analysis, however, reveals that boards can, and do, make valuable contributions though not in the way that theorists expect. ECONOMIC CONTRIBUTIONS
Directors can contribute by being a source of ideas, but they probably tend to reserve their ideas for their own organizations and to apply them where they can gain greater benefits. Boards can attempt to ensure effective management succession, but they are dependent on the word and judgment of management in this respect. Even so, they can make effective economic contributions. A Safety Valve The board's ability to act as a safety valve can be its major contribution to the corporation. Directors will take definite action if the organization deteriorates to the point where it is becoming inefficient and where its survival is in jeopardy, but because of the managementdirector relationships the corporation's affairs must usually be at a very low ebb before the board will act. It is difficult to determine whether a board acts on its own initiative or by the pressure of the stockholders, the
government, or the public. The significant point, however, is that the board can take action and that without its existence many corporations could deteriorate beyond help. The safety valve function is evident in the action recently taken by the board of the Chrysler Corporation. Although many students of corporate affairs had recognized for some time growing weaknesses in the management of the corporation, the board did not take action until the situation had reached alarming proportions. Even then, the action was prompted less by economic reasons than by the discovery of management practices that many considered unethical. Providing Crisis Leadership The board can assume a most important function in providing effective leadership in periods of transition or crisis. The board of Chrysler is evidently playing such a role at the moment -although changes on the board took place before its members began to accept the role of providing necessary leadership. But, again, it is significant that the only organ available to provide crisis leadership is the board of directors. If the board is not prepared to provide leadership during crises, the survival of the organization can be jeopardized, as the example of the Atlas Company illustrates. The president of the Atlas Company, who dominated company affairs completely, died unexpectedly in 1955. After his death, the directors and officers were in a state of confusion. Not having been informed of the workings of the company by the president, they had no knowledge of what action to take regarding past and pending business, and for about a year they did nothing. This unhealthy situation continued until new executives were brought into the company. The new president stated that during the year of confusion the company had lost a considerable amoun,t of business. The directors had not known what action to take and the officers had been hesitant to accept any responsibility. The board, confused and lacking knowledge, had not been able to
BUSINESS ItORIZONS
BOARDS OF DIIKECTORS I~]BVISITED
delegate responsibility to the officers, and the officers had refused to carry out certain company functions until the board specifically delegated such responsibility. As a result, many of the customers, experiencing lengthy delay and indecision, began doing business elsewhere. HUMAN CONTRIBUTIONS
Directors can make other contributions that, though difficult to evaluate economically, are of great value to management and the corporation. These human contributions have not been stressed by the writers on the subject, but there is much to indicate that they can advance the material welfare and the effective administration of the organization. A Psychological Force The board is a symbol of accountability. Management is constantly aware that there is a group with the power to reprimand the officers and, if necessary, to fire them. Management is also conscious that the directors may at any time question its proposals and pry into its policies. The board represents a unit of psy-
FALL, 1962
chological force that keeps management constantly on the alert and forces it to exercise prudence. It serves the same purpose as the armed forces of the United States whose principal purpose since the end of World War II has been to prevent global war, simply by being in existence. In the same way, a board of directors is of substantial value simply because it exists. A Source of Relief The responsibilities of top management are too great for the average executive to bear alone and, at the same time, maintain the equilibrium necessary to run the organization effectively. As a result, boards of directors have become a source of relief to management by accepting the responsibility for its major executive actions and especially by approving decisions that management has made but is dubious about ( fortunately directors are usually unaware of this function or too apathetic to object to it). In essence, the board's approval enables management to do what it wants without having the responsibility for the decision. The broader the responsibility of the business, the more significant is this fune-
47
BERNAP,D J. BtENVENU
45
tion of directors. The positions of executives are very weighty indeed in financial institutions where, in addition to the responsibilities to the community, stockholders, customers, and public, there is the responsibility to depositors. When bank presidents were asked for actual examples of the board's contributions, the acceptance of responsibility was usually the only specific function cited. For instance, after a rather grueling interview, the president of the Clover Bank threw up his hands and asked, "Who would there be to accept the responsibility of running this bank if it did not have a board of directors? Here I am dealing in stockholders' funds and the money of depositors. As things stand at present the burden of running the bank is almost more than I can take. I certainly do not feel that I am in the position nor do I have the desire to accept the complete responsibility for the operation of the bank and be personally accountable to the stockholders and the depositors."
Facilitates Decision Making
The
board fulfills another important role related to its function as a source of relief: it facilitates the making of decisions and the acceptance of risks. Executives retain their jobs by ensuring continued earnings and the payment of dividends. They tend to be reluctant, therefore, to enter into risky ventures. But the continuing stability of the company and thus the position of the executives may be in jeopardy unless the organization is willing to accept risks. The board, by accepting the responsibility for risk decisions, permits the development of venturesome ideas. For instance, a large capital investment for expansion or development involves decisions of substantial risk. The officers recognize that ff the investment does not yield the results anticipated, their positions may be weakened. However, having the directors make the decision gives the executives a line of defense should the results fall short of expectations.
One director pointed out: "The board has helped management make decisions that it probably would not have made otherwise. We usually go along with whatever the president and officers want to do; however, many plans and courses of action have been adopted that management alone might have been fearful, or hesitant, of adopting on its own." This statement questions neither the ability of executives to make decisions nor their desire to obtain constructive advice from the directors. But it points out the apprehension of the officers in making the final decision and their reluctance to decide upon a course of action without first having the board share in the responsibility. The executive vice-president of the Johnson Company, who had also served as an executive of several other business organizations, recalled that he had constantly striven to develop the board so that it could be of direct assistance to management and fulfill theoretical concepts such as "policy making." He found, however, that it simply did not work out, and he was considerably disturbed until he discovered the board's principal contribution: by accepting responsibility for decisions the board is a source of relief and a device for reducing the natural fears of the officers. He described the situation as one very similar to walking in the jungle in the middle of the night surrounded by wild animals-"You feel much better ff you have seven or eight people walking along with you."
Support and Encouragement In The Vipers' Tangle, Francois Mauriac points out an individual's major need: "One cannot preserve one's faith in himself all alone. We must have a witness of our prowess: somebody who notes the hits, who counts the points, who crowns us on the day of rewards. "~ Directors are practically the only ones who can make this type of contribution that executives must have to function effec-
a Francois Mauriac, The Vipers' Tangle (New York: Doubleday & Company, Inc., 1957), p. 60.
BUSINESS HORIZONS
BOAIiDS OF DIBECTOR8 REVISITED
tively. Officers look upon the board as a source of moral support, comfort, and encouragement, and frequently cite it as the main function of directors. On several occasions officers were heard speaking to directors either in person or by telephone. Most of the time the officer was less concerned with seeking advice-he had usually made up. his mind regarding the topic of discussion-than with seeking approval and moral support from the director. This giving of encouragement had progressed so far in some cases that a rather impressive collegiate "rah-rah" atmosphere prevailed. The officers praised the great men who sat around the boardroom table, and in eloquent terms the directors expressed their pride in the company's growth and their gratitude for the wonderful support received from the officers. Frivolous as such mutual admiration may seem, it serves a most useful purpose: a feeling of unity, understanding, and mutual appreciation develops between the board and management.
This valuable contribution, however, can be impaired when directors try to act according to the theoretical conception of their function. One director related that, when he first joined the board of the Ginger Company, the board completely accepted the views and decisions of management. During this period, harmonious relations existed between the board and management, and the company prospered. One evening five of the eleven directors met at a social function and began talking about the company. They decided that they were not fulfilling their responsibilities as directors and resolved to probe into the views, decisions, and reports of management. For six months, the five directors instigated discussions at the meetings and inquired about the various actions of management. But the directors began to rmtice changes; the officers were becoming aloof, the president was losing interest in his work, and friction was developing between management and the board. The five directors concluded that their probing had undermined the president's confidence, not only in them but in himself as well. Consequently, they went back to their previous attitude of complacency. The friction disappeared, and harmonious relations returned. The board also acts as a "father confessor" for management whose position is essentially a lonely one. Though directors can, from a practical standpoint, do very little to assist the officers, they do help considerably simply by listening. In this way, the board almost performs the function of a psychiatrist, enabling management to maintain its emotional equilibrium.
INSIDE VS O U T S I D E
There is considerable controversy about the relative value of inside or outside directors. It should be pointed out, first of all, that when outside boards do exist there also exist unofficial inside boards composed of the executives who handle the business functions of the organization. Thus the argu-
FALL, t962
49
BERNARD J. BIENVENU
ment that an inside board is preferable because it is more familiar with the business is somewhat fallacious. But, moreover, official inside boards could not perform the functions that represent a board's realistic contribution. Would an inside board be willing to recognize a deteriorating situation, or provide crisis leadership for itself? And what value would there be in the human and intangible contributions of directors if they were made by an inside board?
50
THE ADVOCATESof increased board responsibility, although undoubtedly to be praised for their idealistic views, fail to consider that directors are limited by time, ex. perience, circumstances, and lack of dedication. The theorists are, therefore, far from realistic in their assumptions and in their definition of the responsibilities of directors. It is understandable, considering prevailing conditions, that management should seldom look upon the board as a group that can make effective contributions to the organization. In fact, when management does
not adopt such a skeptical attitude, it is accepting serious risks for itself and for the organization as a whole. If directors are given increased duties in the area of corporate management, the time they can devote to performing their functions is even more limited, and the roles they can play effectively-safety valve and crisis leadershipare pushed into the background. Asking discerning questions, providing an independent viewpoint, making policy, and performing the other functions advocated by many theorists are at times in direct conflict with the valuable human and intangible contributions that directors can make. Until a system of professional directors, men able to devote their complete time to serving as directors, is developed in this country, the existing situation is probably the way things have to be. Thus, the meetings of the board as well as the selection and education of directors should be geared toward increasing the ability of directors to provide crisis leadership and to act as safety valves by recognizing deteriorating situations.
BUSINESS HORIZONS
J.
BIENVENU
Boards of Directors Revisited 41
he most neglected tool of management
T is a common description of boards of directors. It is, therefore, no wonder that studies on directors should emphasize developing the board into a positive and forceful body. Making policy, checking results, overseeing operating management, ensuring the corporation's continued existence in a changing world, providing an independent outside point of view, and bridging the gap between the company on one side and the stockho]ders~ consttmers~ employees, Mr. Bienvenu heads the Department of Managemerit at the University o[ Southwestern Louisiana.
FALL, 196'2
and the public on the other are but some of the many responsibilities ascribed to directors. Theoretically, the board Should oversee the administration of the corporation, work on the organization's long-range problems, and act as trustee to ensure that the interests of stockholders, customers, and employees are kept in proper balance. Many students of the subject maintain that simply because boards of directors do exist, they should have more positive functions and broader responsibilities. THEORY VS REALITY
Ideally, perhaps, directors should perform these multifarious functions. The modem
BEIRNARD J. BIENVENU
theoretical approach to the functions of directors, however, does not take into consideration the conditions that usually prevail. An attempt to broaden the scope of operations of boards of directors can create serious problems and hinder the effective performance of the organization. The theorists tend to overlook the following factors: 1 The process by which directors are selected and the effects of that selection do not embrace such functions. 2 Directors do not accept their positions with such objectives in mind. 3 The structure of management-director relationships and the environmental conditions are not conducive to the board's becoming a more positive force.
42
THE SELECTION PROCESS What a board can do is directly related to the personal capacity, interest, and capability of the individual board members, and to their willingness to make an effective contribution to the organization. Surely, therefore, these qualifications should be the principal criteria for selection. But, even when management is interested in seeing the board assume broader responsibilities, directors are selected for what they represent rather than for what they can do. The major objective criteria are the prestige an individual can add to the corporation, his experience and success in a particular field, or the extent to which he may enhance the business opportunities of the organization. In many businesses, particularly financial institutions, the representation of geographical areas and of ethnic or religious groups is also given consideration. MANAGEMENT ACTUALLY SELECTS
Subjective criteria dominate the selection of directors, and a major role is played by the desire for management survival. Board members are, theoretically, elected by the stockholders, but it is well known that stock-
holders are usually apathetic unless a serious crisis develops-a decrease or an elimination of dividends, or a considerable drop in the market value of the stock-and their active participation in director election is the exception rather than the rule. Therefore, director selection, which is tantamount to election, is left to management and to the incumbent board members. Since the board is empowered to make changes in the executive group, it is in the interests of management to goveru director selection so as to ensure its own survival. The case of the Excelsior Corporation1 exemplifies the role played by management in the selection of directors. Whenever a vacancy exists on the board, the president of the Excelsior Corporation asks each director to suggest three candidates. Later, the new director is chosen from the top three nominees. Before the selection process begins, however, the president talks with the individual directors and determines who will make suitable board members. Consequently, the board's nominees are the ones whom the president wants. Once the nominees are known, the president confers with the board members again to make certain that they select the individual whom management desires to have on the board. In another case, the vice-president of a large business organization stated candidly: "Of course, one way that the executives do make use of the board is to ensure their reappointment. We encourage the election of directors who we know will be friendly to management, and will make our position more secure." This is not intended to suggest that there are unethical practices in director selection. It is natural that management should want on the board individuals who will make its position more secure. But the result is that management is likely to choose the type of person who will not assume an air of inde-
1 With the exception of Chrysler, the names of companies and individuals have been disguised.
BUSINESS HORYZON$
]3OAIIDS O F D I R E C T O t t S R E V I S I T E D
pendence or question seriously the plans and practices of management. Much lip service is paid to the necessity of having the board composed of independent thinkers. But, executives principally, though directors as well, prefer to select directors who will not constitute a "disturbing influence." This term is difficult to define, but it connotes the type of person who would probe into policies and activities and might introduce controversy into an atmosphere of peace and harmony. In fact, management and directors will rarely attempt to remove a director who is complacent and willing to go along with prevailing opinion; but they will exert special efforts to replace directors who ask too many questions.
didates whose income was not larger than the salaries paid to management. The motive was to have the board composed of men with high financial standards who would therefore be more likely to increase the salaries of management. Subterranean factors emphasize the tendency for the board to become a social group with the same restrictive qualifications for membership that exist in the most exclusive clubs. These factors not only restrict selection but they may become primary considerations and thus displace all rational criteria. Coupled with the predominant role played by management in director selection, these subterranean factors transform the board into an internal organ whose attitudes and ideas are the same as those of management. 43
SUBTERRANEAN FacrOltS
DIRECTOR ATTITUDE Consciously or unconsciously, subterranean factors are given considerable attention. Boards gradually tend to develop into exclusive clubs, and directors are then selected on superficial considerations such as personality, social or business status, family background, and specific income group. In one ease, the major criterion for selection was being a graduate of a certain university: for thirty-five years the board had been composed of its alumni. In another instance, the wife of a prospective director had to be acceptable to the other members and their wives. In Rayville City the oil industry and industrial expansion had brought about a population increase of 40,000 in fifteen years with the result that Rayville tripled in size. However, the boards of directors of the three local banks were still composed of members of old established families. The directors definitely attempted to retain their status and that of the old families by excluding the "nouveau riche" from membership. The management of the Johnson Company excluded from consideration all can-
FALL, 1962
In their pioneering book The Board of Directors and Business Management, ~ Copeland and Towl list the questions that, ideally, an individual should ask himself before accepting a directorship. These questions are in accord with the broad concepts of director responsibility. But to expect prospective directors to analyze their qualifications for their duties and responsibilities is to ignore the reasons that prompt many individuals to serve on a board. Examples of such reasons are the wish to form associations, the desire for prestige, and, in some cases, the hope for material benefits. The more important the corporation, the greater is the drawing power of its prestige. A directorship in one of the country's largest corporations is the capstone of a business career and the ultimate proof of success. It is to the businessman what an honorary doctorate bestowed by a great university is to
"~Melvin T. Copeland and Andrew R. Towl, The Board of Directors and Business Management ( Boston: Graduate School of Business Administration, Harvard University, 1947), chapter X.
B~RNAnD J. BIENVENU
a statesman or an educator; it is not a duty or a responsibility, but purely an honor.
MANAGEMENT-DIRECTOR RELATIONSHIPS
Although the capacity and interest of directors are strong factors in determining the status of the board in the corporation, management usually decides the role that the board will assume. It controls the data that can be presented to the board, and the executives know far more than the directors about the inner workings of the company and about the external forces affecting it. Their knowledge, moreover, must increase with experience, while such progress is not
44
necessarily the lot of the directors. Finally, in time, intelligent management becomes familiar with the personalities and attitudes of the directors and thus gains skill in manipulating the board. MANAGEMENT CONTROLS DATA
With the exception of such data as may be required by law, the control of the information that is presented to the board lies in the hands of management. For instance, the president of a Federal Reserve bank stated that the board of a bank should be presented with the operating figures of their own bank as well as those of other banks in the area. The decision to present such data rests with management, however, and if such a report is unfavorable, the natural inclination of management is to withhold the information. At one time during the history of the Moto Company, the president was no~ interested in learning the attitudes or ideas of the directors or in gaining their support for his actions and plans. The directors who, in the words of a later president, "had been trained not to ask questions" seldom asked for additional information and approved everything presented by management. Yet all of the board members were college graduates, highly respected, and quite successful in their own fields. DltlECTORS APATHETIC
Obviously, executives know the inner workings of the company better than the directors do. The board members have usually had no previous experience in the business of which they become directors. Moreover, this advantage, inherent in the executive position, increases with time. Being a board member is a part-time job and directors have little incentive to educate themselves about the business on their own time. They are usually content with the management controlled information they get at board meetings where the limitation of time pre-
BUSINESS HORIZONS
BOAI~DS OF DII~ECTOtlS IIEVINITIgD
vents a meaningful study of the company. To the executives, on the other hand, the running of the company is a full-time job and the acquisition of knowledge a basic necessity. MANAGEMENT REGULATES THE BOARD
With time, intelligent management becomes familiar with the personalities and attitudes of the directors and thus becomes increasingly able to cope with the board and to regulate its activities. When Mr. Bing came to the Western Company as its chief executive he quickly realized that the board members always asked for the possible alternatives to any of his proposals. Consequently, he presented an altenaative, either one he favored equally or his original proposal in different words. Although there might be numerous other alternatives, he was never questioned further by the directors since he now followed their pattern of thought by presenting two possible courses of action. Mr. Bing felt that, within reason, the board would approve any of his proposals owing to his greater knowledge of the business and to his ability to forecast the board's reactions.
BOARD INHERENTLY W E A K
Although, legally, the position of directors is a strong one vis-~t-vis management, that position is actually inherently weak. The typical director is out of touch with the day-to-day operations of the business, ttis position on the board is usually a very minor part of his business activities. His professional success has not necessarily given him the knowledge to make decisions concerning the management of another organization. Moreover, since he is selected because of his successful career, he is usually so busy pursuing this career that he has little time to study the affairs of the corporation and to devote to its business. The typical director attends no more than a monthly board meeting lasting an hour or two.
FALL, 1962
Even when the directors are dedicated and when management is sincerely interested in broadening the function of the board and selects its members primarily on the basis of merit, the limitations of time, the differences in background and experience, and the secondary place that a directorship takes in an individual's whole career make the development of the board into a positive force a formidable task. When management has attempted to broaden the functioa~ of the board according to present theoretical conceptions, disharmony, insecurity, and even despair have often been the results, and management, bewildered, has blamed the board for not assuming its responsibilities. On the other hand, when the board itself decides to exercise its socalled true function, it often ties the hands of the executives and makes management fear that the board does not know what it is doing and may make decisions that will not bo in the best interests of the business. Management has therefore learned to look upon the board mainly as a ratifying group. If executives seldom look upon the board as a source of assistance and advice, why does management often supply the board with a great deal of information and instigate discussions on past business, future plans, and the workings of the organization? This is difficult to answer, but observations suggest that management has five reasons, apart from its desire to maintain friendly relations with the board in order to perpetuate itself in office. First, management feels that some use has to be made of the board because it does exist. Second, the board is looked upon as a device to relieve management legally of its responsibility. Third, management wishes to make the board sufficiently active so that its members will feel that they are contributing to the success of the organization, even if, in the eyes of management, they are only a ratifying group. (As a corollary the executives attempt to guide the board's activity so as
45
BERNARD J. BIENVENU
to prevent it from interfering with the plans of management. ) Fourth, the board is kept informed because, if not consulted, it may perversely overrule executive decisions. Fifth, there is the desire to keep the board informed so that if a crisis does arise the directors will not be in a position to accuse management of neglecting its duty to the board. Otherwise, the board might attempt to seize full power, to the possible detriment of the position of the officers and of the operation of the business.
REALISTIC BOARD CONTRIBUTIONS
46
The study of actual conditions leads one to ask whether the board is a mere legal forreality or a group that can contribute to more effective business operations and administration. A closer analysis, however, reveals that boards can, and do, make valuable contributions though not in the way that theorists expect. ECONOMIC CONTRIBUTIONS
Directors can contribute by being a source of ideas, but they probably tend to reserve their ideas for their own organizations and to apply them where they can gain greater benefits. Boards can attempt to ensure effective management succession, but they are dependent on the word and judgment of management in this respect. Even so, they can make effective economic contributions. A Safety Valve The board's ability to act as a safety valve can be its major contribution to the corporation. Directors will take definite action if the organization deteriorates to the point where it is becoming inefficient and where its survival is in jeopardy, but because of the managementdirector relationships the corporation's affairs must usually be at a very low ebb before the board will act. It is difficult to determine whether a board acts on its own initiative or by the pressure of the stockholders, the
government, or the public. The significant point, however, is that the board can take action and that without its existence many corporations could deteriorate beyond help. The safety valve function is evident in the action recently taken by the board of the Chrysler Corporation. Although many students of corporate affairs had recognized for some time growing weaknesses in the management of the corporation, the board did not take action until the situation had reached alarming proportions. Even then, the action was prompted less by economic reasons than by the discovery of management practices that many considered unethical. Providing Crisis Leadership The board can assume a most important function in providing effective leadership in periods of transition or crisis. The board of Chrysler is evidently playing such a role at the moment -although changes on the board took place before its members began to accept the role of providing necessary leadership. But, again, it is significant that the only organ available to provide crisis leadership is the board of directors. If the board is not prepared to provide leadership during crises, the survival of the organization can be jeopardized, as the example of the Atlas Company illustrates. The president of the Atlas Company, who dominated company affairs completely, died unexpectedly in 1955. After his death, the directors and officers were in a state of confusion. Not having been informed of the workings of the company by the president, they had no knowledge of what action to take regarding past and pending business, and for about a year they did nothing. This unhealthy situation continued until new executives were brought into the company. The new president stated that during the year of confusion the company had lost a considerable amoun,t of business. The directors had not known what action to take and the officers had been hesitant to accept any responsibility. The board, confused and lacking knowledge, had not been able to
BUSINESS ItORIZONS
BOARDS OF DIIKECTORS I~]BVISITED
delegate responsibility to the officers, and the officers had refused to carry out certain company functions until the board specifically delegated such responsibility. As a result, many of the customers, experiencing lengthy delay and indecision, began doing business elsewhere. HUMAN CONTRIBUTIONS
Directors can make other contributions that, though difficult to evaluate economically, are of great value to management and the corporation. These human contributions have not been stressed by the writers on the subject, but there is much to indicate that they can advance the material welfare and the effective administration of the organization. A Psychological Force The board is a symbol of accountability. Management is constantly aware that there is a group with the power to reprimand the officers and, if necessary, to fire them. Management is also conscious that the directors may at any time question its proposals and pry into its policies. The board represents a unit of psy-
FALL, 1962
chological force that keeps management constantly on the alert and forces it to exercise prudence. It serves the same purpose as the armed forces of the United States whose principal purpose since the end of World War II has been to prevent global war, simply by being in existence. In the same way, a board of directors is of substantial value simply because it exists. A Source of Relief The responsibilities of top management are too great for the average executive to bear alone and, at the same time, maintain the equilibrium necessary to run the organization effectively. As a result, boards of directors have become a source of relief to management by accepting the responsibility for its major executive actions and especially by approving decisions that management has made but is dubious about ( fortunately directors are usually unaware of this function or too apathetic to object to it). In essence, the board's approval enables management to do what it wants without having the responsibility for the decision. The broader the responsibility of the business, the more significant is this fune-
47
BERNAP,D J. BtENVENU
45
tion of directors. The positions of executives are very weighty indeed in financial institutions where, in addition to the responsibilities to the community, stockholders, customers, and public, there is the responsibility to depositors. When bank presidents were asked for actual examples of the board's contributions, the acceptance of responsibility was usually the only specific function cited. For instance, after a rather grueling interview, the president of the Clover Bank threw up his hands and asked, "Who would there be to accept the responsibility of running this bank if it did not have a board of directors? Here I am dealing in stockholders' funds and the money of depositors. As things stand at present the burden of running the bank is almost more than I can take. I certainly do not feel that I am in the position nor do I have the desire to accept the complete responsibility for the operation of the bank and be personally accountable to the stockholders and the depositors."
Facilitates Decision Making
The
board fulfills another important role related to its function as a source of relief: it facilitates the making of decisions and the acceptance of risks. Executives retain their jobs by ensuring continued earnings and the payment of dividends. They tend to be reluctant, therefore, to enter into risky ventures. But the continuing stability of the company and thus the position of the executives may be in jeopardy unless the organization is willing to accept risks. The board, by accepting the responsibility for risk decisions, permits the development of venturesome ideas. For instance, a large capital investment for expansion or development involves decisions of substantial risk. The officers recognize that ff the investment does not yield the results anticipated, their positions may be weakened. However, having the directors make the decision gives the executives a line of defense should the results fall short of expectations.
One director pointed out: "The board has helped management make decisions that it probably would not have made otherwise. We usually go along with whatever the president and officers want to do; however, many plans and courses of action have been adopted that management alone might have been fearful, or hesitant, of adopting on its own." This statement questions neither the ability of executives to make decisions nor their desire to obtain constructive advice from the directors. But it points out the apprehension of the officers in making the final decision and their reluctance to decide upon a course of action without first having the board share in the responsibility. The executive vice-president of the Johnson Company, who had also served as an executive of several other business organizations, recalled that he had constantly striven to develop the board so that it could be of direct assistance to management and fulfill theoretical concepts such as "policy making." He found, however, that it simply did not work out, and he was considerably disturbed until he discovered the board's principal contribution: by accepting responsibility for decisions the board is a source of relief and a device for reducing the natural fears of the officers. He described the situation as one very similar to walking in the jungle in the middle of the night surrounded by wild animals-"You feel much better ff you have seven or eight people walking along with you."
Support and Encouragement In The Vipers' Tangle, Francois Mauriac points out an individual's major need: "One cannot preserve one's faith in himself all alone. We must have a witness of our prowess: somebody who notes the hits, who counts the points, who crowns us on the day of rewards. "~ Directors are practically the only ones who can make this type of contribution that executives must have to function effec-
a Francois Mauriac, The Vipers' Tangle (New York: Doubleday & Company, Inc., 1957), p. 60.
BUSINESS HORIZONS
BOAIiDS OF DIBECTOR8 REVISITED
tively. Officers look upon the board as a source of moral support, comfort, and encouragement, and frequently cite it as the main function of directors. On several occasions officers were heard speaking to directors either in person or by telephone. Most of the time the officer was less concerned with seeking advice-he had usually made up. his mind regarding the topic of discussion-than with seeking approval and moral support from the director. This giving of encouragement had progressed so far in some cases that a rather impressive collegiate "rah-rah" atmosphere prevailed. The officers praised the great men who sat around the boardroom table, and in eloquent terms the directors expressed their pride in the company's growth and their gratitude for the wonderful support received from the officers. Frivolous as such mutual admiration may seem, it serves a most useful purpose: a feeling of unity, understanding, and mutual appreciation develops between the board and management.
This valuable contribution, however, can be impaired when directors try to act according to the theoretical conception of their function. One director related that, when he first joined the board of the Ginger Company, the board completely accepted the views and decisions of management. During this period, harmonious relations existed between the board and management, and the company prospered. One evening five of the eleven directors met at a social function and began talking about the company. They decided that they were not fulfilling their responsibilities as directors and resolved to probe into the views, decisions, and reports of management. For six months, the five directors instigated discussions at the meetings and inquired about the various actions of management. But the directors began to rmtice changes; the officers were becoming aloof, the president was losing interest in his work, and friction was developing between management and the board. The five directors concluded that their probing had undermined the president's confidence, not only in them but in himself as well. Consequently, they went back to their previous attitude of complacency. The friction disappeared, and harmonious relations returned. The board also acts as a "father confessor" for management whose position is essentially a lonely one. Though directors can, from a practical standpoint, do very little to assist the officers, they do help considerably simply by listening. In this way, the board almost performs the function of a psychiatrist, enabling management to maintain its emotional equilibrium.
INSIDE VS O U T S I D E
There is considerable controversy about the relative value of inside or outside directors. It should be pointed out, first of all, that when outside boards do exist there also exist unofficial inside boards composed of the executives who handle the business functions of the organization. Thus the argu-
FALL, t962
49
BERNARD J. BIENVENU
ment that an inside board is preferable because it is more familiar with the business is somewhat fallacious. But, moreover, official inside boards could not perform the functions that represent a board's realistic contribution. Would an inside board be willing to recognize a deteriorating situation, or provide crisis leadership for itself? And what value would there be in the human and intangible contributions of directors if they were made by an inside board?
50
THE ADVOCATESof increased board responsibility, although undoubtedly to be praised for their idealistic views, fail to consider that directors are limited by time, ex. perience, circumstances, and lack of dedication. The theorists are, therefore, far from realistic in their assumptions and in their definition of the responsibilities of directors. It is understandable, considering prevailing conditions, that management should seldom look upon the board as a group that can make effective contributions to the organization. In fact, when management does
not adopt such a skeptical attitude, it is accepting serious risks for itself and for the organization as a whole. If directors are given increased duties in the area of corporate management, the time they can devote to performing their functions is even more limited, and the roles they can play effectively-safety valve and crisis leadershipare pushed into the background. Asking discerning questions, providing an independent viewpoint, making policy, and performing the other functions advocated by many theorists are at times in direct conflict with the valuable human and intangible contributions that directors can make. Until a system of professional directors, men able to devote their complete time to serving as directors, is developed in this country, the existing situation is probably the way things have to be. Thus, the meetings of the board as well as the selection and education of directors should be geared toward increasing the ability of directors to provide crisis leadership and to act as safety valves by recognizing deteriorating situations.
BUSINESS HORIZONS