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E-MailDavid R. Beatty, C.M., O.B.E. is Conway Director of the Clarkson Centre for Business Ethics & Board Effectiveness, and Professor of Strategic Management, at University of Toronto Rotman School of Management. This post is based on an excerpt from Mr. Beatty’s publication in the Winter 2017 edition of Rotman Management.
You can understand nothing, absolutely nothing, about the operating culture of any company by sitting around the boardroom table. At the boardroom table you “eat what you are fed” by the top management team.
A recent example is the Wells Fargo bank board. It turns out that some millions of fraudulent accounts were created over a decade and thousands of employees dismissed for failing to make targets. Did no bank director get any inkling of how the bank was run? Did any bank director ever visit a branch to have a chat with the branch manager? Did no one check the hot line? It is unbelievable that so many intelligent and seemingly conscientious men and women failed to understand the internal operating mechanics of the Wells Fargo business model.
And where were the directors of companies both public and private where the #metoo revelations are being belatedly brought to light? As at December 31, 2017 the site Fast Company had compiled a list of 71 men against whom charges of sexual misconduct were being levelled.
Every board, of any company both publicly traded or not-for-profit, ought to have an explicit policy that all directors get out of the boardroom and into the field. GE has long had such a policy and so, in Canada, has the Toronto-Dominion Bank. In each instance, the Board Chair encouraged field visits and insisted upon them. Such visits not only serve to inform the individual directors about how things actually work in the field i.e. the operating culture actually is (culture = what employees do when no one is looking) but also helps the CEO understand what is going on in the parts of the field where he/she has not recently visited.
I would urge all institutions to pressure the companies they own to formally require such a policy and also to have the companies in the public domain publish that policy in the annual Information Circulars with the expectation that in a few years the company would then be able to measure the number of these visits by director.
For a director to responsibly fulfill his/her fiduciary responsibilities field visits are a must!
Board Changes over the Decades
Field visits would count as a significant process changes to board guidelines.
The growth of activists and the social media have significantly expanded the external roles of the board in recent years. Activism now certainly forces boards to meet directly with their leading investors and social media campaigns like the one against Des Hague, the former CEO of Centreplate force boards to prepare contingency plans against such quickly forming tsunamis.
But Boards have changed significantly in terms of their composition as well as their processes, due to both regulatory and investor pressures.
Going back to the Disney Board, under CEO Michael Eisner, on March 3, 2004, at Disney’s annual shareholders’ meeting, a surprising and unprecedented 43% of Disney’s shareholders, predominantly rallied by former board members Roy Disney and Stanley Gold, withheld their proxies to re-elect Eisner to the board. Two years later Eisner retired.
One of the issues in this vote against Eisner was the lack of “independent” directors on the board.
The Disney case illustrated the vital importance of “independence”—directors who did not have personal ties to CEOs. This principle of independence is now regulated in the United Kingdom where all directors of major FTSE firms must retire after 12 years lest they lose their “independence.”
Another structural shift came with the Sarbanes-Oxley regulation of 2002 which required the members of the Audit Committee (Section 407) to be not only “independent” but financially literate. That, as well as the follow up with the PCAOB has resulted in significant changes in board composition—the first move towards specific expertise on boards.
And following the Global Financial Crisis (GFC) most bank boards brought on directors with direct line management experience in financial Risk Management.
The notion of “skills matrices” and “expertise” has become central to the building of effective boards. More recently changes to reflect the risks of digital disruption has also influenced Board Composition—Wal-Mart for example now has 4 directors who are digitally savvy and considerable below the average American director’s age of 62.
Boards will continue to get more “expert” in the years ahead as they respond to external disruptive forces and the ongoing expansion of stakeholders well beyond shareholders. The days of the board composed only of “gifted amateurs” is gone.
Board process changes have evolved dramatically as well. Think of measures like “majority voting” which radically transformed the director election mechanics, or “Say on Pay” and the soon to be implemented Pay Ratio or “proxy access” now on many agendas. And right off the press Larry Fink, the Blackrock CEO’s annual letter to Boards challenging them to consider ESG issues in their decision making.
Boards have evolved dramatically in the last few decades and will continue to evolve. Let’s use the sad example of Wells Fargo to get directors out into the field to learn about the real corporate culture in the company’s operations.
