When I initially considered joining the board of directors of a publicly traded company, my first thoughts were the images conveyed by the film industry. I pictured myself sitting with nicely dressed people around a mahogany table, graciously discussing issues that would be the “guiding light” for the company.
I subsequently learned that a well-functioning board required more than playing the part of “Mr. Nice Guy.” Once in a while you have to “pound the table” to make your point.
During my business career, I was fortunate enough to serve on the board of directors of four different companies — Todd Shipyards, Greyhound Lines, Jamesway Corp. and YYY (An exchange traded fund sponsored originally by Bear Stearns and then JP Morgan.) In all four cases, the board made decisions that impacted the company’s viability, or its liquidation.
To fulfill the primary responsibility of the board of directors — protecting the shareholders’ assets and earning a decent return — requires a lot of hard work. The board, which is the highest governing authority of a publicly traded company, must evaluate top operating management, determine their compensation, approve the company’s financial statements, weigh funding alternatives and judge the attractiveness of acquisitions and mergers.
Board members ideally possess incremental skill and experience sets that might not reside within a company. For example, board members might have superior knowledge about governmental regulations, capital markets, marketing or competitors’ product lines
The role of the board in companies’ successes and shortfalls deserves scrutiny. In the same era when Lehman Brothers and Circuit City have failed, and General Motors needs government funds to survive, JP Morgan, Best Buy and Volkswagen have succeeded. In the case of Fannie Mae, Lehman Brothers, and Citigroup, their boards should have seriously questioned the irresponsible use of leverage. These companies suffered from too little equity — less than 3 percent — relative to their debt. Their excessive leverage seems inexcusable given their reliance on billions of dollars of short-term financing.
Even worse, these companies owned a significant amount of illiquid assets of indeterminate worth. These companies used their political influence to block regulation aimed at curtailing risk. The CEO of Lehman Brothers, Richard Fuld, ignored the warnings of Treasury Secretary Hank Paulson to find a buyer. Fuld rolled snake eyes when the Treasury acquiesced to Lehman’s bankruptcy rather than induce a white knight suitor.
I can recall vividly the advice of my late boss Lewis Glucksman, the president of Lehman Brothers. Our firm had advised Montgomery Ward that Lehman could raise $100 million at an interest rate that was slightly above the borrowing costs of Sears Roebuck, its formidable competitor. The chief executive officer of Montgomery Ward, who coveted parity with Sears, threatened to reject our financing offer. He abruptly changed his position when Lew pointedly told him “Finance when you can!”
Several months later OPEC placed an oil embargo on America, sending the country into a recession. During that economic downturn, Montgomery Ward could not have financed in the public markets.
There are a number of constraints that limit the ability of a board to meet fully its fiduciary obligations. Boards generally meet only four times a year. Although company staff spends significant effort putting together workbooks filled with reams of data, the staff might not highlight key trends or might leave out relevant data. A fellow board member wisely warned me to keep my eye on several balls. That is, management always fulfills the No. 1 goal. One must discern whether in attaining the primary objective, other key financial goals were sacrificed.
The operating officers establish the relevant agenda, including the expected time to vet the matters at hand. Since the board has many issues on its plate, members are hesitant to procrastinate even if disconcerting evidence emerges.
Board members rarely converse on company matters outside of formal meetings. Thus, the company spin at the meetings becomes the accepted facts. Also, officers of the company or paid consultants provide almost exclusively the back-up material to support company decisions. Therefore, discussions are frequently rubber stamp justifications. Board members try to act in a collegial manner that encourages compromise rather than discord. Sometimes a voice in the wilderness provides a necessary wake-up call.
Since the creation of the Dow Jones Industrial Index of 30 leading blue-chip companies in 1896, only General Electric has remained a member. Thus, while companies might in theory have perpetual lives, they face extinction unless they reinvent themselves. The board of directors plays an important role in ensuring survival.
Originally published in the Sarasota Herald-Tribune
