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Today’s non-executive directors of public companies are generally not cowards, mutes or con-artists. They are fiduciaries responsible for overseeing effective corporate governance. Yet, by far the surest way for shareholders to discover how and why independent directors made their most important decisions is to sue, even unsuccessfully.
This pathology, along with press leaks about corporate board deliberations, has virtually become the transparency norm. Disney’s unhappy investors diagnosed the collapsible vertebrae in their board’s backbone only after excruciating testimony in the Katzenberg and Ovitz suits. Shareholder Kirk Kerkorian’s fascinating but failed fraud litigation against DaimlerChrysler yielded startling insight into the boardroom behaviour of the US carmaker and its acquiring German juggernaut. Those views were not pretty. Depositions from Enron, WorldCom and HealthSouth criminal prosecutions spoke volumes about how directorial due diligence was, or was not, done.
So will litigation or leaks reveal how well boards have overseen succession at Vodafone, operational accountability at EADS or the turnround strategy at General Motors? Which would serious investors prefer? If such questions seem odd, then it should be clear why the current reformation in corporate governance cheats serious investors. While Sarbanes-Oxley and other institutional “remedies” demand greater operational openness, transparency at the top remains deliberately obscured. Doubters should read board meeting minutes, which are typically less revealing than a winter burka. Independent directors have virtually no duty or opportunity to disclose reasons for their decisions unless, of course, they are being questioned by investigators or are chatting up the media. Good governance? No; bad leadership.
“Companies”, observed super-investor Warren Buffett, “tend to get the shareholders they deserve.” Boards, too, get the shareholders they deserve. Perhaps that explains why so many investors and independent directors at so many companies seem so unhappy. Rules that require meaningful transparency from every part of the company except the board that ostensibly oversees it are rightly seen as hypocritical. Worse, wilful opacity by boards defies the best interests of shareholders. Investors arguably make better investment decisions when they understand how and why boards make the decisions they make. Corporate governance is a global risk factor that serious investors need to evaluate more effectively.
“There’s no doubt in my mind that boards need to be more transparent than they already are,” asserts Harvey Pitt, former chairman of the Securities and Exchange Commission. He is hardly alone. Shareholder activists worldwide now target directors over auditors. The problem is that defining appropriate disclosure for boards is difficult and controversial. The most common objection is that greater openness would create a “chilling effect” on directors’ advice and counsel.
That argument is shockingly disingenuous. In reality, US, European and Japanese directors can be compelled to testify about their decisions on pain of criminal, civil or administrative sanction. Directors enjoy no special standing to avoid explaining why they voted to grant the chief executive more options or to veto an acquisition. Indeed, without lawsuits or administrative investigations, explicit reasons behind board decisions might remain hidden. For fiduciaries to imply they would say one thing in the boardroom but another under oath offers disheartening perspective on their self-professed integrity. It is a dangerous example for emerging markets to emulate.
The ideal is not governance “goldfish bowls” of boardroom webcasts and audit committee transcripts posted online. The challenge is designing cost-effective disclosure that offers investors valuable insight while preserving the board’s ability to work with management. Unlike Sarbanes-Oxley rules, that trade-off need be neither adversarial nor burdensome. As a start, non-executive directors might issue annual reports summarising areas where they have enthusiastically supported management initiatives; decisions where they merely assented; and those with which they disagreed. Detail matters less than direction. A document from the independent directors that included a response from the CEO would give investors useful information about the company’s governance culture.
For example: are there persistent disagreements? Do the non-executive directors act primarily as individuals or as a group? Perpetual consensus from independent directors might be cause for shareholder cynicism, celebration or suspicion – it would definitely be revealing.
Should litigation or regulatory investigation expose gaps between the public disclosures and the private governance realities, the posturing would no doubt prove legally counter-productive. That said, an excellent public-policy case can be made that regulators and the courts should encourage such transparency. Rather than provoke litigation, such disclosure might even deter it. How so? By demonstrating that directors were, indeed, attempting to exercise prudent business judgment.
The unhappy reality is that today’s faux transparency as “good governance” policy has failed. That failure has proven extraordinarily expensive in terms of money, time and credibility. Those costs will only grow as globalisation intensifies.
Non-executive chairs, lead directors and institutional shareholders would best serve the interests of management and shareholders alike by being far more open-minded about transparency. Discretion may be the better part of valour but disclosure is the better part of accountability. Rational transparency attempts to balance both. As the CEO of a software company told me: “People don’t behave as badly when they know their arguments around decisions will be made public.” They also tend to make better arguments.
The writer, a Massachusetts Institute of Technology research associate, has served on the board of a publicly traded company and advised boards on internal IT investment and oversight issues