In 2001 the International Business Leaders Forum and SustainAbility analyzed the power of corporate boards and identified steps for “mobilizing board leadership to deliver sustainable value to markets and society”. Boards operate with little transparency, so it is hard to tell which, if any, boards adopted those recommendations and the opacity of board activity limits our ability to characterize current good practice. However, it is terribly obvious when boards trip up, and the last decade has been characterized by momentous failures of corporate governance and corporations themselves.
The decade opened with the fraud-driven collapses of Worldcom and Enron. Executives were jailed but the entire board is responsible for oversight, and investor plaintiffs specifically asked for out of pocket damages from the non-executive board members.
The response to such crises – Sarbanes-Oxley (2002) in the US and the Companies Act of 2006 in the UK – further specified board responsibilities, but failed to prevent the rash of company failures mid decade. More securities lawsuits went to trial in 2005 than in the previous ten years combined; and it would only get worse.
Boards are responsible for setting strategy and managing risk. The financial crisis and all of the associated failures and bailouts were the clear result of risky strategies by the global financial players. Board activity became visible only after problems had become catastrophic, with regulatory and civil society intervention either in place or at the door. Boards engaged to manage the fire sale of once proud Lehman, Bear Stearns, Merril Lynch and Countrywide. Bailouts for AIG, Royal Bank of Scotland and Lloyds took control away from their boards, implicitly suggesting their failure to govern.
Boards select and replace CEOs (often the same CEO who nominated them to a non-contested shareholder vote). During the last decade CEO tenure fell 25% (8.1 to 6.3 years), but this is not evidence of effective governance. CEOs have been ousted for a wide variety of reasons, including the urging of a federal monitor (Bristol Myers Squibb, 2006), public outcry over deadly accidents, and environmental damage (BP, 2010), shareholder and public reaction to board-approved CEO compensation packages, and reaction to the LIBOR scandal which may only have just begun with the replacement of the CEO and Chair at Barclays.
It appears that boards – and particularly the outside directors charged with oversight – have been at best reactive over a decade of corporate scandal and failure. The degree to which they may have been positive defenders of their corporation’s license to operate is at best hidden from view. There is now a rising storm of concern over corporate governance, but these problems are not new. The report’s recommendations – for better engagement between boards and all stakeholders, diversification of boards, increased transparency, accountability and board responsibility – may well have prevented many of these failings. It is time to once again call for greater accountability and transparency from those who lead large companies.
John Schaetzl joined SustainAbility’s Board of Directors in 2008 and is the Lead Non-Executive Director.