How many of you have seen successful companies run by three or four CEOs? Or watched pharmacists, doctors, hospital administrators, and local business owners make day-to-day decisions about running a financial institution?
It's pretty pathetic, and it doesn't work. It's like trying to get the tentacles of an octopus to move synchronously.
Yet -- with pressure from regulators, lawyers, and consultants -- boards increasingly have become involved in the day-to-day operations of their financial institutions. It's led me to believe that the only thing worse than a board cowed by a CEO is a CEO dominated by the board.
Or how many of you have watched with surprise when strong leaders in their own right take a back seat during board meetings or are not part of the active management team? Rather than criticize them for that behavior, it's time to recognize that 20 strong leaders all exercising their leadership abilities would be dysfunctional.
Not Up to Snuff
The failure of so many financial institutions must raise questions about the way boards operate within our system of corporate governance. But I believe the current solution, getting boards more involved in daily operations, is the wrong one. Why?
They lack industry-specific expertise. They are part time and don't have time to devote to operating the company. They do not have as much information as management about the company (even with the best board package around). And a company doesn't run well with a group making operating decisions.
Tough in a Crisis
I have seldom seen boards perform well when a financial institution is humming along. But, without exception, boards have done a superb job of moving decisively and with good judgment after acknowledging they are in a crisis. Acknowledging the crisis is the tough part.
It's too easy to make excuses like "Maybe it's the regulators being to harsh; maybe it's the economy; maybe it's just a slight down cycle." And on it goes until the crisis no longer can be ignored.
As a board member was quoted in "Pawns or Potentates," by Jay Lorsch: "Directors are like firemen. They sit around doing very little until there's a crisis, and then they spring into action."
Early Warning Signal
That's not a bad approach if boards develop the process to the crisis earlier, when there is a better chance that the emerging problems can be rectified without harming shareholders or, as is the case with insured financial institutions, the insurance funds or the taxpayers. It's time to redefine the board's role in this light.
What can boards do to improve their ability to recognize an oncoming crisis and take appropriate action?
First, break some boardroom taboos and talk openly about what the role of the board really is. Define objectives and the methods for meeting them.
Second, focus on the areas of greatest concern and risk. Too often, board meetings are dominated by operating minutiae, and the major strategic issues don't have sufficient air time.
Adjust Audit Function
Third, oversee the audit and review functions so that they report to the board more than in name only. They can be a major signal that a crisis is brewing.
If audit (both internal and external) had functioned more independently of management and had a strong relationship with the board (or audit committee), many of the failures I have worked with could have been averted.
Fourth, insist on board information packages that are designed with a board perspective. Information that the board receives and does not review can come back to haunt it later.
Call In Experts
Fifth, periodically meet without management to discuss company performance and/or concerns.
Sixth, use outside experts to help the board assess its own processes or institution trends.
Seventh, when danger signals appear, stop business as usual and acknowledge that a new role for the board is needed until the problems are, rectified.
It is time that we more clearly differentiate the role of management and the role of the board before we perpetuate the monster of having our financial institutions run by groups of wellmeaning but ill-prepared directors.
Instead, let's use these talented individuals for the function for which they are best suited -- acting as the stopgap when the company is headed for crisis.