Even before the Enron scandal and the advent of the Sarbanes-Oxley Act, experts have debated what makes a successful board of directors. After Sarbanes-Oxley, the push was for independent directors from diverse backgrounds. Now, in the current economic environment, similar discussions are popping up again.
In his Breakout Performance blog, Ironfire Capital managing member Eric Jackson offers his take. Though he admits it's harder than it may seem to determine which corporate boards are the best because the same "formula" will not work for every company, he identifies three things are essential for success. He borrows the first two from Charles Elson, head of the Weinberg Governance Center at the University of Delaware, and then adds his own:
- Board members must be independent in that they will think for themselves rather than simply rubber stamp management's ideas, but not so independent that they don't have relevant experience in the industry or as a director.
- Board members must personally invest in the companies they serve. (On this point, Jackson notes that stock options or stock grants are "found money" and not the same as investing one's own money.)
- Board members must have the time to carry out their responsibilities. In other words, it is possible to serve on too many boards and be stretched too thin.
As an example of what not to do, Jackson points to Citi board members Ann Mulcahy and Andrew Liveris, who, in their "day jobs" head Xerox and Dow Chemical, respectively. He says:
When their own companies were seeing their stocks drop like stones last year, both Mulcahy and Liveris participated in 25 Citi board meetings and 12 audit committee meetings. In my view, they were stretched too thin from their day jobs to flag Citi's problems early enough.
It makes sense.