Platt Perspective on Business and Technology

Boards of directors and accountability

Posted in strategy and planning by Timothy Platt on January 31, 2010

Yesterday I outlined something of a classification system for boards of directors, focusing on the relationship between boards and touching on the way this relationship shapes board communications, and affects organizational strategy. There, both communication and strategy issues flow both ways between board and executive suite. I developed and presented a basic model outlining three basic types of board.

I did not get to post yesterday until quite late but I have already done enough thinking about the basic issues involved here to want to write a second general posting on boards before delving into the specific issues of the nonprofit board. And this posting is all about one word, that if any could serve as a single word summary as to what a good board of directors is supposed to do. A good board provides accountability.

Board members can bring networking reach and experience and expertise. They can bring personal reputation and credibility and a lot more, and it is values and qualities like these that go into making boards that really effectively work with and support nonprofits, startups and a lot of other specific organizational types. But the one crucial element that any working board has to be able to bring to an organization is a recognizable and trustworthy level of accountability.

I want to focus largely on the for profit world in this posting and on an issue that has become way too prominent in the news this past year and more – executive compensation. And I want to discuss this in the context of the tripartite model of board types presented yesterday, with the added wrinkle of overlapping boards and executive suites, and of partisanship in what should be third party outside review.

It used to be and until fairly recently was the standard that executive compensation could be as high as even 20 times the average compensation offered an employee. That meant base pay, and any bonus would be performance based. I will add that in keeping with the spirit of this approach, senior executives should lead by example so if the business is not performing well, they should be the ones who forgo their bonuses first. The people under them in the table of organization who most directly contribute to the top and bottom lines should be the last to loose their bonuses if anyone is to receive anything of this sort.

A few short months before the housing bubble burst and the economy really started to overtly head towards the edge of a cliff, I attended the annual stockholders’ meeting for a large corporation in the banking and finance sector. Along with the proposals brought forth by the executives of this business, there were several coming from shareholders that had reached the threshold of support needed to formally be placed on the ballots for this meeting. One of them would have limited executive compensation to no more than 200 times the average compensation of one of the business’ employees. The president of this corporation got up and scornfully dismissed this as a damaging limitation that would drive the best performers away from their company. He insisted that senior executives – he and his fellow C level officers should be receiving 400 times that average salary.

The economy had not entirely left the road yet in its journey towards that cliff edge but it was already suffering for that business, and in the last quarter it had just racked up a 5.9 billion dollar loss. Even using the anemic standards for compensation requirements in place, these executives did not qualify for bonuses in December. So in January these bonuses were relabeled as retention incentives and as incentives for future performance and dolled out without any reduction – specifically and only to the top executives. That was in January and this was just two short months later, with even bigger quarterly losses to add to the previous ones.

• I have written about this situation elsewhere and will simply cite a word I have used in that context – kleptocracy, or governance by theft.
• It is one of the most important roles of the board of directors that they determine and vote on compensation for the senior-most executives of their organization.
• The board in this case was primarily what I have referred to as a rubber stamp board for most issues.
• The board in this case was also a member of a group of overlapping boards with members of the executive team for company A on the board of company B, members of its executive team on the board for C, members from C on A and so on.
• Then these companies voted as board members for each of these other companies, using these others from their own closed group that they were in conflict of interest with as benchmarks in determining industry standards and best practices for executive compensation.
• On top of this, outside third party audits were being done by companies also sharing uncomfortably close relations with these businesses they were reviewing.

Issues like executive compensation should be managed and determined with transparency in all processes and standards used. Neither Rubber Stamp Boards nor Ruggedly Independent Boards can be expected to do this consistently and correctly, and this is definitely an example of where a Strategically Aligned Board is needed. Overlapping boards as discussed above are toxic where the companies involved in these systems are used as benchmarks for executive performance or compensation, and even the appearance of such conflicts of interest is tremendously problematical. It is the hallmark of the Strategically Aligned Board that its members can both be independent enough to make valid decisions and connected enough to be able to work with the executive team to help make things work for the business. And as I said above, the real benchmark for all the board does has to be in maintaining accountability, and I will add with high standards of integrity.

I posted very late yesterday and again today as the last few days have been very hectic for me. I will post tomorrow on boards and nonprofits, having finished setting a foundation for that discussion.

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4 Responses

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  1. resveratrol supplements said, on February 1, 2010 at 4:15 pm

    Just wanted to let you know that its not showing up properly on the BlackBerry Browser. Anyway, Im now on the RSS feed on my laptop, so thanks!

  2. venusesobn said, on February 21, 2010 at 11:04 pm

    hi there! I am new to the board and just wanted to introduce myself 🙂

    • Timothy Platt said, on March 4, 2010 at 4:29 pm

      Hi there too, and congratulations for achieving a position on a board of directors. I have found this to be richly rewarding and add that I have learned so much from this type of participation that I have to see myself as having gained more than I have been able to offer in return.

      Board participation can be very rewarding, and yes it can get frustrating at times too, and particularly if you find yourself running a board or chairing a committee drawn from one to clarify and manage a contentious issue. It is still worth it – being there and making your voice count.

      So congratulations and good luck,

      Tim Platt

  3. leboncoin said, on March 1, 2010 at 1:30 pm

    Thanks for the post

    _____________
    leboncoin


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