Duty of Care; Duty of Loyalty

December 2, 2009 at 10:11 pm 2 comments

Professor Henry Mintzberg is ranked nine on the “Top 20 Business Thinkers” list of the Wall Street Journal and 16 on the Financial Times’ “The Thinkers 50” list. He has been teaching at my alma mater McGill University since 1968 and I recently attended a McGill alumni event during which Mintzberg spoke about his new book, simply called: “Managing.”

Mintzberg makes many points and observations in this new book including the idea that what we have defined and described as the financial crisis of late is actually a management crisis. “Where were the managers of those banks?” he is known to say.

I would actually take it a step further and ask where were the directors of those banks? To use the oft-cited example of Lehman Brothers, the board was in fact right there but unfortunately composed of individuals who may not have been truly qualified to understand the details of what was going on. The former Chief Executive of Sotheby’s and a theater producer (wonderful accomplishments and not to be diminished) could hardly be expected to recognize and grasp the details of what was going on at the company. Furthermore, the independent research and rating firm The Corporate Library rated Lehman’s board a “D” and rated Lehman’s governance risk “high.” Interestingly their main concern was that half of the board was over 70.

To take it one step even further, the question needs to be asked, how did these individuals get selected for this board in the first place? Did Dick Fuld simply make these decisions on his own? Who in addition to Fuld was involved in the selection and nomination? If an outside advisory or recruitment firm was retained, how did they identify and assess qualified candidates?

All of the fixation on boards, proxy access, executive compensation etc. will serve only partial good if the heart of the matter is not attended to. That is, how do these boards come to be in the first place and how can corporations better structure these work groups in order to achieve the ultimate goal of value creation?

While our entire governance structure is being investigated and scrutinized wouldn’t is be wise and prudent to also examine the “behind-the-scenes” methodology and processes by which these boards get configured? Boards and the companies they serve must commit to a rational qualification process that is based on what an executive knows and not who they know. The selection process must be strategic, objective and merit based and if the SEC has their way justifiable. As outside advisors, we Board Recruiters need to be mindful of our own fiduciary duties of care and loyalty!

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Entry filed under: Business, Corporate Governance, Recruiting.

I vote for books! A Resume is Not Enough!

2 Comments

  • 1. Joseph Tibman  |  December 2, 2009 at 10:41 pm

    Not only was the board unqualified, but Fuld was both so iron-fisted and paranoid a leader that he could only have tolerated a board that was largely impotent. Indeed, when his mentor, Lew Glucksman decades earlier ousted co-CEO Pete Peterson from Lehman decades earlier he did so without consulting the board — only later informed them of the coup. And it wasn’t simply corporate governance that failed at Lehman, but internal controls as well, as Fuld and Joe Gregory threw risk management under the bus, dismissing all who opposed them friom their positions or even ousting them from the firm so that they could accumulate the risk positions that ultimately brought Lehman down.

    Joseph Tibman
    Author, “The Murder of Lehman Brothers, An Insider’s Look at the gGlobal Meltdown”
    lehmanbook.blogspot.com

  • 2. Alain Hendrich  |  February 9, 2010 at 9:51 am

    I am interested in this notion of Board Members who may “not have been truly qualified to understand the details of what was going on” which is often cited in discussions on our failed banks.
    If you look at the Boards of banks, perhaps too many are composed of members from other banks, big business or ex politicans past their sell-by dates. Is this a recipe for GroupThink?
    I’ve often wondered why we don’t promote the value of successful “normal” people who have no idea of the details but are infused with that rare commodity – “common sense”. Would a full time housewife managing a tight budget have a different perspective on risk ? You bet she would.
    OK, so we don’t want a whole Board of Betty Jones’s but we do need balance. Some people who understand most of the detail (did anyone understand it all!) and some who are there precisely because they dont. These latter Boad Members need to be prepared to be in a minority of one on occasions and to keep on asking that most difficult question of all for a CEO to answer – Tell me, exactly why are we doing this ? The CEO’s answer need to be subjected to robust risk assessment – financial, reputational, compliance, operational and governance.

    Alain Hendrich
    Independent Board Member
    Dimensions (NDG) Ltd
    £100 million pa NFP


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