Can You Survive Your Board and C-Suite?

Governance 101 | Bite-sized Nuggets for Serious Fiduciaries GOV 155: Can Your Company Survive Your Board and C-Suite?

DO NOT MISS this rich interview with Professor Mervyn King SC (https://www.dhirubhai.net/in/professor-mervyn-king-sc-45aab5105/ ), about the book on his life, The Corporate Revolutionary. He calls us home to the Best in Governance. The interview is here The Corporate Revolutionary: Behind the scenes - Good Governance

The Board of Directors functions as a “collective mind,” one that makes Business Judgment decisions in the best long-term health and sustainable interests of the Company and its Stakeholders. The Company is a legal fiction, an artificial person created by statute; it has no mind of its own. Directors are the “Heart, Mind and Conscience of the Company.”

Serving on the Board of Directors requires an “open mind of original intellectual thought…. Mindful Judgment and Compliance… (not) mindless box-ticking – Grudge Compliance,” says King.

Since the 19th Century creation by English Parliament of the Companies Act, the world has struggled to hold Companies accountable. We have entered an era where courts and society hold the People Who Run Them accountable. It’s less and less about mere financial accountability to “Shareholders” and more about the performance we owe to our wider community of Stakeholders.

Notorious American episodes of lapsed Governance abound: Enron, Kettering Health, and Boeing have taught and retaught the lessons. Imagine, the chair of Enron’s audit committee was Stanford accounting professor Robert K. Jaedicke. An English Lord and a wife of a U.S. Senator sat on that Board. The NY Times once reported that the Enron Board knowingly suspended its Code of Ethics to enable the exploding partnerships that took down the company, jailed its officers, and (helped along by selective DOJ antics) destroyed one of America’s largest accounting firms of the old “Big Eight.”

Kettering Health alumni remain under criminal investigation including its CEO and the church minister who chaired the Board. A few of the lost cabal remain entrenched in their fiefdoms, chasing off and persecuting the wrong people. Local Stakeholders, who once took the Company at its word, not look carefully before they leap, and have found it harder to remind the Company of the promises it has made... and to keep them.

Then we consider poor, poor Boeing! We’ve lost track of how many Capitol Hill grillings have starred its hapless executives with their “prepared remarks” since their airliners and parts started falling out of the sky. Now behold the unfolding episode of the Starliner with its astronauts trapped in the Space Station. How much is traceable to failed Governance and Competence of the Board and C-suite – have they created an irreversible downstream corporate culture where Quality Control has failed repeatedly?

The Business Judgment Rule and Corporate Veil were created to focus risk on the Company, the non-existent, fictional person – to shield the humans who Govern and Operate it from bankruptcy anytime something goes wrong. Basic to this is the expectation expressed in laws and court cases that the Governors and Operators will act responsibly so as to merit such protection. Fiduciary Duty is the theme that holds it all together. Few Directors we have known grasp the fullness of that sacred covenant.

“D&O” insurance and indemnification serve as protective back stops if some energetic Plaintiff breaks through, or tries, to sue the Directors and Officers individually. Cases such as Caremark and the Delaware Chancery Court’s Boeing decision, however, warn the days of wine and roses for Directors are but a memory vapor. https://tinyurl.com/GOVNug08302024 (See also our earlier piece on the Delaware Chancery Court’s Boeing case and the judicial excoriation of what was - is it still? - going on there.) https://www.dhirubhai.net/pulse/governance-blind-eyed-board-ted-ramirez/?trackingId=7HJMjqOHsqCciUBTEOGGpA%3D%3D

Are more laws the answer? King emphatically argues “NO”; he argues, rather, for “Voluntary Compliance.” With his decades of experience in the hard-ball trenches of big business (no mere lofty academic penthouse for him), King teaches us why the Best Governance derives not from legislation (or, one might add “Policies”). Laws and Policies focus on CONformance and lead to “Mindless Box-ticking.”

We have seen this in America where, for example, the vaunted Sarbanes-Oxley legislation proved to be but a pebble in the road for the mad cap corporate Big Shots on Mr. Toad’s Wild Ride. (Well, at least the consultants got rich from “SOX.”) The Companies, their Boards and Officers found new ways to embellish the dark arts of reckless growth, personal enrichment, and grossly unsustainable leaching of vanishing resources including time, money and, most sadly, people.

King challenges us: What kind of people do you want in the Boardroom and coming to work each morning? Those focused on CONformance? Or PERformance?

Yours for Better Governance,

Ted L. Ramirez ? 2024