Boards of Directors are an essential element of corporate governance
However, in my experience, boards can easily become complacent, manipulated or simply negligent. This has likely been a major factor in the financial crisis. Directors, knowingly approved compensation systems, risk taking and speculative practices. How much did they truly understand? Many of them had no financial experience and while they often pleaded ignorance, they did not protect the company or its shareholders against the hubris of management.
The selection process of Directors is barely subject to shareholders’ approval. Often chosen (directly or indirectly) by the Chairman and CEO, a director’s relationship with management can often be submissive. Being the counterweight of a powerful CEO can be disruptive, but often necessary.
I have had the opportunity to sit on dozens of boards in my life. Without being overly confrontational, directors have a unique opportunity and duty to assist the CEO and offer advice, vision and oversight.
In the cases where CEOs are Chairs on the Board of Directors , the duty of a director is even more challenging. In some cases, resigning from a board is the only way to maintain one’s integrity. I experienced this twice while serving on boards.
The first board seat was with Caraco, the NASDAQ listed US subsidiary of India’s company Sun Pharma. The company had ignored the warnings of the Federal Drug Administration (FDA) and manipulated the information given to the board. Their operations were halted by the FDA for several years.
The second board strengthened my belief that institutional shareholders, too often, only play lip service to governance. I resigned after being elected to the board of Fortis, now called Ageas, a Belgo-Dutch financial conglomerate who was rescued by the Belgian Government. Its board took acquisition risks with ABN Amro, increasing its capital in penalizing shareholders without telling them of the toxic assets that were being purchased. Shareholders lost 90% of the value of the company. However, the combination of Chinese, Dutch and Belgian institutional investors ignored their own governance and it became obvious, when I was elected, that some of the necessary measures would never be taken to reform the company.
I currently sit on the Board of two companies in Asia: