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Corporate Boards Need to Wake Up

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Everybody was abuzz last week when the Obama administration pressured General Motors (NYSE: GM  ) CEO Rick Wagoner to step down. Here's what I want to know: What the heck was the GM board of directors doing over the years?

One of investors' biggest problems -- whether they know it or not -- has been a tendency toward ineffective, entrenched boards of directors that don't do their primary job, which is to look out for shareholder interests. Whether such boards are lazy, corrupt, or just not-so-swift, they've laid the groundwork for a very bad precedent, where outraged folks demand the government do what competent and prudent boards should have accomplished a long time ago.

Who's your buddy?
Although some people defend the job Wagoner did at GM, the fact is, the company hasn't been profitable for years and has made glaring strategic mistakes. Unfortunately, it has taken the government to finally do what many of us would argue its board of directors should have done a long time ago.

I ran across an anecdote about how GM shareholder Jerome York, who had worked at Chrysler and was also an expert in restructurings, joined GM's board at one point, only to resign with the comments, "I have not found an environment in the board room that is very receptive to probing much beyond the materials provided by management."

And therein lies the crux of the problem -- when a lethargic and ineffective "culture of the boardroom" or buddy system develops. Boards are supposed to sometimes push back against management as they advocate for shareholders.

The banking industry faces a similar situation; Treasury Secretary Timothy Geithner has recently suggested some banking executives could suffer the same fate as Wagoner.

That may not come as welcome news for those of us who prefer less government intervention, but it also comes as no surprise. Why wouldn't people like to see Bank of America's (NYSE: BAC  ) Ken Lewis take a hike after the ill-conceived acquisition of Merrill Lynch? I'm pretty sure the same goes for the CEOs of Citigroup (NYSE: C  ) and AIG (NYSE: AIG  ) . All of these companies have repeatedly taken government aid, and there's been no sign of real progress. (Forget about fantasies about "operating profits.")

Meanwhile, like it or not, government is taking the lead in shaking up some of these boards. It is drawing up a slate of new directors to propose at GM's next annual meeting, and the boards of Fannie Mae and Freddie Mac were disassembled after their takeover last year.

Chairman of the bored
Ineffectual boards are by no means uncommon. There are many reasons why this can happen. Sometimes it's just that too many board members are CEOs at other publicly traded companies, and are simply too busy to devote enough time to these ancillary duties. Directors can also become complacent due to ridiculously long tenure, and some are simply getting up there in age.

Some elements are more nefarious, though. "Interlocking" directors are particularly troubling. That's when people serve on one another's boards. That's a conflict of interest, and seems pretty sure to contribute to aspects like astronomically increasing executive pay.

Berkshire Hathaway's (NYSE: BRK-A  ) (NYSE: BRK-B  ) Warren Buffett is often sought for companies' board of directors, not surprisingly, but it appears he's not highly sought on compensation committees, given how he's a critic of exorbitant pay.

Here's an excellent example of how weird things can get. Remember how Merrill Lynch's Stanley O'Neal left that company in shame (with a huge goodbye payout, of course), but darned if he didn't land on Alcoa's (NYSE: AA  ) board of directors. Does that sound like the kind of person you'd want on your company's board, supposedly looking out for your interests, when one could easily argue that he didn't look out for shareholder interest at the company he himself ran?

Wake up!
Many boards of directors have been asleep at the wheel, and it's infuriating, given the disturbing and dangerous things that have gone on during recent years. Shareholders must stop being so complacent about suboptimal boards letting management run companies into the ground (and enriching themselves along the way).

And the fact that the government is stepping in to do what boards should have done is a dangerous and slippery slope.

We need a shareholder revolution that expects better things from corporate boards, and pushes for other corporate governance policies that help make companies more robust, such as separating the CEO and chairman roles and pushing for more independent directors.

We must examine boards for signs of conflict of interest. We must try to remove board members who let managements get away with too much. We must expect boards will do their jobs, and heck, maybe even do them well, exercising things like "scrutiny" and "skepticism" when it comes to management's actions, even if that might be kind of a buzz-kill.

Letting things erode until government steps in has put the competitiveness of our companies -- not to mention our whole economy -- at risk. These are tough times, but they're good times to consider change, and ways to make our companies work well again. A push for robust, smart corporate boards that look out for long-term shareholder value would be a step in the right direction.  

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Berkshire Hathaway has been recommended by Motley Fool Inside Value and Motley Fool Stock Advisor. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletters today, free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.

Read/Post Comments (5) | Recommend This Article (19)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 08, 2009, at 4:17 PM, mrwizard555 wrote:

    vote NO, NO, NO. maybe yes if the board recommends a no.

    put me on the board of a couple companies and i would retire on the board fees and be a pure SOB.

    management's only goal is to preserve management. in order to do that, mgt has to convince the boards that mgt is right. doing an excellent job, too.

    i have not voted yes for a director in ages. not have i voted for an executive comp package. i work for a living. my fondest dream is to win a 100 million lotto, plow it all into a single company, get elected to the board and start making changes.

  • Report this Comment On April 08, 2009, at 5:41 PM, ehdoan wrote:

    I just sent the following comment to my cousin yesterday.

    The problem that needs to be fixed is the Boards of Directors of these public companies. The Board of Directors of every company is the fiduciary body that is supposed to protect and act in the best interest of the company and the shareholders. The Board members are not only paid a lot of money to do nothing, they are actually given incentives to do nothing, or more accurately to do whatever the CEO, the Chairman, or the other board members want them to do.

    Not only do Board members get paid generally between between $75,000 and $500,000 to attend 1 to 4 meetings per year, the company also purchases insurance policies so that if any or all of the board members violate their fiduciary responsibilities the insurance company pays the claim. So the board members have no down side risk or skin in the game. Their sole mission is to get reelected to the board so that they can continue their posh easy street life. Sounds a lot like Congress doesn't it. And the way they stay on the board is to not ruffle anyone's feathers, and to do what the other board members and executive management tells them to do.

    And what makes it worse, many of these people sit one each others board of directors, and they continue to vote what is in the best interest of themselves and the executive management, and not in the best interest of the company or the shareholders which is their purpose.

    So the way to fix the problem, is for Congress to pass a law to remove, reduce or restrict the use of fiduciary insurance policies, to make sure that the board members actually do the job for which they were intended. The argument against this is that the companies will say, they won't be able to find qualified people to sit on the boards of directors. To that I say BS. I am qualified to sit on most of these companies boards, and I would be happy to take on that risk and responsibility for $100,000 per year for a maximum of 2 weeks of work per year.

  • Report this Comment On April 09, 2009, at 1:07 PM, jpanspac wrote:

    Well, the day traders certainly don't care about shareholder interests, and I very much doubt the mutual funds, pension funds, and insurance companies do either. They're only interested in this year's performance. So if you subtract those shares out, what percentage of a companies shares are owned by people who do care?

    Has anyone done a study comparing companies' trading volumes to their executive compensation? Might be interesting.

  • Report this Comment On April 15, 2009, at 5:26 PM, jc66vett wrote:

    The comments about BOD's are right on the money. I worked for a public company and witnessed many board meetings where CEO's rec's were approved with little or no discussion. Comp committee's do little to control excessive comp for the top players, and few decisions are actually based on what is best for shareholders. A shareholders revolution is long overdo.

  • Report this Comment On May 08, 2009, at 4:01 PM, ragstoo wrote:

    Every comment here is accurate. Board of directors get paid two - ten times the salary of the poor fools who work 50 weeks out of the year for their 4 - 6 days they work. The pay, benefits, and perks are too much for them to challange a CEO or question his salary when more for him is more for them. Most of the directors are professional directors in that they are much like professional sports manangers with a limtited pool of people that are allowed to be on boards, and some of them sit on 10 and 12 companies earning millions of dollars a year in compensation for merely attending 30 - 40 meetings a year. Real tough life. The stock holders need to get tougher on the board of directors and their compensation. I can recall when I first started investing and the average Joe made around $26,000 per year, that sitting on a board might have given you a $6,000 retainer and a $500 check for each meeting you attended. Between the board of directors and the CEO's, there is little left of any profit for the shareholders. This call for a revolution of the shareholders to demand reduced pay for all of them.

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