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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?
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.