January 2001
According to the text-books, the Board of Directors of a company is responsible for management oversight. It is comprised of outside (non-employee) directors and inside (employees) directors. Usually, outside directors are executives of other firms, members of academia, retired executives and former government employees. In theory, the Board finds suitable executives to manage the company on a day-to-day basis. Management takes its marching orders from the board. Its mission could be increase market share, or grow sales, or increase earnings, or cut costs, or develop new products. The Board has oversight responsibility, votes on major issues and is ultimately responsible to the owners, or shareholders.
But Boards have shown themselves very reluctant to butt into management’s decisions, many times only becoming involved when a crisis hits. Don’t believe me, just ask John Bogle (founder of Vanguard Funds) and Warren Buffet (credited with being the most successful investor of our time). Both Bogle and Buffett have been quoted recently saying boards, and management, need to be better monitored by shareholders. They imply Boards are failing in their oversight responsibility.
Why this is, is not too difficult to understand. Being on a board is no risk, big reward, winning lottery ticket. Board members get paid to attend meetings, sometimes handsomely. For instance, Enron paid each Board member $50,000 per year, committee chairs received an additional $10,000 and each Board or committee meeting attended was worth $1,250. In 2000, on average each director was compensated $79,107. Outside directors of Global Crossing received $5,000 per year plus $2,500 per Board meeting, plus $1,500 for each committee meeting. In addition in 2000 each new non-employee director received options on 120,000 shares. In 2000 each outside Kmart director received $50,000 and options to purchase 6,600 shares. Often times, payment is deferred and/or must be taken in stock or options. But let’s remember, this is far from a full-time job and holding three, four, five or more directorships simultaneously is not uncommon.
Being on a Board is like being a member of a great club. It’s an easy job, it’s a lucrative job. But there are penalties for non-conformance. Walter Hewlett, who opposes Hewlett-Packard’s merger with Compaq was lambasted for his opposition to the merger. One might think that differing opinions on matters crucial to a company would be welcomed and debated. But if the HP/Compaq merger fails it is widely reported that the other Board members believe Hewlett should resign. Why? For having an opposing position? Hewlett has discovered that if you are a board member it pays to conform.
Non-conformance can be as drastic as Mr. Hewlett’s public opposition to the HP/Compaq merger. Non-conformance can be questioning, too vigorously, management’s actions. Non-conformance can be questioning, too vigorously, management’s pay. But, as Bogle and Buffett imply, non-conformance is not common enough. For non-executive outside directors, losing a board membership can entail a large loss of income. For those outside directors that are part of the executive ranks (of other companies), questioning management too closely leaves you open to be questioned by your own Board. Word travels fast because the nexus between Boards is tight.