To Whom Should Boards be Accountable?
A well-respected and influential newspaper was forced into a public auction by a hostile buy-out offer. Let's say you were on the board. How would you have reacted?
"It is pretty clear to me to whom the board is accountable: the shareholders."—J. W. Penland
"When the board deviates from long- and short-term shareholder interests as it has recently done in some instances, it creates a vacuum that no other part of the corporation can fill."—Allan Page
"There is no definitive answer to the question of how any given board balances the needs of various classes of shareholders, employees, vendors, etc."—Amy Savin
"The board should be guided by the company's stated mission."—C. J. Cullinane
These comments, along with other very thoughtful responses, suggest a wide divergence of views on the role of the board in the life cycle of a corporate entity. Interestingly, those who teach corporate law suggest that board accountabilities are subject to very broad interpretation. Lynn Stout, for example, points out that "... corporate law grants directors a wide range of protection from liability for decisions that sacrifice shareholders' immediate financial interests while serving the interests of other corporate 'stakeholders.'" Margaret Blair states, "To generate wealth for shareholders, corporate managers and directors must first be accountable to and for the satisfaction of customers, the loyalty and opportunities for growth of employees [and others] ..."
How does this play out in the consideration of bids for a company from a premium bidder whose interests may not coincide with those of employees, customers, or the public, as opposed to a substantially lower bid from a company whose interests are more closely aligned with the seller's and its various constituencies? Some of you opted to sell to the high bidder; some did not.
Ian Taylor had what is perhaps the most creative approach to the dilemma. "Several years ago ... as a board we sat and discussed this very issue... [and decided that] the board should be prepared to sell to a lower bidder ... But the discount should be set by a third party [group board or non-execs] because we do have a responsibility to shareholders to get the best price."
In the experience I related, the board decided that the 20 percent discount involved in the sale to the desired bidder was just too much. Influenced in part by large shareholders, the board accepted the higher bid. Was it the right thing to do? Would the approach of Ian Taylor's board been more acceptable? Are long- and short-term interests of shareholders synonymous at the moment of truth of the sale of an entity they own? What do you think?
In his newly published book, Authentic Leadership, Bill George reopens this question, based in part on his former role as CEO of a highly respected S&P 500 U.S. corporation. He makes clear his position by asserting that boards' almost single-minded devotion to shareholder returns may be an important cause of the recent shortfalls in corporate governance and leadership integrity, and a bias toward short-term thinking in general among corporate directors of U.S. firms.
George's view brings to mind the story of a well regarded, widely read, influential regional newspaper that was forced into a public auction by a hostile buy-out offer. While the board was willing to accept a small discount in price in order to sell to an organization with a comparable journalistic reputation, the fear of a shareholder lawsuit limited the size of the discount, even in a company with a semi-public, family-controlled ownership. What, if anything, was the board's responsibility to the public? And what, if anything, would the courts have to say about it in response to potential shareholder lawsuits? As it turns out, the two final bids involved two news organizations, one with a stellar journalistic reputation willing to pay 20 percent less than its competitor who had a reputation for meeting its numbers by cutting the newsgathering budget.
What is a board's responsibility to employees and customers, among others? And just how can it be exercised in the context of a rich history of shareholder (versus employee or customer) litigation against boards? Do you agree with Bill George? As a director of the newspaper described above, which of the two offers would you vote for?
Curiously, the proposed Sarbannes-Oxley guidelines say little about this. What, if anything, should Congress or the legal establishment do to encourage more balanced board responsibility? Do governance policies and processes for non-U.S. companies provide any guidance in this matter? What do you think?