Bridging Board Gaps, a New Study Group Report on Improving Board Practices

By Cydney Posner

Following is a link to an article from The Wall Street Journal regarding a new report, "Bridging Board Gaps," which recommends improvements to corporate governance practices at the board level.  The recommendations are from the Study Group on Corporate Boards, co-sponsored by Columbia Business School and the John L. Weinberg Center for Corporate Governance at the University of Delaware, consisting of a panel of 20 current and former chief executives, investors, academics and others, including retired Delaware Chief Justice E. Norman Veasey, retired Delaware Chancellor William T. Allen, former SEC chairman Arthur Levitt and former Treasury Secretary Paul O'Neill. The WSJ reports that the panel believe an overhaul is necessary to address the "heavy criticism of boards for being asleep at the switch as the massive risks that led to the financial crisis built up." CNBC  reports that the guidelines address "gaps" in seven core areas: Purpose, Culture, Leadership, Information, Advice, Debate and Self-Renewal. The WSJ reports that activist investors expressed the view that the report's suggestions, if adopted, could help directors to act more assertively and independently of management.

According to the WSJ article, the most far-reaching recommendation is for "wider use of dissenting votes when directors cannot reach consensus. Historically, there have been few split votes in U.S. boardrooms. Directors face heavy pressure to seek unanimous final votes to head off possible lawsuits or other challenges to their decisions." But directors are encouraged in the report to eliminate their "taboo against dissenting votes" and instead "see a lack of unanimity ‘as a sign of governance strength' …. Directors who disagree with their colleagues currently have few options. [Reuben Mark, a panel member and former Colgate-Palmolive CEO], objected to Citigroup Inc.'s succession-planning process while serving on that bank's board. Rather than cast a dissenting vote, Mr. Mark left Citigroup in spring 2003. A dissenting vote ‘almost never happens,' Mr. Mark said in an interview this week." Similarly, William T. Boardman, a Bank of America director, preferred that B of A hire an outside CEO and therefore opposed the appointment of Brian Moynihan as CEO. According to the WSJ article, he went along with the majority after being asked to support a motion making the board vote unanimous, but he is not standing for re-election this year.

In addition, according to the WSJ, the report encourages directors to " explore term limits for themselves" to improve their oversight function and prevent entrenchment and to "rely more on outside expertise in dealing with critical, complex issues. For example, advisers can help directors ‘act as a valuable counterweight to excessive risk taking by management,' the report concluded. Experts alongside external auditors ‘can look at risk factors and risk processes,' said Frank Zarb, the panel's vice chairman, and a former interim chairman of American International Group Inc. ‘It hasn't been that way' before, he added." The panel is also promoting the separation of the roles of CEO and chairman, although the panel recognized that there "could be exceptions—and even drew dissenting opinions on the issue—it said independent chairmen should be the default option."

The WSJ reports that, Charles Elson, the panel's other co-chairman and head of the Weinberg Center for Corporate Governance at University of Delaware's business school, believes that " ‘Boards are not good enough monitors, because of the way they are comprised and how they function.'" According to CNBC, Glenn Hubbard, Dean of Columbia Business School and Study Group Co-Chair, identified "two kinds of gaps: oversight and expertise. Each is important, he said, and require looking beyond mere process. ‘Many of the contributions to corporate governance in recent years focused inward to the board's operations rather than outward to the board's work in areas such as risk.' "

In an NACD blog, one of the panelists contends that the report's "truly new message" is in the last three areas: "advice, debate, and self-renewal. Boards are not investing enough in advisors; their fear of treading on management's toes leads to serious gaps in knowledge. Also, boards are too deferential in their discussions. Rigorous debate is required and there is also a place for outright dissent (votes need not always be, as they usually are, unanimous). And finally, the third message that to me seems quite new is the suggestion that although obviously evaluation is the best way to refresh board membership, boards should consider term limits—a backstop that fewer than one in ten corporate boards have implemented, according to NACD research."

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