The Drucker Difference

RIM's Prickly Board Problem


Techies like to talk about "device independence," whereby any kind of hardware can run any sort of software or instantly access the Internet. But now, smartphone maker Research in Motion (RIMM) is being forced to think about another kind of independence: that of its board of directors.

Bowing to investor pressure, RIM said late this week that it will create a committee to examine whether it should split the roles of chairman and chief executive. Currently, Mike Lazaridis and Jim Balsillie serve as both the company’s co-CEOs and co-chairmen. The move comes as RIM, producer of the BlackBerry, faces declining business and rising competition from Apple’s (AAPL) iPhone and Google’s (GOOG) Android operating system.

"There seems to be no compelling rationale for the company to resist handing over all the duties" of the chairman’s post "to an independent director who will preside over all board meetings and decisions," the advisory group Institutional Shareholder Services declared earlier this week.

But for Peter Drucker, the "first item on the agenda" would not be "the membership of the board." Instead, the focus would be on the particular responsibilities that every member of the board of directors has "and the work needed to discharge" those responsibilities.

DIRECTORS DON’T MANAGE

As Drucker noted, the board is not (and, practically speaking, hasn’t been since the 19th century) the managing organ of the business. But it remains the body responsible for ensuring that the company’s senior executives effectively manage the organization, and to this end it has several specific obligations.

"The first task of a functioning board is to insist that company management design adequate yardsticks of performance for itself," Drucker wrote in a 1978 article titled "The Real Duties of a Director," during a period in which federal regulators were clamoring for more boardroom accountability, just as they have continued to do from time to time in the decades since.

Most businesses, Drucker explained, need such gauges in five areas: return on investment; whether management is making resources (be they capital or human) as productive as possible; how well the company develops people and appoints them to essential positions; how innovative it is; and whether its strategic planning (including "what business the company is in and what business the company should be in") is sound. In each of these categories, Drucker advised, CEOs and their teams should spell out what they anticipate will happen, and then they should "be judged, a few years later, by results as measured against these expectations."

In addition, Drucker said, the board must guarantee that the company "has adequate policies for its key outside relationships" with government officials, organized labor, and the public at large. And it must ensure that the company has appropriate standards in place with respect to legal matters.

MORE THAN "SHADOW KINGS"

Of course, Drucker recognized that for a board to accomplish these important tasks, it must be genuinely independent—something he called for as early as 1954 in The Practice of Management, when he cautioned that the typical director had turned into little more than "a shadow king."

While a board dominated by corporate insiders "cannot be fooled by anyone else"—an advantage, some would argue, in a highly complex organization—"it can easily fool itself," Drucker warned. Some 30 years later, in The Frontiers of Management, Drucker added that an independent board must not be composed of men and women who see themselves as representing just shareholders, but rather by those willing to stand up for "the integrity and the interest of the enterprise itself."

Some governance experts have long suggested that a good way to foster the kind of independence Drucker advocated is to have one individual acting only as CEO and another individual—an outsider—acting strictly as chairman of the board. And, indeed, over the past 25 years, the trend toward dividing these jobs has accelerated, so that 40 percent of S&P 500 companies now follow this practice, according to the Spencer Stuart Board Index.

Still, it remains highly questionable whether those in the chairman’s seat represent what Drucker really had in mind. That’s because outgoing CEOs account for about half of those in this position, Spencer Stuart reports, meaning that only 19 percent of all S&P 500 boards today have truly independent chairs.

RELUCTANT TO YIELD

As for RIM, the company initially resisted the idea of Lazaridis and Balsillie giving up their dual chairman-CEO slots. Finally, however, it agreed to establish a panel of independent directors—those from outside the company—to study several issues related to RIM’s corporate structure, including the "necessity for RIM’s co-CEOs to have significant board level titles."

But beyond the chairman-CEO issue lies the bigger question of whether RIM’s board as a whole is ready and willing to take the ultimate step. "It is the duty of the board not to permit mediocrity in high places," Drucker asserted. "Today most boards will act only if there is gross malfunction in top management—and this is not enough."

With RIM having had trouble launching new products, its profit forecast dwindling, and layoffs mounting, the board needs to demonstrate that it understands management’s performance is nothing to phone home about.

Wartzman
Rick Wartzman is the executive director of the Drucker Institute at Claremont Graduate University.

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