The Problems with Boards

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We've gone from assessing whole boards to now assessing specific committees and specific directors. We've told people: "You've served your time and it's time to move on." That's not easy for a fellow director to do.

But isn't it the job of the nonexecutive chairman or the lead director or the head of the nominating/governance committee to sit down with a problem director and have a quiet chat?

It's hard. There's a sense that this is a peer group. And when you're in a peer group, people are reluctant. A case in point is this one fellow on a board whose fellow directors said he was impossible to work with. Yet because of who he was, no one on the board was giving him feedback. That's not unusual. These individuals are shocked when told they are engaged in dysfunctional behavior.

Of the largest 500 public companies in the U.S., what percentage would you say have boards that are really performing well?

I think too many boards think they're doing well and are afraid to rock the boat. They've delegated the assessment to a simple questionnaire that is tabulated by the corporate secretary. It doesn't produce much substance at all. We have a long ways to go. Back in 1988, only 12% of the Fortune 1000 used any kind of third-party help in selecting directors. Today more than 90% do it. We have the same kind of opportunity now for third-party assessments. Our firm has done 28 of them.

Don't lawyers tell boards to conduct only internal assessments for fear that any outside assessments will be subpoenaed and become the basis of shareholder lawsuits?

Yes, but it's been five years now since the New York Stock Exchange mandated assessments and I don't know of any company where the materials of assessment processes have been subpoenaed.

CEOs used to really drive the compositions of their boards, and allegedly stack them with pals. What role can CEOs play in today's environment?

It's a mixed bag. With all the changes that have come about and with the obvious problem of attracting directors today because of liability and time commitments, no one is going to go on a board if they learn that the CEO doesn't really want too much help. That's the first sign of a dysfunctional board. If the CEO is making all the decisions with regard to new members, that's a bad sign and good directors would back away.

We're seeing a shift toward nominating and governance becoming a real committee. In the past, nobody wanted to be on it because it didn't do anything.

In addition to writing Armchair MBA for BusinessWeek.com, William J. Holstein writes for The New York Times, Fortune, Corporate Board Member, Dealmaker, and Strategy + Business.