Winning - Jack Welch [123]
This question came at a technology and innovation conference in Las Vegas that spanned three days and featured about twenty speakers. I was one of them.
How do you think corporate boards will change because of the Sarbanes-Oxley Act?
This question, which I heard in various forms and in many locations, including Australia and Europe, reflects a growing attention on governance, a topic for discussion that used to be reserved for shareholder meetings and business school classrooms.
Then, of course, came the postbubble corporate scandals, and people began to ask, “Where the heck were the boards in all these messes? Why didn’t they see the funny business?”
Very quickly, laws and regulations were passed to make boards and senior executives more accountable for any corruption that might occur on their watch. In general these rules, such as the Sarbanes-Oxley Act, are a good thing, necessary to restore economic confidence.
But laws will never guarantee good corporate governance. There is no way that a board’s finance committee, comprised of a finance professor, an accountant, and several busy CEOs, all from far-flung locations, can spend a couple of days every month studying a company’s books and verify that everything is on the up-and-up. Imagine being a board member of a multinational bank. You have people trading everything, swapping Japanese yen for euros in London, and others betting on U.S. commodity futures down the hall. But even most small companies have too much complexity for a committee to track, with hundreds of transactions every day, near and far.
While boards cannot be police, they must assure themselves that companies have auditors, rigorous internal processes, tight controls, and the right culture for that purpose.
Boards play other roles as well. They pick the CEO and approve the top management. In fact, they should know members of the top team as well as they know their own colleagues. Boards also monitor the mission of the company. Is it real? Do people understand it? Is it being executed? Can it win?
Boards also gauge the integrity of the company. That’s huge. They must visit the field operations and conduct meaningful conversations with people at every level, eyeball to eyeball. It is in this subtle, nuanced integrity watchdog role that boards can make a real contribution.
For some boards, Sarbanes-Oxley will require a real change in behavior. They will need to stop thinking about their jobs as eight, ten, or twelve closed-door meetings a year with lovely catered lunches.
For others, it will only reinforce their existing approach.
Now, in the rush to deal with the scandals, perhaps some aspects of Sarbanes-Oxley went too far, for example, the rules that imply the superiority of independent directors over directors who have some sort of stake in the company, either as investors, suppliers, or any other form of business partner.*
This new requirement needs a re-look with a big dose of common sense.
There is nothing wrong with directors having skin in the game. For the shareholders’ sake, directors should really care about how the company is doing. But the notion that independent directors are better for the company is having the unintended consequence, in some cases, of removing good judgment and experience from where it is needed most.
Take the case of Sam Nunn, the distinguished former U.S. senator from Georgia. Or Roger Penske, the automobile industry entrepreneur. Both were required to leave key GE board committees. Why? After leaving the Senate, Sam joined King & Spalding, a law firm that GE had done business with for decades. In Roger’s case, he had a minority interest in a small GE truck-leasing joint venture. Or take the case of Warren Buffett. Activists wanted him off the audit committee at Coca-Cola because