S+B: Where do you draw the line between a board that’s too supportive of the CEO and management, and a board that’s appropriately skeptical and challenging?
MILLSTEIN: That’s the question that most boards are wrestling with today. I can’t give you a bright line. To me it’s a “gut” issue. A board member has to know the nature of the business well enough, know the CEO well enough, have a deep enough understanding of the company and the man or woman who’s running it and its management, and judge when to be skeptical, and when to be supportive, or when to be both.
S+B: Can’t we say that, because of today’s environment, thanks to Enron, WorldCom, and Tyco, the board’s default position must be “the more serious the initiative, the more skeptical the board”?
MILLSTEIN: Clearly, the bar is raised. The more serious the issue, the bigger the problem, the more the board should be skeptical. No question about it. Because of “Sarbox,” because of the scandals, that line is going to be crossed earlier rather than later. The tough questions will have to be asked sooner, to show “good faith” and diligence.
S+B: What does this mean in practice? Does that mean asking tough questions of the C-level executives? Or should directors actually go into the guts of the organization and do due diligence on their own?
MILLSTEIN: The latter is the last resort.
S+B: You don’t believe the board should be quicker to bypass the C-suite to see how the business is really doing?
MILLSTEIN: When you start doing that, you’re on a downhill slope with the CEO. I have never seen a board taking that next step without the support of the CEO in a serious situation that didn’t ultimately lead to “goodbye” for the chief executive. Because it means that you’re so critical, you’re so concerned, that you can’t trust the CEO. The only way that it may work is in those instances where the CEO himself welcomes and supports the bypass.
The Big Problem
S+B: Then maybe the healthy thing to do would be for C-level managers to actively encourage the board to do that kind of probing, to neutralize it, and to show that they are open to board-level scrutiny.
MILLSTEIN: As I said, that would be nice, but it’s probably counterintuitive. Tell me about the manager who’s secure enough to say, “I’ve messed up” or “I’ve got a problem that’s unsolvable. Talk to my managers, and they’ll tell you why.” When can you count on the CEO alerting you to the big problem that may well involve his stewardship?
Take steel. Steel, for the last 20 or more years, couldn’t be fixed without wrenching changes. It was going to be one Chapter 11 or reorganization after another, or moving into different kinds of businesses. What CEO do you know of in the steel business who came forward early on and said, “I can’t fix this without disrupting labor and community relations, or maybe an early Chapter 11.” Airlines today and rust-belt industries with high labor costs, and health-care and retirement obligations, fixed by contract, are in the same predicament. Perhaps history won’t repeat itself.
S+B: You’re arguing that many boards don’t realize that these structural problems exist?
MILLSTEIN: Many of these rust-belt industries are being run for the benefit of employees and retirees, not for the shareholders, and I think that’s clear to many boards. But even so, the “solutions” are wrenching and difficult to face. It’s hard to be judgmental.
S+B: What would have made a board effective in the days when this evolution was occurring?