Finally, formal leadership of the board almost always rested in the hands of the CEO, since most held the title of board chairman. These factors gave the CEO enormous influence in the boardroom, which prevented boards from acting against the desires of the CEO.
Directors found it difficult to leverage their one strength, sheer numbers. Although the outside directors often outnumbered the CEO and insiders, there were few, if any, formal mechanisms for collective action. Outside directors were seldom a cohesive group; they met infrequently and were only casually acquainted with one another. Their strongest relationship was usually with the CEO: He or she was the hub to which the directors connected.
To make matters worse, directors had busy lives outside the boardroom, with little time to spare, so few objected to the boardroom norm discouraging contact other than at the regular meeting. Inevitably, there was no process for tapping a leader from the pool of directors in times of crisis, and boards were often ill-prepared to take quick, decisive action when it was needed.
The Lorsch and MacIver findings exposed these problems and sounded a loud alarm. Lorsch and MacIver themselves proposed several important changes. These included establishing nominating committees chaired by outside directors; limiting the number of board memberships a director could have; adding more retired CEOs as directors (they were to have more time to spend on company issues as directors); tying director pay to stock options or annual grants of stock; increasing the use of committees to govern; performing formal CEO reviews; and designating a lead or presiding director. Their most radical proposal was to choose a chairman from the ranks of outside directors who would play a strong role in setting the board’s agenda, conducting meetings, and selecting directors.
The groundwork laid by the challenges of the three muscle men of the 1980s did produce some boardroom empowerment in the 1990s. Formal CEO reviews, greater use of committees, and equity compensation for directors became popular practices among boards of the Fortune 1000. Boards showed their muscle by sacking some CEOs of well-known companies in the early 1990s — James Robinson of American Express, Rod Canion of Compaq, Ken Olsen of Digital Equipment, John Akers of IBM, and Robert Stempel of General Motors were all ousted by their boards. Lists of governance best practices emerged and were used by the press and investors to rate boards. In 1996, Business Week published its first report card on the best and the worst corporate boards.
The Long Shadow of Shareholder Value
By the mid- to late 1990s, a single metric of corporate performance, shareholder value, overshadowed all the others and became the focus of most CEOs and their boards. Judging solely by this metric, many boards were apparently doing their job well. An exuberant stock market and a few corporate stars reinforced this focus on shareholder value. There were the General Electrics, the Cisco Systems, and the Microsofts, along with the skyrocketing and then crashing stars of e-commerce like Amazon and Yahoo.
With his myth-building best-selling book Mean Business: How I Save Bad Companies and Make Good Companies Great (1996), turnaround artist Albert Dunlap, better known as Chainsaw Al, became the poster boy for shareholder value. Wherever Al worked his downsizing magic, shareholder returns skyrocketed. He also became one of the loudest advocates for paying board members purely in stock.
From the vantage point of Charles Atlas’s beach, the new muscle man on the block is now the shareholder. Indeed, research reported in our new book, Corporate Boards: New Strategies for Adding Value at the Top (2001), written with David L. Finegold, shows that today most directors see their primary role as enhancing shareholder value.