However, as we enter a new century, it is a good time to question whether the ’90s fascination with shareholder value was misplaced or perhaps overdone, and whether it has actually led to more effective boards. Al Dunlap’s star has fallen, exposing a checkered management past, because he stumbled badly at Sunbeam. A slowing economy has also raised the question of whether continuing annual eye-popping jumps in a company’s share value are feasible. Meanwhile, board intervention is often late — serious red ink or major crises have to surface before boards mobilize for action, as the example of Xerox highlights. Moreover, the formal leadership of most boards remains vested in the hands of CEOs; nonexecutive chairmen and lead directors are still rare.
Allan A. Kennedy, in The End of Shareholder Value: Corporations at the Crossroads (2000), argues that the board’s preoccupation with shareholder value has led companies to mortgage their futures for today’s higher stock price. It also has created a class of entrepreneurs who, for a brief time, were able to sell companies to a gullible investing public at unsupportable stock prices. From Kennedy’s perspective, the CEOs of large public companies deserved most of the blame.
But the story is more complicated, and here is where the boardroom enters into it. Kennedy says that the world of corporate boards has changed little in the years since Lorsch and MacIver’s book. He points out that CEOs of large companies still belong to an exclusive club, since almost two-thirds of the board members of most companies are current or former CEOs of another company. Within this snug club, favors are often exchanged. The lucrative stock-option program supported in the confines of one CEO’s boardroom is promoted at another CEO’s board meeting. And a board’s capacity to be vigilant, in Kennedy’s view, is seriously compromised by the nature of its relationship to the CEO.
Today’s boardroom, he argues, is just a more insidious version of earlier ones, because rising share values have provided opportunities for CEOs and boards seemingly to collude in order to create outrageously generous compensation packages. According to Kennedy, those puny fellows on the corporate beach are really muscle men in disguise, helping one another kick sand in the face of everyone else who has a stake in today’s corporations. While some might question the extent of purposeful collusion, CEO pay packages have, in many cases, gone through the roof. It is also clear that boards sign off on these pay packages, and, as we point out in our book, board members are dramatically improving their own compensation.
Are board members weaklings in need of muscle building, or are they wheeling-and-dealing muscle men in need of policing? Kennedy says policing is the answer. He would start by changing the membership requirements for the clubhouse. Specifically, he would ban all CEOs of large public companies from serving as directors of other large public companies. In addition, under Kennedy’s plan, board members would be selected to represent the interests of customers, suppliers, communities, and employees — not just shareholders. Any board insiders would be nonvoting members. Finally, a respected outside agency would conduct regular audits of the effectiveness of board members and the board’s overall performance. This agency, or another independent body, would also develop tough standards for boards and mandate that all new board members attend an intensive orientation program.
Ram Charan’s Boards at Work provides a dramatic contrast to Kennedy’s views. Charan starts by arguing that a handful of boards have proven themselves to be the Charles Atlases. From these role models, the rest can learn. Unlike those who see boards as either 97-pound weaklings or colluding muscle men, Charan sees board members largely as critical untapped strategic resources, potential stars who must perform. From his perspective, boards need CEOs and processes to recruit, train, and harness talented, wise strategists who can help the senior management of companies be successful.