Is recruitment of members for corporate boards of directors from outside the company the answer to stricter and more ethical control of the country's major businesses? That's the trend, as American corporations seek to avert further scandals through strengthening the power of diversified boards.
But Texas A&M University management professor Albert Cannella, who specializes in studies of corporate governance, cautions that even strong outside board members can be circumvented, so he's offering some advice to anyone brave enough to take on the responsibility of corporate board membership.
"Directors from outside the company must exercise the initiative to talk on their own with the company's auditors, outside the presence of the CEO," said Cannella, who is director of the Mays College Center for New Ventures and Entrepreneurship. "These directors need to ferret out and scrutinize any issues where the auditors disagreed with management or that required extensive discussion before an audit decision was reached."
"Corporate directors wear two hats: they're supervisors of top management, but they're also consultants and guides to those same people," he continued. "This dual relationship creates a certain amount of tension for board members. They need to be on guard, to pay more attention to what's going on with the everyday operations of the company."
Cannella says there are some simple things directors can do to protect themselves.
"They need to make sure the board meets sufficiently regularly to oversee the company properly, they need to give reasonable consideration to the issues under discussion at such meetings and they need to document all this with good notes. Additionally, the outside members should meet at least twice per year without the CEO or other inside directors present.
"Finally, outside directors should insist on an exit interview with each executive who terminates his or her employment."
These precautions are necessary so directors can defend their actions in the face of increasingly frequent shareholder suits.
"Under the business judgment rule, if directors can show that they acted in good faith in a situation, courts generally will not hold them responsible when things don't turn out as planned," Cannella said. "However, increasingly egregious scandals may influence courts to tighten up this rule, requiring more stringent proof of 'good faith' from the directors of companies being sued."
Cannella sees the addition of more outside directors as a good step in the direction of better corporate governance, but he adds that the bad publicity associated with recent board actions will probably do more to correct shortcomings than insisting on more outside directions. Additionally, he cautions that good directors are hard, and becoming harder, to recruit.
"The most desirable directors are usually already wealthy due to their business acumen," he observed. "And corporate directorships simply don't pay well enough to be financially attractive to persons in their income bracket, given the subsequent risk involved."
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