Boards for Dummies and Relation with Harvard
Independent board members are put in place to protect the shareholders and stakeholders of a publicly traded company. The shareholders are the owners of the company but are not the decision makers in day to day matters. Boards are put in place to protect shareholders interests. They provide checks and balances and approve key decisions to ensure these companies are not controlled by insiders or a good ol’ boy group who toe the company/CEO line. They act as a third party check and balance for the good of the company, its shareholders and stakeholders.
Ensuring the independence of board members is key. So, how does a company choose an independent board member?
Bringing in an outsider can help but doesn’t automatically solve the problem. They must truly be an independent party. Friends or others who are too involved with the CEO/Chairman or too cozy with the board due to other engagements does not help protect the shareholder. Conflicts of interest in any way which would make it difficult for the independent board member to make the right decision on behalf of the best interests of the company and its owners should be strictly avoided. Family members of other members of the board or executive management would never be considered because of the overwhelming conflicts of interests inherently involved.
How a board is selected, and reviewed by independent third parties says everything about a company and how the owners’ (shareholders) interests are protected.
How to avoid conflicts of interest.
Third party evaluations are important to make sure board members are contributing, how they are performing and if there are conflicts of interest. An independent board member is often from an unrelated field to help them bring a different perspective on ethics and perception on matters of importance. Even though they may understand the industry less, they bring a more proper independent voice and check and balance to protect shareholders and stakeholders.
Other questions to be asked: Who is the third-party firm that is hired to review independent board members? What process/procedures were followed used to select board members and the third-party evaluator? The process or lack thereof reveals where the problem lies. The more ‘skin in the game’ a board member has based on personal or business relationships, the less independent they are and are not looking out for shareholders’ interests.
What kinds of conflicts of interest can arise?
Bernard Joseph White, president emeritus of The University of Illinois and dean emeritus of the University of Michigan is the author of Boards That Excel: Candid Insights and Practical Advice for Directors.
Boards That Excel was named Governance Book of the Year for 2014 by Directors and Boards. In his book, President White describes a situation where an alumnus gave a major gift to the school and then subsequently asked him to join the board as an independent director of his publicly traded company that he chaired. In his words, “After “careful due diligence [he] determined that the company was solid and had a good reputation. I was confident in my ability to be independent in thought and action as a director because that’s my makeup... So, I joined the board. I thought things would be fine until I attended my first meeting. There, I was surprised to find myself thinking and feeling uncomfortable about the concurrent timing of [the alumni ‘s] major gift to the school and my joining the board as an independent director of a public company he chaired. Could I be as independent as I naturally was? I wasn’t sure I could. I decided to play it safe and never find out. I went to the chairman after the meeting I told him I was concerned that I could find myself in a conflict between my roles as a dean of the Business School to which he was a donor and an independent director. I decided it was best for me not to serve on the board. It was a decision that cost me a lot of money - several million dollars in light of stock options and the later sale of the company - but it passed the ‘look yourself in the mirror’ standard”.
How does this relate to us at Harvard? This scenario that the highly respected Dean of the University of Michigan and President of the University of Illinois gave is an almost identical scenario that HBS Dean Nitin Nohria has been in. Dean Nohria orchestrated a much larger ($50 million) gift to Harvard Business School from the Harvard alumnus and Chairman of publicly traded Tata and Sons and was later asked to serve on his board.
Dean Nohria did not have the same “look at yourself in the mirror “standard that Dean White had. He stayed serving on the board despite Tata giving much larger sums of money to Harvard and then demonstrated the massive conflicts of interest in these types of situations by needing to “pay back” and remain loyal to his previous donor by lynching the new chairman who had just received high-ranking reviews by and recommendations for a raise by other independent boards but, through his cleaning up of that debt and lack of corporate governance was tarnishing the ex-chairman’s reputation. To top it off, Nohria added his brother-in-law and close friend 7 weeks before the planned coup to ensure the number of votes needed to fire the chairman.
As a reminder, we are not talking about the despotism of a totalitarian third world dictator. We are talking about the current HBS Dean and shortlisted nominee for president of Harvard.
Dean Nohria: What are you? A dean/president of a university or the board member of your home country’s largest publicly traded company? You cannot be both. You need to choose.
Harvard: Do you have any standards at all or is fundraising your god?
Perhaps you should follow and enforce your own suggested rule to ensure the best people are serving in the boardroom.
From the Harvard Business Review.
Principle #2: Boards Should Install Mechanisms to Ensure the Best Possible People in the Boardroom