Years ago being a director of a public company was a much simpler proposition. Directors were invited to join the board by the chairman, usually a friend or close acquaintance in the same hometown. Boards were small, board members knew each other very well, were friends, were like-minded, and were parochial. Boards served largely to act as advisors to their friends and colleagues who managed the business. This system worked reasonably well for much of the 19th and 20th centuries. So what changed?
Well, business changed. After decades of mergers and acquisitions, business became larger–national and multi-national. Companies became more complex with a greater variety of businesses and models that were difficult to understand. Rules and regulations exploded. Shareholders expanded from a small number in the community to strangers, foreigners, pension funds, and professional risk takers. And financial and operating risk increased. All of this required a different type of director.
Today’s boards of public companies in some ways resemble those of old, with a relatively small group of people voted upon by shareholders. But directors now are recruited mostly by search firms, often are strangers to each other, and are more diverse in experience, gender, race, and geographic origination. They no longer are friends and colleagues of management. This has led to a different kind of board, with best practices drawn from guidelines written by government, shareholder groups, business groups, etc. The system has changed rapidly over the past ten years to adapt to the changing environment as well as the various business crises that erupted.
To overstate it: boards have evolved from a business advisory model to a risk/compliance model. The intent is to avoid more business failures and breakdowns in compliance that created dramatic business failures and shareholder loss. This evolution obviously was necessary. The positives are evident as nobody likes to see a company’s constituencies harmed. But we also need to be mindful of the cons. We directors need to ensure that the risk/compliance activities don’t distance us from management. We can’t switch totally to a risk/compliance group and simply outsource our advisory role to external consultants. We need to be sure we continue to provide the advice and counsel to the companies that boards have traditionally provided. We need to have a trusting, collegial, relationship with management.
Yes, we the directors need to augment our roles to adapt to the current environment and needs of the modern corporation. But we need also to remember our traditional roles, and be a safe place for managements to turn for advice and counsel. It is in this balance is where our highest and best contribution lies.
— Steve Odland