Exploring Corporate Governance Around the World

By Allison Garrett, Senior Vice President for Academic Affairs at Oklahoma Christian University

Monday, October 09, 2006

Nose In, Fingers In: The (New?) Role of Corporate Directors

Today's Wall Street Journal contains a special section on corporate governance under the title, "Move Over, CEO: Here Come the Directors." For decades, the prevailing view of the role of corporate directors has been a "nose in, fingers out" view, meaning that directors are supposed to be nosey but they aren't supposed to run the business; that's the job of the executives.

Directors are supposed to exercise independent judgement, ask probing questions of management, and push for more information if the answers seem flimsy or inaccurate. In appropriate circumstances, they should replace managers. Executives are charged with the day-to-day operations of the business, with guidance from the board of a high-level, strategic nature.

But according to the cover of the WSJ section, today's directors are in "the trenches to talk to investors or employees." A board that is engaged with various constituencies can monitor the company's activities better than a disengaged board, but it can also get in the way of the executives whom the board has hired to run the company. Outside directors may, for example, not be well versed in the art of dealing with analysts and may misstate information about the company. Outside directors who try to influence executives with respect to personnel decisions and other similar matters risk distracting the executives from running the company. Instead, the executives may end up spending too much time responding to questions and comments on routine managerial issues.

One way for directors to learn more about the company is for the company to appoint senior executives to serve as a liaisons with the board members. These positions can be rotated from year to year so that board members learn about the company from other executives and gradually are exposed to likely successors to the CEO. Board members might also be invited to attend meetings with analysts, with the understanding that the CEO and CFO will do most of the talking. Board members from other industries should focus on acquiring industry knowledge, perhaps by reading trade journals or attending conferences.

In the end, though, the board should establish the strategic direction of the company and monitor the company's progress, but it should leave the running of the company to the CEO and other executives it has selected.

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