Robert C. Gross Associates Blog

February 23, 2010

Getting it Right: Boards of Directors

Filed under: Corporate Governance — Robert C Gross @ 9:35 am

“The failure of the financial system in 2008 wasn’t simply a massive failure of common sense, regulation, and leadership. It was also a failure of corporate governance.”
That, from the February 3, 2010 edition of Newsweek magazine’s introduction of senior business writer Daniel Gross’ interview with John Gillespie and David Zweig, authors of Money for Nothing: How the Failure of Corporate Boards Is Ruining American Business and Costing Us Trillions.
Corporate boards and the process known as “corporate governance” are, indeed, again under attack. Anger from Main Street and Washington policy-makers rages at the astronomical compensation, bonuses, and pay packages of Wall Street financial firms – especially those bailed out by U.S. taxpayers.
And while that anger is largely directed at corporate management, the role of public company boards of directors is increasingly under intense scrutiny.
We begin here a series of discussions about what corporate boards can and should do to restore the trust of corporate shareholders and other stakeholders, including employees, communities and policy makers. While our focus here will be on public company boards, these discussions have equal utility to the enhancement of private company boards, their cultures, and their processes and practices.
We therefore invite your feedback and your thoughts to our discussions about the role of boards in the process known as “corporate governance” – described by Robert A.G. Monks and Nell Minow, in their book Corporate Governance” – as “the structure that is intended to make sure that the right questions get asked and that checks and balances are in place to make sure the answers reflect what is best for the creation of long-term, sustainable value.”
Typically, corporate governance is thought of as a series of checks and balances among a company’s players: its owners or shareholders, its management, and its board of directors. It is the role of corporate boards theoretically to represent the interests of shareholder by overseeing and monitoring management. Sadly, as we see in companies that have underperformed or failed, the boards are often functionally beholden to management, the same management that appoints and pays them.
But the traditional notions and definitions of corporate governance participants leave out at least three other important broadly-based corporate governance constituents: other stakeholders, including employees, retirees, communities, and regulators.
We want to explore in future posts and discussions suggested “fixes” to the role of boards of directors in corporate governance in the face of their many challenges: from over-exuberant policy-makers, whose “cures” may address symptoms rather than illnesses, to the rampant “short-termism” which infects many institutional investors and their advisors.
Ben W. Heineman points out in a January 26, 2010 Business Week article entitled “Restoring Trust in Corporate Governance”, that one answer to a fix of corporate governance, especially in the financial sector, is increased public regulation. But, as he points out, “regardless of the regulatory outcomes, boards of directors and business leaders will still have to make complex decisions that direct the destiny of corporations.”
He then details six essential, interrelated and immediate tasks for corporate boards – many of which we will explore in some depth, along with others, in this series of posts. He calls them the “foundation for rebuilding trust in corporate governance and addressing the ultimate questions of corporate accountability which underlie the governance debates”.
They are:
• A redefinition of the mission of a company – and the role of the board of directors and the CEO to create durable value for shareholders and other stakeholders through sustained economic performance, sound risk management, and high integrity (emphasis added).
• A revamped internal training process – for boards, leaders, and leaders to be.
• A refocused CEO selection process.
• A restatement of fundamental but operational metrics for performance, risk and integrity.
• A revision of compensation for CEOs and executives.
• A re-alignment of the board’s fundamental oversight function.

And there are many additional resources and recommendations for enhanced corporate board governance from other outstanding sources, including the National Association of Corporate Directors (NACD), which we will explore.

Ultimately, enhanced boardroom governance involves much more than the adoption of “check the box” best practices. At its core, true reform and enhancement are anchored to a committed “tone at the top” culture that “fuses high performance with high integrity”. High integrity is grounded in a commitment to “doing what’s right” and not just to “doing the right things”. It is based on a foundation of ethics and values that balances risk with reward.

So we invite you along as we explore ways the corporate boards can restore trust as they enhance their performance……………..

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October 15, 2009

A remarkable narrative: Learn from a man Warren Buffet admires

Filed under: Corporate Governance, Leadership — Tags: Bill Child, Book Review, Leadership — admin @ 12:29 pm

For entrepreneurs looking to hone a capitalist nature, or for ambitious industrialists looking develop a successful enterprise, I recommend Jeff Benedict’s How to Build a Business Warren Buffett Would Buy: the R.C. Willey Story.

It’s a remarkable narrative—one we can turn to for insight on effective business practices, corporate-governance guidance and personal relationship development.

In it, Bill Child, a 22-year old husband, father, student and teacher-to-be with little business training or experience, took over his father-in-law’s cinder-block appliance store. Located in a small, rural community near the Great Salt Lake, the shop blossomed under Child’s service-centric leadership and integrity-rich management style. Called R.C. Willey, the store grew quickly. Child added locations in Utah, Boise and Las Vegas, and his brand became synonymous with quality and value. And four decades after Childs took over, legendary investor Warren Buffett acquired the furniture powerhouse.

“Bill Child represents the best of America.” Buffett said about the small-town to big-business story. “In matters of family, philanthropy, business, or just plain citizenship, anyone who follows in his footsteps is heading true north.”

Indeed, Child’s story is more than a case study in how to build a successful business. His mantra, to “treat the other fellow as you would like to be treated yourself,” is the footings and foundation for a compelling narrative of how constructive values make a difference in building a successful business and life—one centered on serving others.

In the autobiographical afterword, Childs attributes R.C. Willey’s success to simple principles. I encourage you to read his words for yourself, so you can appreciate firsthand the remarkable story of leadership, vision, persistence, discipline, consistency, frugality and integrity.

For the impatient, let me summarize Child’s essential recommendations:

Relationships with customers, employees, bankers and suppliers matter.
The cornerstone of relationships is integrity; be honest and do the right thing.
Frugality, humility and discipline are essential for the “long view” in life and business. Also essential are perseverance, persistence and consistency in thought and action.
Value a willingness to adapt and stay ahead of the herd.
Character and work ethic are more important than resumes.
Little things—be it customer courtesies or store cleanliness—are small actions that count for much.

On Amazon: How to Build a Business Warren Buffett Would Buy: the R.C. Willey Story

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September 1, 2009

In Fed We Trust: Preventing Depression 2.0 (but barely)

Filed under: Consultation, Corporate Governance, Leadership — Tags: Economic Consulting, Federal Reserve, Finance and Banking, Leadership Consulting — Robert C Gross @ 3:29 pm

Bankers and non-bankers alike will see value in Pulitzer-Prize winner David Wessel’s In Fed We Trust, a compelling account of the Fed’s response to the 2007/2008 global economic meltdown.

In fact, the book is a must-read for understanding what caused the worst global financial crisis since the Great Depression and the Fed’s bold responses to prevent “Depression 2.0.”

Wessel, Wall Street Journal economics editor and author of the Journal’s weekly Capital column, says the book is the story of Ben Bernanke’s Fed “abandoning ‘failed paradigms’ in order to do what needed to be done.”

He discusses “what the Fed saw and what it missed” and “a handful of people – overwhelmed, exhausted, beseeched, besieged, constantly second-guessed – who found themselves assigned to protect the U.S. economy from the worst economic threat of their lifetimes.”

In Fed We Trust is a story of individual and collective “failures of imagination” at levels of business and government leadership. It is also an outstanding primer on the art of crisis leadership—of leaders ignoring warning signs, learning from their mistakes and then acting boldly.

As a long-time business executive and leadership student, I heartily recommend this balanced and nuanced account of Bernanke’s leadership. After all, effective leaders aren’t born; they learn on the job. Bernanke is proof that—despite what critics might say—effective leadership is not measured by mistakes but by how a leader reacts to those mistakes.

The book begins with a riveting account of the Fed’s September, 2008 decision to allow Wall Street powerhouse Lehman Bros to fail, the ensuing global financial “run” following that failure and the Fed’s $85 billion bailout two days later of insurance giant AIG.

Next, Wessel offers a historical overview of 20^th Century financial panics and their parallels to the causes, effects and responses to the 2008 Great Panic.

Also included is commentary on Ben Bernanke, and how his brilliant academic analysis of the Great Depression launched his career. These conclusions remain pivotal to his reputation as one of America’s foremost economic historians. Among them: the Fed’s responses to (and mishandling of) the 1929 crash aftermath.

Noting that Bernanke, Treasury Secretary Paulson and New York Fed President Geithner did not “appreciate the tidal wave that a Lehman bankruptcy would cause,” we understand Wessel’s unvarnished view of the early mistakes and the bold innovations that transformed America’s financial system. Wessel’s view is that “Bernanke mostly got it right,” and I’m inclined to agree.

My thoughts on the future? President Obama has appointed Bernanke to a second four-year term as Fed chair. Critics and fans alike—both inside and outside the Fed—will continue to examine his every move with laser-like intensity. Bernanke’s place in history and, indeed, the immediate future of the U.S. economy, will be measured by second-term performance.

Let’s just hope Bernanke can extricate the economy from the massive injections of liquidity during his first term without an inflationary explosion.

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