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When we enter a board meeting, we only ask two questions. One, are we going to fire the CEO today? If not, then how can we help?

Did you ever expect a corporation to have a conscience, when it has no soul to be damned and no body to be kicked?

If a few rotten apples can spoil the barrel, I think we have to look at the nature of the barrel, not just the apples. Organizational design, structure, and culture do play a role and almost always have in corporate scandals. Companies that get into trouble often do so because of minimal internal connections between many parts of the organization. With deficient information and knowledge, you can't put all the pieces together or understand when something might be going wrong.

A well-designed CEO-compensation plan has four elements to it. One is base salary; one is a short-term bonus that is basically a one-year result based on customer satisfaction and the employee-values survey as well as just financial results. Then there's a longer-term cash bonus, based on the same results over three to five years. Finally, I think stock options-at a reasonable level, please-are an appropriate part of compensation. But they ought to reflect true economic value creation over time. One way to do that would be to say that stock options don't vest until after at least five years, and then they vest ratably over the next five years. Stock options are about giving executives a chance to participate in the value that they create over time. If you didn't create any value over a five-to-ten-year period, then shame on you-you don't deserve anything anyway.

The problem has not been the use of options in themselves but the ability of someone to exercise options and sell the stock in the short termÂ…Remove the short-term incentive-that's the real cure.

Â…restricted stock forces you to ride the stock's rise and the stock's fall. An option is an expectancy of a future profit. It can be worth a lot, or it can be worth nothing. There are no negative wealth implications to you of owning an option; the worst that happens is that you walk off with no more than you walked in. On the other hand, stock that you're awarded can fall in value, which represents a personal wealth diminution. I believe that to create the proper alignment with the shareholder, you have to give the executive an incentive to ride the stock up and share the glory with the shareholders, and if the stock falls, share the pain.

Concerning the gulf between the haves and the have-nots, it is more than ironic that perhaps the largest gulf of all is not between Americans and people in other countries, but rather between CEOs in America and their own workers. How are we going to narrow the former until we take steps to narrow the latter?

Most bungled successions can be traced to five failings.
First, many incumbents are reluctant to give up power, either hanging on too long or trying to foist like-minded successors onto their boards.
Second, when appointing new leaders, boards often choose a safe replacement, rather than someone who will question the directors' roles.
Third, swayed by force of personality, boards frequently fail to define or adhere to an objective set of selection criteria.
Fourth, many don't look beyond the most visible senior management candidates, and therefore fail to identify strong potentials from the next generation of executives.
Finally, short-term concerns-such as antsy shareholders-are allowed to dictate the succession timetable.
Add to this the usual heady mix of egos, corporate politics and greed, and you have a recipe for trouble.

Note: Older EBF articles are not currently online. I'm not sure if this is temporary or permanent. If you click you will be taken to the Archive.org site to find an archived copy.

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History will look back on the last decade of executive compensation in the United States as an atrocity. The levels of pay exceeded any historical precedent, bore little comparison with compensation in other countries, and - most importantly - failed to have any correlation with the creation of value for shareholders.

Often, performance-based plans are a measure not of an executive's ability to reach a specific goal, but his ability to negotiate favorable, easily attainable goals with his superiors or the board.

There is a ready bounty of CEO material currently available, but there is an unholy alliance between risk-averse boards and executive recruiters promoting marquee candidates that gives the appearance of a shortage. That very small group can't possibly perform at the messianic level expected of them, and the list gets shorter and shorter over time as the unrealistic expectations become apparent.

Next time you hear a chief executive go on about teamwork, about how "we" did it by all pulling together, ask who among the "we" is getting what kind of bonus. When you hear that chief boosting about taking the long view, ask how those bonuses are calculated. If cooperation and foresight are so important, why have these few been cashing in on generous stock options? Do we take the money back when the price plummets? Isn't it time to recognize this kind of executive compensation for what it is: a form of corruption, not only of our institutions, but of our societies as democratic systems?

While the focus on stakeholders may be a bottom-up movement, the control in corporations is still exercised top-down: The money's at the top, the pain at the bottom. CEOs today are making well over 400 times the average worker's salary. If there was any group in the country looking out for the mid-range executive--which there isn't--they'd have some wicked things to say about the gap between the mid-range executive praying that they won't dump him and the crowd at the top who think they're the second coming of Horatio Alger because they fired 30,000 people and got their stock up 20 points. As long as corporations are top-down mechanisms driven by the bottom line of their compensation packages and their institutional investors, it's difficult for me to see what difference it makes if there's spirituality or religion at the bottom half of the employee roster.

Large companies are neglecting the development of internal executive candidates since the old paternalistic, career-oriented employment contract was destroyed with the downsizings of the 1990s...Similarly, companies invested less in career and executive development because of the new transience and heightened career mobility...So organizations aren't doing what they need to do to develop executive talent, yet they decry a shortage. Then they poach from other organizations...that do prepare leaders. It seems they would rather pay a premium for their irresponsibility in executive development by hiring costly superstars rather than spend the money internally to develop their own.

Every time researchers study the effect of the CEO on firm performance, they contribute to the idea that the big boss has a make-or-break effect, even though research usually finds that he doesn't. Most people-including CEOs-would agree they can't save a company on their own, so why do corporate boards persist in looking for a savior in a shrinking (and somewhat discredited) pool of saviors?

A CEO's goal should be credibility, not celebrity. In the quest for credibility, CEOs should avoid anything that feeds expectations. Underpromising won't guarantee success, but overpromising is the surest path to failure. This often means being more boring, less newsworthy, and less available than the press would sometimes like.

Note: Older EBF articles are not currently online. I'm not sure if this is temporary or permanent. If you click you will be taken to the Archive.org site to find an archived copy.

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The job of the directors is to represent the shareholder and the board's primary tool for doing that is by asking tough questions that elicit insightful responses. The best outcome from being 'grilled' by the board is not that management receives the authority to do what it wants to do. The best outcome is that management sees the world differently. Its powers of analysis are deepened, its world-view expanded, its blind spots subjected to new light.

What's fascinating about so many of the governance reformers is not that they are cynical about the role of boards, but that they are so idealistic. The notion that independent directors can, on a part-time basis, simultaneously and successfully formulate strategy, hire and fire senior executives, ensure rigid compliance with myriad global procedures, detect fraud, appropriately incentivize managerial performance, and oversee metrics for organizational performance, all without any actionable conflicts of interest, strikes me as exceedingly optimistic.

There are times when the need for economic and political understanding requires direct, openly adverse comment: Reference to corporate management compensation as something set by stockholders or their directors is a bogus article of faith. To affirm this fiction, stockholders are invited each year to the annual meeting, which, indeed, resembles a religious rite. There is ceremonial expression and, with rare exception, no negative response. Infidels who urge action are set aside; the management position is routinely approved. The shareholders who previously suggested some social policy or environmental concern have their proposals printed with supporting argument. These are uniformly rejected by management. The only significant recent exception has been at the meetings of the highly intelligent, socially eccentric and financially successful Berkshire Hathaway, Inc. of Omaha, Nebraska. Proposals by its stockholders are frequently accepted; some have thought this by prearrangement with management. In any case, it represents a highly exceptional tolerance on the part of the corporation. No one should be in doubt: Shareholders - owners - and their alleged directors in any sizable enterprise are fully subordinate to the management. Though the impression of owner authority is offered, it does not, in fact, exist. An accepted fraud.

Note: Older EBF articles are not currently online. I'm not sure if this is temporary or permanent. If you click you will be taken to the Archive.org site to find an archived copy.

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Whenever an institution malfunctions as consistently as boards of directors have in nearly every major fiasco of the last forty or fifty years it is futile to blame men. It is the institution that malfunctions.

Despite the overwhelming evidence to the contrary, boards tend to favor the "proven" talent, but often fail to ask "proven in what context?"

In the end, managers are responsible to the institution they manage, the company, not to shareholders, not to employees, not to customers. They are required to protect the integrity of the institution. And I think that's the rule of management. It is responsible ultimately for protecting the integrity of the institution. And when I mean integrity, I mean it in all senses of the word. Integrity means it's holding together. Integrity is what lies at the core of the management profession. Now, integrity cannot be maintained unless shareholders are satisfied, because they will withdraw capital. Integrity cannot be maintained until the employees are satisfied, because they'll withdraw their labour, or customers or other "stakeholders," which is a word I don't like.

I would argue that managers are ultimately responsible for protecting and maintaining the integrity of the institution they manage, and that all the other responsibilities and obligations flow from this basic and primary responsibility. Then the directors become the referees that will ensure that the managers are indeed doing their job of protecting the integrity of the corporation.

America's Sarbanes-Oxley Act, UK's Higgs Review, and Ontario's Bill 198 do not promote good governance and, therefore shareholder value, as pointed out recently by Boardroom's Brian Lechem, so much as they protect investors from unseemly conduct. Like speed limits and stop signs they are useful to protect, but in no way do they constitute guidance for skillful, wise driving. One look at the unending stream of codes, particularly since Cadbury's 1990 report, is convincing evidence that there will continue to be more. While new prescriptions of practice are not without value, they have sharpened boards' interest in lawful compliance more than in better governance.

The board does not exist to advise or assist management, but to empower, charge, and evaluate management. A board might "ask good questions" or advise, but these do not constitute its job. They wouldn't for a CEO with respect to his or her subordinates and they don't for a board. A governancedestroying CEO-centrism quickly turns the board's commanding role into the feckless one of advisor. The board does not exist to react to CEO requests, to have its agenda management-driven, or to be either management's adversaries or its cheerleaders any more than the CEO's job exists for these reasons with respect to his or her subordinates.

The most important predictor of director effectiveness is not independence, but strategic experience that matches the company's needs. Â… Evidence that director experience is critical to board effectiveness is relatively new. However, evidence that board independence has neutral to negative effects on board effectiveness is not. The first research casting doubt on the value of board independence appeared in the late 1980s. Since then, not only have advocates of governance reform in the U.S. continued to focus on this issue, but the board independence mantra has spread to other countries.

While financial returns may be a good measure of how well executives are managing the company's existing assets, they do not accurately reflect executive performance in areas with deferred returns-for example, strategic planning, growth opportunities, business initiatives, or investments in the discovery and development of new products and technologies. It is clear, then, that incentive plans based solely on accounting measures can induce senior management to make short-term business decisions, and compromise investment opportunities with the promise of deferred or non-monetary returns.

There are a number of key questions board selection committees should be asking. The most important is: What risks does the company face? An understanding of a company's business environment and the potential risks it could face is essential to ensuring the board's ability to detect trouble sooner rather than later.

Following an assessment of a company's risks, the next question is an obvious one: Are there board members who understand the company's risks? The selection of new directors should be based in large measure on the extent to which the current board collectively understands the company's risks and opportunities. New director appointments should fill the gaps.

The final step is the first question that board selection committees should put to candidates: Does the candidate under review understand the industry risks that the current board members lack?

When directors who fill these risk gaps have been identified, only then is it possible to go back and add extra criteria, such as the ability to assist the CEO, exercise judgment, obtain regional and ethnic representation, and even a cultural fit. By doing so, directors may also contribute to identifying and growing market opportunities and sales.

New regulations could, and probably should, force companies to give shareholders more power over managers. But today's shareholders, individual and institutional alike, rarely exercise the rights they already have. Often, when managers let owners down and confidence in capitalism falters, investors are at least partly to blame. Even if they are not cheering the managers on to greater feats of daring, they are failing to demand probity and accountability.

Note: Older EBF articles are not currently online. I'm not sure if this is temporary or permanent. If you click you will be taken to the Archive.org site to find an archived copy.

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Businesses in the Western world are still governed by antiquated corporation laws. In the past, employees were regarded as an adjunct to business; they were simply the "hands" to operate the machines. Power was concentrated at the top. The law gave priority to the shareholders, based on the assumption that the human elements were mere extensions of the capital assets.

Most of today's corporations, however, have no or few capital assets. They are dependent on brain power; people are the critical success factor. But businesses are still ruled by 19th-century legislation. Managers are forced to optimise capital before all other concerns. Excessive power is given to shareholders and that power is being abused.

Note: Older EBF articles are not currently online. I'm not sure if this is temporary or permanent. If you click you will be taken to the Archive.org site to find an archived copy.

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If you have a great idea, you want to set up your own firm, make a quick buck and a swift exit, then the limited liability structure makes sense. If, however, you want to grow a successful company over the long term, you should steer clear of the classical limited liability formula - it gives too much power to too few people.