Time for US boards to step up

The writer is a former investment banker and author of ‘Power Failure: The Rise and Fall of an American Icon’

It is increasingly clear that too many US corporate boards are not getting the job done. Instead of acting as a much-needed check on a chief executive on behalf of shareholders, creditors and other stakeholders, all too often corporate directors opt for the path of least resistance: flattery, accommodation and the avoidance of asking hard questions for fear of retribution.

The examples are strewn across the corporate landscape but for instance, take one case that has been freshly reported. In their new book, Unscripted, journalists James B Stewart and Rachael Abrams investigate how CBS and Viacom went off the rails under the leadership of Sumner Redstone, Les Moonves and other executives. It shone a critical light on the relationship they enjoyed with their mostly white, male boards of directors.

Redstone spent the twilight years of his long life feuding over control of Viacom and CBS as lurid details of his personal life and sexual affairs emerged in the press. Before he died in 2020 aged 97, there were legal disputes over his cognitive abilities. As for Moonves, he resigned as chief executive of CBS in September 2018 after a series of reports in which women accused him of misconduct, including sexual assault. Last year, CBS and Moonves agreed with the New York attorney-general’s office to pay a total of $30.5mn to settle allegations they concealed knowledge of alleged misconduct, including sexual assault, from shareholders. One quote from Unscripted is particularly notable.

“I don’t care if a hundred more women come forward,” the late CBS board member and film producer Arnold Kopelson reportedly said at one point as reports about Moonves’ behaviour were trickling in. “Les is our leader and we have to stand behind him.” Stewart said in an interview on the Marketplace radio show that the behaviour of the board was “an appalling indictment of so-called corporate democracy”.

And those are the sins of commission. What about the sins of omission? Take, for example, fitness machine manufacturer Peloton which suffered a 92 per cent fall in its share price from a late 2020 peak amid a series of missteps. Should the board of Peloton have challenged John Foley, the flamboyant founder of the company earlier and harder, before he resigned as executive chairman last September?

Likewise, it is worth asking where were the boards of directors of both Disney and Starbucks when it was time to pick the successors to their charismatic leaders, Bob Iger and Howard Schultz?

Founder Schultz is on his third tour of duty as CEO of Starbucks, after two previous successors to him, chosen by the Starbucks board, apparently couldn’t get the job done. At Disney, meanwhile, Iger returned as CEO in November, after his chosen successor Bob Chapek flamed out after some 33 months in the job and, incredibly, just five months after the Disney board gave him a three-year contract extension. That flubbed decision cost Disney shareholders roughly $20mn in severance payments alone to Chapek.

How to improve this sorry situation? Boards need to do their job of keeping the CEO honest and to account. They do that by being given the time to review discussion materials in advance and then taking the time to read them and think deeply about the matter being decided.

They do that by not letting the CEO, and their agenda, dominate a board meeting. They do that by asking penetrating questions without fear or favour. They do that by being the kind of person that got them elected to the board in the first place: smart, fearless, resolute, driven, entrepreneurial, creative and confident. If a director finds himself sitting in a corporate board room without the energy or the gumption to hold management accountable, then he is not doing his sole job of representing the owners of the company for whom the management works. It’s not the other way around.

Maybe the time has come for more American corporations to separate the role of CEO from that of board chair? In the US, there is an unfortunate tendency to anoint an “imperial CEO”, who is both chair of the board and the chief executive. That has been only slowly changing.

Corporate boards are essential to the great leap of faith that created the idea of corporations run by a professional management in the first place, allowing founders, and others, to do something else while still having the benefit of ownership. But the system is very fragile and only works if every board member in the room feels empowered to do what they were put there to do and is not cowed by an imperial CEO. Otherwise, the board becomes a rubber stamp, or a cheerleader, and what’s the point of that?