The Hindu Business Line : When corporate boards fail

Should boards of directors in the modern corporation be reconstituted as vigilant monitors? Should such boards be active participants in the management of the firm?

These are the questions that Oliver E. Williamson addresses in one of the chapters included in The Economics of Corporate Governance and Mergers edited by Klaus Gugler and B. Burcin Yurtoglu ( www.e-elgar.com ).

The disparity between the principle and practice of corporate boards of directors is widely interpreted as ‘a serious, perhaps the defining, illustration of the failures of capitalism,’ observes Williamson.

“If, therefore, corporate boards have been going from bad to worse, it is all the more urgent to retake control from the management, which has usurped it, and return it to the shareholders (or maybe even the stakeholders), where it belongs.”

The author cites views such as that of Michael Jensen, on how leveraged buyouts (LBOs) and venture capital funds provide the models for effectively redesigning the boards of today. Williamson, however, is of the view that LBOs and start-ups are akin to sprinters whereas the modern steady-state corporation is a long-distance runner.

Another view, from contrarian literature, is that the shareholders may benefit from a CEO-friendly board because the CEO will be more forthcoming under those circumstances (Renée Adams and Daniel Ferreira).

“The CEO dislikes monitoring by the board because he values control… [but] likes advising by the board because advice increases firm value without interfering with his choices… [where] both monitoring and advising by the board are more effective when the board is better informed.”

Recommended study.

Rings of confidence

A good management system will not function without adequate audits and reviews, writes John S. Oakland in Total Organizational Excellence: Achieving world-class performance (Elsevier). All procedures and systems should be audited at least once during a specified cycle, but not necessarily all at the same audit, he suggests.

“For example, every three months a selected random sample of work instructions and test methods could be audited, with the selection designed so that each procedure is audited at least once per year.

There must be, however, facility to adjust this on the basis of the audit results.”

Internal system audits and reviews must be conducted as part of the preventive strategy and not as a matter of expediency resulting from quality problems, Oakland insists. Design the management system as ‘rings of confidence’ with a customer focus, he says.

Useful inputs.

Urging senior managers to take the responsibility for the adoption of the appropriate documented management system, even if it meant translation from ‘engineering language,’ Oakland cautions that in the alternative the message may only get translated into different other forms such as ‘inefficiencies, waste, high costs, crippling competition, and loss of market.’

D. MURALI
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