The Hindu Business Line : What it takes to be on the board

Directors who provide advice and information are looked upon favourably and get additional board appointments while those who want to monitor performance and exert control over managerial decision making by asking the hard questions are not likely to. Perhaps it is time researchers started looking closely at the contribution and compensation of company boards.

Motorola was very keen that I attend the company's annual meeting held last week. Considering the influence that my few shares has vis-a-vis that of institutional shareholders, my usual reaction is to file theproxy voting form in the waste paper basket. But, then, I received a second mail from the company requesting my vote and I began to take notice.

Motorola's management was facing a challenge from Carl Icahn, who wanted a seat on the board. Motorola had 13 directors of whom two were not standing for re-election. Of the proposed slate of 11 directors to be elected at the May 7 meeting, Icahn wanted to be one and the company did not want that. So, the company wanted my vote for their its of directors.

Motorola has enough problems on its hands. The last two quarters saw disappointing earnings and it does not seem to have promising products in the pipeline, which is worrying for a firm in the mobile phone industry. Its 2006 revenues were about $43 billion (Rs 1,76,300 crore) and it had an 8.5 per cent return on sales.

Deserves a Voice

Icahn felt he deserved to be heard and he had been shouting loudly, through press statements and full-page newspaper ads. His complaint was that the company was not performing well, and he laid the fault not only at the management's door but also at the board's that he said had "played on with business as usual," that is, siding with the management in not asking the hard questions. Icahn usually does not have a high opinion of board members.

In an interview to BusinessWeek in 2005, he is reported to have said that board members are cronies appointed by the very CEOs they are supposed to be watching.

If nothing else, Icahn's stake, which is more that those of the other directors combined, should give him a voice. He purchased about $1.2 billion (Rs 4,920 crore) worth of Motorola shares (about 1.4 per cent of the company) because he felt the company is undervalued.

Motorola's response to Icahn's request to be on the board was to suggest that he was not suitable for several reasons, especially that he is not knowledgeable about the technology or the business, and he is already on eight other boards and so does not have the time to devote to Motorola matters. So I wondered how the Motorola directors (average age 58) stand on the criteria they are using to judge Icahn's credentials. I found that of the 11, only four might be said to have expertise in the technology or business of Motorola.

Five of the 11 are on the boards of at least five other companies or trusts. Three are on the boards of between two and four other organisations. Seemed to me that the criteria they chose to reject Icahn, although relevant, were weak given their own position. The stronger ground would have been to call him for what he stood for — a raider.

Icahn is a classic raider of company stock, looking for short-term gains. Some call him a `greenmailer'. His usual strategy is to push a company towards actions that will increase its share price. Then he will sell at the higher price and be off to the next company, stopping at the bank on the way. But, of course, he cannot be so blatant about his intentions so he will usually talk broadly about company strategy and operations leading to poor performance.

Motorola has already used some of its large cash reserves to buy back shares at his instigation, an act that would raise share price. A better use of this money would perhaps have been to put it into R&D and business expansion, but Icahn would not usually be around for that long a term. Hopefully, Motorola's directors are advising the firm for the long term.

Theory tells us that there are three broad roles performed by members of a board. One is monitoring managerial performance, the second is contributing to the strategy and direction setting for the firm, and the third is a boundary-spanning role. This last is meant to serve as a link between the organisation and the various constituencies of which it is a part.

Getting on the board

An empirical research paper that appeared in the Academy of Management Review (April 2007) looked at the factors that affect the rate at which a board member gets appointed to additional boards.

Ingratiation (such as flattery or doing favours) towards individuals who are on board nominating committees is a strong factor. That is not surprising, for after all, we are dealing with humans. But what is interesting is that directors who provide advice and information are looked upon favourably and get additional board appointments while those who want to monitor performance and exert control over managerial decision making by asking the hard questions are not likely to receive additional board positions.

The word probably circulates that this is not a `yes man'. Thus, the monitoring role does not pay but the strategy role does.

Chances are that Icahn will not be reading that academic article. But he should realise that his complaint about Motorola board not paying attention to performance is right.

Board members do not do a good job in monitoring the work of management and pulling them up when they fall short. But what about the boundary-spanning role? Does it help the company to have a lot of people representing various constituencies but without perhaps much expertise in the other two roles?

Graded Low

Let us look at another company in a related industry — AT&T, the telecom giant. Its CEO, Mr Ed Whitacre, announced his retirement at 65 and a grateful board is sending him off into the sunset with $158.5 million (Rs 650 crore) in his pocket.

The Corporate Library, a governance watchdog, listed AT&T as one of the companies where there is a disconnect between pay and performance and gave the board a low grade on effectiveness.

Whitacre is credited with having led the company successfully for many years. He transformed the smallest of the spin-offs (called South-Western Bell) from the anti-trust break-up of AT&T to finally grow and swallow its parent and also take the name. But he has also been given the third largest retirement package in US corporate history and it would be good to look at the board that approved it.

The company board has 20 members. Of the 17 who are currently standing for election (average age 64), I could find there were only two with expertise of a technical or relevant industry nature.

There are four with finance backgrounds, a couple of lawyers, an economist, an accountant, and others representing the theatre, brewing, fragrance industry and other esoteric interests.

They are now guiding the fortunes of a company with $63 billion (Rs. 2,58,300 crore) in revenues. At best, you may say this board has a lot of boundary spanning skills.

And yet this board recommended against two shareholder proposals at its annual meeting at the end of April that would have given the shareholders the power to pass an advisory resolution regarding top management compensation and another one limiting executive retirement plans. Runaway top management compensation is a burning issue in the US, even making the conservative President George Bush and the Federal Reserve Chairman comment about it.

Perhaps it is time for researchers to start looking closely not at top management pay and performance, but the contribution and compensation of the board. Till then, if they can get away with it, they will.

(The author is a professor of international business and strategic management at Suffolk University, Boston, US. He can be reached at cgopinat@suffolk.edu)

More Stories on : Management | American Periscope | Human Resources

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Glossing over

A tale of three visions

Not the first revolt against the British

What it takes to be on the board

Can RBI be an effective driver of credit growth?

`4% farm growth is a key element of strategy for inclusive growth'

World-class education

Land acquisitions