Governance Committees Can Defuse Boardroom Fireworks

The corporation, like many other institutions, continues to be criticized for all sorts of shortcomings, the critics ranging from shareholders to employees to neighbors. Viewed in that light, a quiet but promising attempt at self-improvement is worthy of attention - the rise of the corporate governance committee.

Some background information may be helpful. In theory, if not always in practice, the basic power over a corporation's affairs is lodged in its board of directors; they are elected directly by the shareholders. In turn, the board selects - and it can oust - the chief executive officer (CEO) and other top officials. The company's board of directors sounds like a very powerful group.

In practice complications arise. In most cases, the CEO also serves as the chairman of the board. He (rarely she) establishes the agenda and conducts the meeting. This makes it difficult for board members to cross swords with the CEO/chairman at board meetings.

In any event, an effective board works in harmony with the CEO. A committee can set overall policy and advise and counsel, but it can't run an organization.

When a company is well run, the essentially passive or supportive attitude of the outside director is acceptable. However, when management is ignoring a serious problem, it is difficult for the board to respond promptly. There is no obvious mechanism that a director can use as a basis for action.

As a result, most boards of directors usually respond very late to crises - but then they usually do the right thing. The situation has to get very bad (key executives resign, major customers are lost, red ink flows rapidly) before they deal with the problem.

That reaction often is to fire the CEO. As a board member who's participated in such action, it is clear to me that this is painful and you do it reluctantly. In part, such dramatic action is taken because there is no intermediate procedure whereby dissatisfied board members can caution a CEO who is losing their confidence. Although the board may believe that its move was fully justified, the CEO can point out that this precipitous action was "a bolt out of the blue."

The newly created governance committees of corporate boards are designed to avoid this type of situation from developing. Each committee almost universally is comprised entirely of "outside" directors (those who aren't officers of the company). The committee is usually charged with reviewing on a continuing basis the effectiveness of the CEO as well as the board itself. It also takes on the duties of the traditional nominating committee that selects new directors.

As the chairman of one such new corporate governance committee, my inclination is to proceed cautiously. The current fashion - to establish formal criteria and to make decisions on that basis - doesn't appeal to me. Although a set of standards is useful, effective management is essentially a matter of judgment - and so should be evaluations of managements.

The governance committee is an effort at preventive medicine. Its formation is a way of trying to provide improved communication between the top management and the board and also within the board itself. Questions can be raised and answered before they become serious criticisms of performance.

However, the governance committee is not a vehicle for managing the affairs of the company. It should avoid acting in a way that the CEO becomes concerned about infringements on his or her prerogatives. The committee is designed to be merely a vehicle for improving the interaction between the board and the CEO.

At this early stage of its development, the governance committee is basically an experiment and has yet to demonstrate its value. By enhancing the ability of a company's board of directors to respond to shortcomings in the management of the enterprise, it does seem to be an attractive alternative to further government intervention into the workings of the business firm.

* Murray Weidenbaum is chairman of the Center for the Study of American Business at Washington University in St. Louis.