Who Is Responsible When A Business Goes Awry

The Public Corporation
I am a stockholder in many public corporations but I wish I weren't because I know there's a good chance that management and directors are in cahoots to retain their positions and deny the stockholders what is in their best interest. For example, when a board recommends voting against a declassified board, for a golden parachute agreement, or against disclosure of political contributions, etc. I realize it is not on my side as a stockholder. The board's cohorts, the executives, preserving their power, place their own personal welfare ahead of the company's. The directors to whom the executives are supposed to be directly responsible, if they are not in cahoots, are not savvy enough to know when they are being hoodwinked.

When the annual reports arrive at my door, I read the CEO's and Chairman's optimistic spiels, then look at the figures and find they often don't jive. I feel I'm being sold a bill of goods. Reading the bios of the directors up for election, I see that many are celebrities or from academia that have no business background whatever that would qualify them to perform the required oversight. Recently, Chairman Mitchell of Disney publicly stated that the board's job is simply to protect and advance the interest of the stockholders. But that's only half the job; the other half is to be able to read a P & L Statement and Balance Sheet intelligently enough to ask questions and offer advice.

Besides having worked for public corporations, I've also worked for closely held companies, and for one in which I was majority owner. As its CEO, my company took precedence over me because were it to fail, so would I. Were I to take an exorbitant salary, the company would suffer, and I'd incur the resentment of my employees. Every dollar had to be productive. My primary interest was the future of the company upon which the employees, the customers and the community depended. Though I was top dog, I had a knowledgeable board of directors who held my feet to the fire and on occasion prevented me from making bad decisions.

One member was a lawyer who advised me on what was legal or not in our dealings with the outside world. Two were people from our industry who understood how our products were made and their markets. One, although not technically a director, was our accountant who served strictly as an advisor to the board. And one was a company executive who was sympathetic to, and understood the needs of, our employees. All ran the risk of being liable for possible illegal acts by top management, so the company protected them with liability insurance policies. One director, a professor at the Harvard Business School, resigned when things began going badly for the company – which proved to be temporary. But there was no question the directors felt that they were responsible for what I and my executives did, both good and bad.

Of course there are corporate executives who are competent and dedicated, but not in the same way as a business owner. I recall attending a course for small company presidents at Harvard in which CEOs from public corporations lectured us on various management issues. When they let their hair down in the dining hall they said they were envious of us; they'd give their right arms to be running their own businesses. So what did they envy? Certainly not our incomes which couldn't compare with theirs, nor our prestige, since none of us would have been invited to lecture at the School or write an article in the Review. It was our autonomy, the bald responsibility we took for our own actions, and the testing of our ability to succeed on our own merit -- or fail for lack of it.

This tells us something about the corporate CEO's mindset. He or she is besieged by forces within the organization, including the inexpert board, which must be sold on the idea that all is well, or is headed that way. Responsibility? The organization is so large that bad things could be going on that the CEO couldn't even imagine. Merit? Make the bottom line look good for the short term to please the stockholders, and more to the point, make it so the CEO can cash in those options as the price of the stock temporarily rises. So the CEO is on a constant campaign to quell bad news. No wonder those CEOs envied us. It's a hell of a way to run a business.
Of course, none of this is real. That is, the CEO knows, has to know, about the bad things that transpire within the company. To deny it is to admit incompetence. The CEO knows that short term thinking, catering to the stock price, could well lead to his or her demise, so why not make hay while the sun shines? The CEO knows whether he or she is up to the job, and if not, to obfuscate and cover up through force of personality. The CEO has a built in constituency: the board. Most members are his friends? And those that aren't will soon be.

So where does the ultimate responsibility lie in a public corporation. Not on the CEO who does not have the freedom, or the mental orientation, to behave like a sole proprietor. Some suggest that it should be the employees. Make them stockholders and all will be well. In a sense, the employees are the easiest stockholders to fool. The last to know the truth, they are subject to executive propaganda daily. In my closely held company, which eventually became partially employee owned, we had to teach the employees how to read our financial statements so we could intelligently discuss our predicament, otherwise how would they know and believe what was true? As an aside, some believe that employee ownership results in a more productive, happier company. I found that it made no difference, that the younger employees saw the benefits of ownership too far into the future to matter, and the older employees couldn't wait to cash in. What did work was running an open company in which reward was tied to productivity.

Our democracy has checks and balances via three governmental divisions overseeing each other, yet this is not the case with most corporations. Were a board to perform conscientious oversight, demanding full disclosure, there's no doubt that it would be at odds with management. Precisely! Then the board could do its proper job of questioning, advising, and consenting.

The ultimate responsibility in a public corporation lies with the board. Its function is to scrutinize and understand. If the CEO or his cohorts do bad things, say steal from the company, or commit illegal acts, it is responsible just as much as the CEO is responsible. Responsibility must rise to the very top. We held Nixon responsible for Watergate and forced him to resign, Johnson responsible for expanding Vietnam and forced him not to run again. As Truman, the ostensible chairman of the board, understood, the buck stopped with him. But today, at Enron and Worldcom, Tyco, Rite Aid, Adelphia, and Parmalat one would think that the boards didn't exist. None have been held responsible for the gross violations of trust that were committed.

If such responsibility were enforced, one might say that it would be virtually impossible to find competent people to serve on boards. True, fewer would be willing, but those fearless, courageous ones, who believed in their own competence and ability to dedicate themselves as overseers, wouldn't hesitate. You could be sure celebrities and big name academics would not apply. The board member must know how a business operates, must demand detailed information on every aspect of the business, must be impeccably honest, and, perhaps most important of all, must establish a high moral code to which he or she insists the corporation adheres. Knowing that the board is ultimately responsible, is liable, the CEO and the executives will be reluctant to go off half cocked for fear of discovery within. Until we have genuine internal corporate oversight we will not hear the end of corporate tragedies and the financial ruin of employees and stockholders due to executive transgressions.