Normally, today is a day to post about widely diverse Business Topics. I don’t do opinion pieces on Mondays. I have looked at plenty of companies and how they are being operated over the last few months and I feel I need to say something.
When I get on this rant, I start it off by reminding everyone that the fundamental problem at most companies are employees. At that point, a lot of people want to argue with me. However, the employees I mean are the Executive Management. In particular, the C level offices and similar roles who are not doing their jobs. People often forget that the CEO is simply an employee of the company. He or she is one with a large set of responsibilities, but they are still just an employee. It is the shareholders that the company is supposed to benefit first.
So, let me dive straight to the heart of the matter and that is the current way that the Boards of Directors (BoD) operate. In public companies (and this is a bit less of a problem in private companies), the BoD is supposed to represent the interest of the shareholders and ensure that the Management Team is running the business effectively. The problem comes from how these BoD members are elected to the Board.
Theoretically, the BoD is designed from Independent Executives or Retired Executives who can bring to bear their experience to help direct Management. Management brings large scale decisions and business updates to the BoD. The BoD takes in the information, asks relevant questions, and then renders decisions. In many businesses, these responsibilities can take 1 – 2 days per quarter or 4 – 10 days a year. A lot depends on committee assignments that the individual Director takes on. The Director is compensated with salary and equity for performing this duty.
The problem is that Management generally selects who will be BoD members. Think about that for a moment. Imagine picking your boss and being the one who makes sure he or she will get paid. How effective do you think their oversight would be? What this means is that often CEOs get away with not being effective in how they run their business. Many CEOs do not have a large stake in the company’s stock. They make more money on their Salary and Bonus structure. This creates an alignment problem between how the CEO is compensated and how the shareholders get their Return on Investment (which if you recall is the whole point of investing in the first place). This makes a nice cozy relationship between a Board and the Management Team that is not always in the best interest of the shareholders.
I do not want to say that these groups are against the shareholders or are always bad. It is just you can see the ability for things to twist.
So, what are some solutions? First, we need to move the Management Team off the BoD. Right now the CEO is almost always a BoD member if not Chairman. I can see the CEO (or any other employee) having a BoD seat but not being Chairman. This restricts the influence of the CEO. Second, we need to move the BoD nominating process from Management to the BoD with the goal of greater independence. Finally, we need to find ways to compensate CEOs that are in alignment with regular shareholders. This can be done with open bonus structures (based on the meeting of Business Plan objectives).
This is never going to be perfect, but we can make it better.
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