Regarding the Bailing Out of Corporations, What is the Role of Their Board of Directors?

BY busadmin  December 15, 2008 at 12:02 PM EST

From left, General Motors Chief Executive Officer Richard Wagoner; Chrysler Chief Executive Officer Robert Nardelli; and Ford Chief Executive Officer Alan Mulally testify to Congress on a proposed auto bailout; AP photo

Question/Comment: Regarding the bailing out of corporations like the automakers, what is the role of their board of directors? Do these board members not have any fiscal responsibilities for keeping their companies afloat? Non-profit board members have a fiscal responsibility when their organizations have financial problems. I am trying to understand this concept of accountability in corporate organizations—is there any?

Paul Solman: Not hardly, it wouldn’t seem. This has been an issue in business schools for decades, but I haven’t seen much – if any – progress in making boards more professional, more accountable.

The reasons are various. Directors are often friends with the CEO, which hardly makes them objective. But more importantly, there’s no way they can scrutinize a corporation closely, given the fact that these are, for many, part-time of part-time jobs (though very well paid, I must say – not to mention the often fabulous perks of directorship).

I remember when a dean of the Harvard Business School back in the 1970s, Larry Fouraker, told me about the boards on which he sat.

I can’t remember the exact quote, but the gist of what he said was that the only way to find out what’s going on in an organization is to interview people in the middle ranks.

The point is that Fouraker, an honorable, intelligent and experienced man, had more than enough on his plate as dean to spend time interviewing middle management at the four (if I remember correctly) companies on whose boards he served.

Venture capitalists make sure they’re on the boards of the companies in which they invest; they’re monitoring their investment. But professional board members usually have no such stake, and are protected from liability by insurance provided by the company.

The scandal of unchecked CEO pay has long been attributable to the lack of board member accountability. (You can see many of our stories on the issue)

The legerdemain of Enron et al. can be similarly explained. And now we have a full-blown global economic crisis which we can blame in part on feckless directors.

Editor’s Note: On a related note, you can learn more about the automakers’ proposed bailout by watching this segment below from Nightly Business Report.