Three Things Corporate America Could Learn From the Not for Profit World
Corporat America and Not For Profits
Anyone who has ever worked in a not for profit organization, for any length of time, can tell you of the constant comparisons made between not for profits and "business." Most often these comparisons begin with a simple questioning of a particular practice but inevitable end with, "wouldn't it be better or easier if," or why don't you do it this way." Most often these suggestions are offered by well meaning individuals from the world of "business" who simply can't comprehend why not for profits operate as they do, and don't understand why, "they" meaning the not for profit, simply doesn't do things the same way as they're done in business. And often the subtle implication is that the poor not for profit really doesn't know what it is doing and would be oh so much better off if it just learned how to do things the same way as they're done in "business." On other occasions, the implications are not so subtle, as they will simply come right out and tell you that you'd be better off if you'd just learn how to "do things the way they do" and "run this place more like a business." During my own early years in a not for profit I too had questions regarding why we did somethings differently than "business." But in time, I came to recognize why most of these differences exist. Now this is not to suggest that everything that is done in a not for profit makes sense or for that matter is well reasoned, for that simply isn't the case. Unfortunately, not for profits suffer from all the same human frailties that can bedevil any "business." Greed, deception, corruption, ignorance and human error, as well as down right stupidity can find their way into any organization where individual and organizational performance is not monitored and proper over sight provided.
Not for profits function differently than "business" primarily because of their mission and their very public nature, due largely to the fact their subsistence is predicated upon their receipt and use of privately and publicly donated funds. Therefore, most not for profits are exposed to considerably more public scrutiny than most public corporations. This scrutiny, by the public,has resulted in far greater transparency and required financial accountability. Something that appears to be woefully lacking in many American corporations. Also, not for profit boards are comprised of individuals who usually have a genuine interest in the enterprise they govern and actively involved in their fiduciary responsibilities. They have also clearly separated the responsibilities of policy making from the management of the organization. "Business" on the other hand and corporate America, specifically, operate very differently. And it may now be argued that some of these differences have contributed significantly to many of the problem currently plaguing corporate America today.
It was once believed, even hoped that the collapse of Enron, the bankruptcy of World Com, the demise of Arthur Anderson, plus the financial bust of a number of high flying hi tech corporations, only a .short few years ago, were sufficient to provoke reform within corporate America. But given all that has occurred within the past couple years, Yahoo, Best Buy, to name a few, in addition to Citigroup, Lehman and Barclay, it would appear that this expectation is/was sheer folly. And once again the principal issues troubling corporate America, then as now, can be attributed to the absence of oversight of management by the corporation's board of directors.Yet common sense alone would suggest that this kind of business chicanery is and will continue to be inevitable, even predictable. As the old saying goes, "it is a train wreck waiting to happen."
So given all that has occurred in corporate America over the past number of years and particularly within the past few years, I thought it might be useful for an old executive from that other world, the world of not for profits, to offer up some insight and advice into just what "business," corporate America, might learn from not for profits. After all, turn about is fair play isn't it and I've certainly had to endure my share of "good advice," and who knows who might be listening.
When you look closely at nearly all of the problems troubling corporate America today, they stem from an appalling lack of over sight of individual and organizational behavior. Corporate boards, due primarily to their recruitment practices, composition and absence of meaningful involvement in the affairs of the corporation they are suppose to govern have failed miserably in carrying out their fiduciary responsibilities to their stock holders,who elect them, while providing little if any oversight of management. Now before launching into my own "remedy " for addressing these inexcusable indiscretions impacting corporate America today. I would like to acknowledge, up front, that I truly believe the vast majority of public/private corporations are operated legally, ethically and their boards and corporate officers have the best interest of their stock holders at heart. But as we have seen corporate misconduct continues to occur and these are not isolated instances, suggesting there are fundamental weaknesses in the corporate governance system-process that, if not addressed will continue to accommodate these indiscretions. And Sarbanes-Oxley won't do it.
To begin with the CEO doesn't own the corporation, nor are they King or Queen, what ever the case may be. While they may be a significant shareholder in the corporation, as well they should - it is always good to have a little of their own skin in the game - it is still owned by its stockholders who have in trusted the governance of the institution to a board of directors which they elect. The CEO is hired help. Hopefully a highly skilled professional manager with vision and foresight capable of providing leadership and direction to the operation and management of the corporation for the purpose of making a profit for its stock holders, but hired help none the less. A hired gun who, for these services, is/should be well compensated. For too long now corporate CEO's have been over rated and over valued in terms of their capacity to lead and their ability to bring added value to their organization. They have been given too much power and authority by their hand picked boards, while provided unreasonable compensation for their performance or lack thereof. And when their lack of performance finally becomes apparent they are rewarded with enormous golden parachutes at the expense of the stock holder. Since when is failure rewarded ? This kind of behavior on the part of these boards is callous, intolerable and inexcusable. But given that these boards are comprised of insiders, senior managers of the corporation, in other words employees of the CEO and a few hand picked so-called outside board members, what else would you expect.
Next, boards need to reclaim their authority. Board recruitment and governance practices need to be completely overhauled. As a rule, corporate boards are too small, I once had a crusty old CEO of a major corporation ask me, how I could get anything done given the size board I had to deal with. And before I could respond he went on to tell me. "hell I've got nine on my board and that's seven too many."
Boards are too small, by no means diverse, recruitment practices questionable, lacking term limits and members not sufficiently involved, primarily because management doesn't want any interference in the affairs of the corporation they've been elected to govern. And all too often boards are dominated by inside board members, senior management, employees of the corporation which means the fox is guarding the hen house. In any other environment the existing practice of corporate governance would be laughable and not tolerated.
Board recruitment is not predicated upon the needs of the corporation but rather upon who knows who, thus the majority of boards are OWM (older white males) who are card carrying members of the "o'l boys network," each member scratching the back of the other, working or retired. Just check the number of interlocking boards, which is an entirely other subject.These kinds of assemblages are too self indulgent, too trusting and unquestioning of their leadership, who they are beholding to for placing them there in the first place. Therefore these boards are not vigilant, the group's interest, what ever they are, will always supersede the interests of the larger community of interest, which is a pretty sad scenario, but more importantly a sure fire recipe for certain failure in today's fast pace, dollar driven environment.
Board recruitment should be predicated upon the needs of the corporation. Boards can and should do their own screening and selection. There are certainly ample resources available from which corporate America can choose new, different, younger, male, female and minorities, with the experience and expertise required for participation on these boards. Shareholders should be able to nominate and elect board members more easily and efforts by Senator Chris Dodd to further obstruct this practice are dishonest. Board members should have defined term limits and the practice of inside board membership, senior management of the corporation, eliminated. And the arguments opposing any of these changes are fallacious. The real issue is loss of control. And after all when you've had it both ways for all these years why would anyone want to give that up ? This is understandable, but doesn't make it right.
Those opposing change simply don't want to lose the control they've enjoyed for so long nor do they want to be held accountable by an independent board.They like things the way they are and don't want to properly prepare their board members in such a manner that they become too knowledgeable of the intricacies and subtleties of the business for all of the obvious reasons. First because it requires work on management's part but more importantly it will mean that management will relinquish their role as corporate oracle, which reminds me of that old adage, "whoever controls the information controls the process." And finally can you imagine what might occur if these board members take their responsibilities more seriously and become well informed and knowledgeable. My God, they might even begin to ask more probing and pertinent questions or worst yet even question management assumptions, judgement and decisions. Now I am in no way advocating the micro-management of the corporation by the board, that is clearly the responsibility of the chief executive officer, but I do believe a well informed, involved board can and will serve the corporation better.
By shifting control of corporate governance, out of the hands of those entrusted to manage and operate the business, into the hands of individuals who are acting as representatives of the stock holders an organizational dynamic occurs that can and will benefit everyone. It really can be a win win for the investor as well as management. Although there will be some pretty bruised egos initially. But once the process is initiated and permitted to work the advantages will become apparent. As in this new arrangement the role and responsibilities of the board and that of management become more clearly delineated. Lines of authority, responsibility and accountability better defined.
The elimination of senior management from board membership does not preclude their participation at board meetings. Senior managers should, by all means, participate in all board meetings, making presentations, providing insight and information, acting as a resource, but when it comes time to take the vote they, like their counter part in the not for profit world should sit silent. Does anyone honestly believe that a senior manager, whose pay check is signed by the CEO, can oppose a proposal made by the CEO or be objective when it comes to evaluating the performance of that CEO. Come on.
Finally, the position of Chairman of the Board and Chief Executive Officer should be separated. It is impossible to properly serve two masters simultaneously. The Chairman of the Board should be elected by the board from its membership and be the presiding officer at all meetings of the board. The CEO, more than likely, should be a member of the board and I would leave the clarification of these two very separate and distinct responsibilities to the discretion of individual boards. But, these two positions, each with very different responsibilities, should be separated from one another. In so doing, the duties of each position become more clearly identified and the residual creates a check and balance between these two positions.
I can see/hear the critics now, rolling their eyes and moaning aloud. Replying, superciliously, that I obviously do not understand how the world of business really works and these suggestions are clear evidence of that. That it was good I remained in the not for profit world for I certainly would not have survived in the real world with such Pollyanna notions. They would be quick to point out that in today's world of increasing technology and rapid change and the now added burden brought about by the Internet and social networks that an organization simply can't work that way. That things happen too quickly in real time and there simply is not enough time to educate and bring along these outsiders, who do not always have the background nor the experience necessary to make these critical decisions quickly. Which then raises the rather obvious question, how then did these dim wits get on their boards in the first place ? Arn't most of these individuals CEO's or senior managers of other corporations, can they really be that dense? The other argument, of course, is that in times of trouble or crisis, experience and expertise must prevail, which is really just another way of promoting the status quo.
Corporate governance, by definition, is the mechanism used by investors-stockholders to insure their investments, in an enterprise, are properly used and any sums due them, for the use of their resources, are paid in full. It establishes the balance of power between ownership and management. The board of directors, elected by its shareholders, is responsible for protecting the interests of its stakeholders and as we have seen, in recent years, boards have abdicated their responsibilities to their shareholders as management has gained control of these enterprises and Peter Drucker's admonition, "power without accountability always becomes flabby or tyrannical and usually both," comes quickly to mind.