In December 2001, Enron Corp. collapsed into bankruptcy – at the time the biggest U.S. publicly traded company to ever do so – following years of fraudulent accounting. Two decades later, Theranos CEO Elizabeth Holmes faces criminal charges that she defrauded investors as she built her blood-testing startup.
In both cases, the companies’ respective boards of directors have been blamed for allowing misdeeds to happen – or not doing more to prevent them.
That’s because boards are broadly seen by regulators, governance experts, lawmakers, newspaper reporters and the public as the main body meant to hold senior executives accountable. Legally, their role as overseers is baked into the Sarbanes-Oxley Act, which is the most recent major legislation targeted at boards, and written into the guidelines of major stock markets.
It may come as a surprise, then, that board members view their role very differently.
Board members rarely seek to vote down management decisions.
I wanted to better understand what boards of directors actually do, as well as whether they approach their jobs the same way external observers believe they should.
But most research on boards has relied on assumptions about what directors believe. And those assumptions have been shaped by agency theory, which stresses that there is always a risk of managers being self-interested and using a company’s resources to enrich themselves.
Because of this risk, scholars have long assumed that directors need to exercise careful oversight and control over their decisions.
The problem is, scholars weren’t asking directors what they actually believe their role is.
In a new study with fellow management professors Mike Withers, Scott Graffin and Kevin Corley, I conducted extensive interviews with 48 corporate directors – some of whom were also executives at other companies. We also interviewed two executives who have never served as directors.
The directors we interviewed sit on the boards of more than 140 different companies in various industries. Some of them were veteran corporate directors, while others were relative newbies.
Our overarching finding was that directors generally said they viewed their jobs as primarily supporting managers, not monitoring them. In fact, we were surprised by just how uniform this sentiment was.
In practice, this means board members rarely seek to vote down management decisions. Rather, directors seek to become partners with executives and provide input and improve decision-making. Many directors said that the best way to protect shareholder value or help their company thrive was by collaborating with the CEO.
When we asked about monitoring the work of CEOs and other executives, most of the directors said it wasn’t possible to do this effectively. Our interviewees said this is because CEOs know a lot more about their companies than the directors do.
When we pushed directors on this point, they confessed that they do not even want to monitor the CEO. We interpreted their view as basically: Either trust the CEO and give him or her your total support, or fire the CEO and hire someone you can trust.
“You don’t go back to … the CEO, and say, ‘You know what, that strategy is wrong. We’d like you to do this strategy.’ That’s not what you’re paying him for,” one director told us.
Our other main finding was that directors tend to see their jobs as a form of service, even though they get paid as well. That is, they said they feel like they are giving back by serving on corporate boards.
Our interviews suggest that this feeling of service makes directors unwilling to tolerate conflict or tension in the boardroom.
Our study shows investors and regulators need to reconcile their expectations of directors with the realities of the boardroom. If investors or others believe companies need oversight, they’ll probably need to do it themselves.
Steven Boivie is a professor of management at Texas A&M University. Distributed by The Associated Press.
