A corporate governance expert explains why boards fail.
(Photo: Peter Macdiarmid/Getty)
Given a scandal of the size of that unfolding at News of the World, it’s not surprising that people are beginning to look at root causes. One important causal factor is the way in which News of the World‘s parent company, News Corporation, is governed.
I wanted to hear from someone who really knows about this stuff, not just in academic terms but from the point of view of someone who has seen up-close just how corporate boards function—and malfunction. So I decided to fire a few questions at Prof. Richard Leblanc, an expert on governance and someone who has been engaged by corporations to perform board evaluations.
Chris MacDonald: Rupert Murdoch is both CEO and chairman of the board at News Corp. From a practical point of view, why does that create problems in how a board operates?
Richard Leblanc: From a practical point of view, he’s running the meetings and controlling the agenda and the information flow. And as an independent director, you’re sitting there and you owe your position to him because he’s the significant shareholder. So you really aren’t independent, in the sense of making the final calls. You’re more of an advisor, or a friend, is what directors tell me who sit on control-block boards.
CM: The board at News Corp. doesn’t seem to have a lot of independence. You’ve interviewed dozens of directors about what makes a board work well. How does lack of independence play out in terms of actual board dynamics? Does it really mean everyone just saying “yes sir” to the CEO?
RL: Independence is a state of mind. There are formal rules but that doesn’t capture the co-optation by the CEO, and personal and social ties. Second, independence should reflect reasonable perception standards, and in this case, independence from the significant shareholder. So when you have a non-independent board, or several directors who are beholden, things don’t get discussed, information doesn’t reach you, you don’t have executive sessions as you need to, and there’s less tone-checking.
CM: Without reference to News Corp. in particular, what connection do you see between a well-functioning board and the likelihood of wrongdoing at a firm?
RL: I’ve assessed some of the best run corporate boards in the world. I’ve also assessed boards that have had massive failures, including death, property destruction and monetary loss. The best boards are independent, competent, transparent, constructively challenge management, and set the ethical tone and culture for the entire organization. Usually where there is some ethical failure, or corporate wrongdoing, there is some defect at the board level, I find. Undue influence, bullying, poor design, lack of industry knowledge, and directors who are not engaged, or don’t have the power or incentives to be engaged, are some of the red flags.
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Rupert Murdoch and corporate governance
A corporate governance expert explains why boards fail.
By Chris MacDonald
(Photo: Peter Macdiarmid/Getty)
Given a scandal of the size of that unfolding at News of the World, it’s not surprising that people are beginning to look at root causes. One important causal factor is the way in which News of the World‘s parent company, News Corporation, is governed.
I wanted to hear from someone who really knows about this stuff, not just in academic terms but from the point of view of someone who has seen up-close just how corporate boards function—and malfunction. So I decided to fire a few questions at Prof. Richard Leblanc, an expert on governance and someone who has been engaged by corporations to perform board evaluations.
Chris MacDonald: Rupert Murdoch is both CEO and chairman of the board at News Corp. From a practical point of view, why does that create problems in how a board operates?
Richard Leblanc: From a practical point of view, he’s running the meetings and controlling the agenda and the information flow. And as an independent director, you’re sitting there and you owe your position to him because he’s the significant shareholder. So you really aren’t independent, in the sense of making the final calls. You’re more of an advisor, or a friend, is what directors tell me who sit on control-block boards.
CM: The board at News Corp. doesn’t seem to have a lot of independence. You’ve interviewed dozens of directors about what makes a board work well. How does lack of independence play out in terms of actual board dynamics? Does it really mean everyone just saying “yes sir” to the CEO?
RL: Independence is a state of mind. There are formal rules but that doesn’t capture the co-optation by the CEO, and personal and social ties. Second, independence should reflect reasonable perception standards, and in this case, independence from the significant shareholder. So when you have a non-independent board, or several directors who are beholden, things don’t get discussed, information doesn’t reach you, you don’t have executive sessions as you need to, and there’s less tone-checking.
CM: Without reference to News Corp. in particular, what connection do you see between a well-functioning board and the likelihood of wrongdoing at a firm?
RL: I’ve assessed some of the best run corporate boards in the world. I’ve also assessed boards that have had massive failures, including death, property destruction and monetary loss. The best boards are independent, competent, transparent, constructively challenge management, and set the ethical tone and culture for the entire organization. Usually where there is some ethical failure, or corporate wrongdoing, there is some defect at the board level, I find. Undue influence, bullying, poor design, lack of industry knowledge, and directors who are not engaged, or don’t have the power or incentives to be engaged, are some of the red flags.