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Key25 The best and worst in corporate boards

A board asleep at the wheel is the worst corporate board. For example, the minutes of a Johns-Manville board meeting as long ago as 1932 reflected an awareness on the part of the board that there were serious health problems among asbestos workers. Such information did not bode well for a company whose one product was asbestos.

The workers were suffering from a disease called asbestosis caused by the inhalation of airborne asbestos particles. But the company and the board took no action for over 40 years when class action litigation had mounted to such a level that the company’s outside auditors refused to certify the financial statements of the company without disclosure of the amount of liability exposure the company had. In the end, after years of living in denial about the nature of the company’s product and the damage it can cause, Johns-Manville entered Chapter 11 bankruptcy. It eventually emerged from bankruptcy but has never recovered its sales and must still assign 25% of its profits to a trust fund to compensate workers for their disease and their families for their eventual losses. Litigation from building owners for the costs of the removal of asbestos still continues.

This was a case in which a board knew of an issue, understood its significance concerning potential liability, but chose to do nothing. Worse, it even pursued a course of conduct to conceal the information from shareholders, customers and workers. The qualities of integrity and independence from management were not present in the John-Manville board. The result was the near destruction of the company.

There are other companies in which boards perform in exemplary ways. For example, Scovill Corp., a brass company founded in 1803 when Thomas Jefferson was President, has evolved into a company with diverse product lines. It frequently calls employees and front-line salespeople into its boardroom for input and ideas. PPG encourages board members to challenge every aspect of management’s conduct was well as its proposals for expansion or diversification. There is no hesitancy to speak on the part of PPG’s board and the company’s record of 100 consecutive years of dividends bears out the nature of its board and its effectiveness. The Stanley Works, yet another 100-year-dividend company, encourages ideas for innovation from everyone, including the board and has evolved over the years into a company with a reputation for consistent quality.

All good boards are the same: the directors challenge and confront because they devote the time necessary for preparation and participation and bring with them a rich body of business experience to assist management.

But unlike Tolstoy’s unhappy families, all poorly-functioning boards are also the same. They are fraught with conflicts, have members who fail to attend meetings and are ill-prepared, have an atmosphere of cronyism (摯友主義) and lack of independence. They are unwilling to challenge decisions and information. They fail to ask the questions necessary to get to the heart of corporate issues. The inevitable response of board members who find themselves dealing with a company with earnings reversals or litigation or malfunctioning products is:”I had no idea.”

Indeed, that is the problem. That boards and board members make mistakes is not the issue. Of course that will and the rules concerning business judgment will protect them in those cases. But directors who fail to learn about fundamental corporate missteps are at the heart of poor corporate governance. Knowing what to ask and being willing to ask it is the role of every effective director. Their companies can only benefit from such vigilance.