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C. Warren Neel
Executive Director
Corporate Governance Center
University of Tennessee

Balance of Power:
Boards, ‘Birthers’ and Builders
Beware CEO icons who are confused about their legal powers and their moral obligation to the real owners of the company.

By Warren Neel

Enron, WorldCom, Tyco, HealthSouth, and Adelphia are but a few of the scandal-tainted company names indelibly etched in the public memory. When viewed collectively, these scandals raise the question: Are there observable patterns that might help boardrooms of the future?

One pattern that stands out is that the egregious acts involved CEOs who were founders or were those who built a new company on the ashes of an old business and who considered themselves corporate icons. Whether they were founders or builders, their behavior suggests they acted as if they were “owners” — that is, as if they owned the business.

How were they different in attitude and behavior from other chief executives who run companies? Is there something inherently different about a founder/icon CEO that affects the boardroom, and, if so, what might be observed?

These questions resonate as we read continuing reports of option backdating at over 140 companies and wondering about the decision climate in those boardrooms.

No Qualms about Their Actions
At first blush, many CEOs in this founder/icon category appear to have difficulty differentiating between what belongs to the shareholders and what belongs to them. The reported behavior suggests they have no qualms about their actions because they birthed the company and created wealth for the shareholders. Taking inappropriate latitude with accounting or with the company apartment or other manipulations does not seem to concern them. The attitude exhibited is they own the company (even though it is listed) and are discharging all fiduciary obligations to shareholders.

Tragically, it is not a single act of personal financial gain that is most detrimental to the firm’s future but the attitude at the top that establishes the norm for others. Eventually that attitude percolates downward to infect other layers of the organization. The CEO’s intent may not to be corrupt but his actions can become the cultural norm. In these cases it is an affirmation of an old truism: Show me how you act and I will know what you believe.

Control Freaks
The second noticeable characteristic of their actions that mirrors the misguided “ownership” behavior is their focus on preserving control, particularly in the boardroom. The manifestation of this trait is often so subtle that unless one is in such meetings and attuned to the dynamics, it will go unnoticed. This is particularly true when board members have served for some years and have become almost unknowingly focused on the maintenance of friendships rather than monitoring of management. It’s in that kind of trusting environment, where directors find any hard questioning of management an affront, that a founder/icon CEO easily controls the board.

Sarbanes-Oxley addressed the issue of control by requiring key committees to exhibit autonomy to mitigate against the tight control they might be experiencing from the CEO. However, in many cases these controls still persist, particularly for those chief executives who view themselves as having birthed the firm or built it.

For example, a committee may be responsible for determining its agenda — but the CEO will determine when committees meet. He will be sure that committees meet when he is able to attend all sessions. He may insist on concurring with every agenda item of every meeting, both those of committees and the board. These actions can be symptomatic of an environment where the CEO is intent on control and can escape the intent of SOX.

Believing Their Press Clips
The CEO’s personal image outside of the company can exacerbate the control issues. These executives may have personal publicists, ghostwriters, and a host of other consultants to extend their public image beyond that of the firm. If the image becomes too large there is the risk that affirmation by the press will confuse these icons as to their legal powers and moral obligation to the real owners, the shareholders.

Additional evidence of the balance of boardroom power will likely come to light as the option backdating investigations continue. It will be interesting to look at the backdating schemes for patterns that show that authority for compensation remains a founder/icon’s domain even though the charter of a compensation committee will state otherwise.

Comfort Level
The larger point is that governance processes are a good indicator of the balance of power in the boardroom. For some companies run by founders or by icon CEOs, the balance will likely shift more slowly — in many cases, not at all.

In this post-SOX environment of director responsibility, board members experiencing balance of power issues will have to decide if they are comfortable in a “birthed and built” environment or do they confront the control issue with the confidence that reflects a new governance era.

C. Warren Neel is co-founder and executive director of the Corporate Governance Center at the University of Tennessee (http://www.corpgovcenter.org). He returned to the university in 2005 after serving as commissioner of the Tennessee Department of Finance and Administration. He had previously been dean of the university’s College of Business Administration. He has served on nine corporate boards in his career and is currently a director of an NYSE and a Nasdaq-listed company.