From Corporate Board Member:
Do directors need to start looking at their company’s exposure to risk in a radical new way? Absolutely, says Malcolm S. Salter, professor emeritus at the Harvard Business School. He argues that board members of companies owned by Kohlberg Kravis Roberts and other private equity buyers are far more involved in day-to-day management and hence much more aware of the particular business risks the companies face. “They look very carefully at the upside and downside,” Salter says of private equity boards. “They have the risks in mind from the very beginning and follow them very closely.” He says directors of public companies should start to think and act the same way. ...
Andrew Metrick, a Yale School of Management professor who specializes in private equity and corporate governance, agrees that public-company directors should work like their private-company peers. “Being a board member is really a professional thing that should be a career,” he says. “That doesn’t mean giving up your day job, but it does mean giving up your night job” of serving on more than one board. Metrick calls the private equity model “a useful benchmark for thinking about how boards can behave” but notes that “we’re very far away from that now.”
Malcolm Salter bases his ideas partly on research he did for a course he taught at Harvard and describes them in Innovation Corrupted: The Origins and Legacy of Enron’s Collapse (Harvard University Press, $35), along with the lessons that can be learned from that debacle. If public-company directors monitored those companies as closely as private equity boards watch over theirs, he says, disasters like the ones that engulfed Enron back in 2001 and Lehman Brothers recently might have been headed off.
But it’s hard to find wide support for Salter’s theory, typically because of the demands on a director’s time and a general feeling among boards and top managers that the CEO should be left alone to run the company. Steve Odland, 50, chairman and CEO of Office Depot and a director of General Mills, probably speaks for the majority. He acknowledges that directors could be doing a better job of overseeing risk but thinks the way to achieve this is “to have boards look through the front windshield instead of the rearview mirror.”
Another skeptic is Stephen Bainbridge, a professor at the UCLA School of Law, who points out that directors had little to do with the toxic investments that nearly destroyed the financial system. The real villain was “government policies and private-sector decision-making that put way too much money into housing,” he says, adding that Sarbanes-Oxley accounting reforms in the wake of Enron proved ineffective because they were “designed to fight the last war. You can’t point to a single thing that SOX did to make the current situation any better.”