(Bloomberg) -- Twenty years after the Enron scandal, another chief executive officer is now on trial for allegedly misleading a compliant board of directors that failed to sniff out trouble.
But even as the criminal trial of Theranos Inc.’s Elizabeth Holmes gets under way, and Big Oil bows to shareholder activists after a landmark governance battle, a new study of corporate directors found that they see their primary role as championing CEOs, not confronting them.
The findings, gleaned from interviews with almost 50 directors at more than 140 companies and published in the Strategic Management Journal, question how seriously boards take their traditional fiduciary responsibility to look out for shareholders. Increasingly, directors have come to think the best way to protect shareholder value is by working hand in glove with the CEO.
“Directors view their strategic collaboration with the CEO as critical to their board service, while not perceiving the monitoring of the CEO as their focus,” said the study’s four authors, all of them business-school professors. “Most directors have an implicit theory that the CEO is acting in the best interests of their firms.”
The research dismayed governance activists, who scored a historic victory in May when Engine No. 1, a tiny investment firm pushing Exxon (NYSE: XOM ) to diversify its business and fight climate change, snagged board seats at the oil company.
“Usually directors at least pretend to acknowledge their legal obligation to provide oversight of CEOs on behalf of shareholders,” said Nell Minow, who advises institutional investors on corporate governance issues at ValueEdge Advisors. “This acknowledgment that directors see themselves as corporate cheerleaders instead of skeptics whose job is to push back, question, and insist on better is further proof that shareholders will need to support more Engine No. 1-style challenges.”
While prior research into the role of directors concludes that their primary role should be oversight of managers, those theories “may have failed to keep up with the realities of today’s boards,” the authors said.
Steven Boivie, one of the authors and a professor at the Mays Business School at Texas A&M, said he started the research after getting the sense that directors didn’t view their role in the same way academics and others do. So while the conclusions didn’t surprise him, the uniformity of responses did.
“They all feel very similarly about this,” he said.
Some of the directors interviewed, who served on companies of various sizes and industries, said that being a watchdog was not only not their job, but nearly impossible to do, as CEOs knew so much more about their businesses than boards did. Said one board member: “You can’t stop people from doing bad deals, and you can’t stop people from doing complicit fraud ... if people are going to screw you, they are going to do it.”
To be sure, directors still recognized their fiduciary role, but how that role is best carried out has evolved. Those seeking to keep an arm’s length relationship with managers are now in the minority, the study said, while most said directors should assist the c-suite to create value. Such assistance includes helping formulate strategic decisions, rather than voting against the CEO’s choices -- including the all-important choice of who will be the next boss.
Directors who aggressively challenged CEOs were described as exhibiting bad behavior -- which, inevitably, could lead to trouble when the corporate chiefs start to behave badly themselves.
“Directors do not hold the implicit assumption of managerial opportunism,” the authors said. “Rather, they approach their board work with an overarching role as a strategic partner with executives rather than as a shareholder watchdog.”
©2021 Bloomberg L.P.
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