Skip to main content Skip to main menu

Main menu

Slideshow

Corporate board members feel their role is to support CEOs or fire them

Subtitle:
Twenty years after Sarbanes-Oxley reforms, board members report little change in their role or relationships with CEOs
Monday, November 15, 2021 - 12:21pm
By:
Merritt Melancon
Image:
Illustration of Board members encouraging a CEO with signs.

In the last two decades, federal regulations tried to build more oversight into the roles of corporate boards of directors. There’s just one problem: it’s not a job board members want.

In one of the first broad surveys of corporate board members since 1989, researchers found that board members saw their job as hiring the best CEO for their firm and then backing that person with advice and support.

“Directors want the firm to be well run, but they don’t want to run it,” said Scott Graffin, a professor of management and the Synovus Chair in Servant Leadership at the University of Georgia’s Terry College of Business.

Graffin and his co-authors published their insights on the role of the modern board member in their paper, “Corporate directors’ implicit theories of the roles and duties of boards,” which was published in the September issue of Strategic Management Journal.

Graffin worked with Texas A&M University management professors Steven Boivie and Michael Withers and Arizona State University qualitative management expert Kevin Corley on the study. The team interviewed 50 corporate board members about their board service, why they served and what they thought about their responsibilities to shareholders, the firms’ employees and the general public. In total, they analyzed 1,000 pages of transcripts.

“We looked at what they said and then looked for common themes,” Graffin said. “You’re using words like data, finding themes and then aggregating what the interviews have in common.”

The research team thought this type of descriptive study was needed because of the changing legal landscape. The 2002 passage of the Sarbanes-Oxley Act changed the makeup and responsibility of corporate boards, requiring a majority of members to be independent — meaning they are not company employees or contractors. SOX also required board members to form an audit committee, responsible for verifying the company’s financial statements.

These reforms were meant to prevent accounting scandals like the one that brought down Enron in 2001. Boards have become larger and more independent, but Graffin’s team wanted to see if board members felt they had a regulatory role.

The overwhelming majority of them said they did not.

Nominally, the board should be offering approval or disapproval of the CEOs’ major initiatives and guarding against a CEO who puts personal interests ahead of the firm’s. In actuality, board members don’t feel they have the time, information or background to judge the CEOs’ decisions on a case-by-case basis, Graffin said.

“Let’s say I spent a week preparing for a board meeting, and the CEO has spent the whole year working on a plan and preparing to present a plan,” Graffin said. “And now I’m supposed to detect malfeasance. I’m supposed to figure out if a CEO is making decisions that are not the best decisions for the firm. How could I possibly know that?

“How could a board member know what’s better for the firm than someone whose job it is full-time to manage that firm,” he said.

Graffin said that doesn’t mean board members don’t take their responsibilities seriously or that they don’t prepare. Most spend about a week preparing for a board meeting. Members who do not prepare are replaced.

“They’re engaged; they prepare,” Graffin said. “They read all of the plans, and they talk to the CEOs regularly. They want the firm to succeed, and they feel like they’re helping the firm to succeed the best way they can — with advice and support.”

Board members select a CEO because they believe in the person as a capable leader and manager, Graffin said. They don’t want to second guess them. So, they support their decisions and put all their faith in the CEO until that trust starts to falter. As soon as it wavers, they fire the CEO.

“They’re not cheerleaders,” he said. “They have no compunction about firing a CEO. However, they implicitly trust the CEO to make the right decision until they don’t.”

This recurring theme of support and advice was shared by new board members and board members with decades of experience.

“There was a lot of variance in who we talked to, and very little variance in what they said,” Graffin noted.

The takeaway is that shareholders and the public need to be more realistic about what board monitoring can accomplish, Graffin said. It can’t be a panacea for corporate misbehavior. Other entities — regulatory agencies, activist shareholders and the financial press — still need to be part of the monitoring puzzle.

 

Department or Program featured: