Paul Holmes 02 Oct 2005 // 11:00PM GMT
Directors see independence as the quality that has the most positive impact on how a company’s governance practices are perceived, according to a new survey of more than 200 board directors at publicly traded companies released by Directorship and business communications firm Financial Dynamics.
But the survey raises questions about the independence of outside directors, even when they have no business or personal ties to the company or its management. Nearly all board members receive most of their information about the companies on whose boards they serve from inside sources, including the CEO (92 percent), other senior management (70 percent) and board books (63 percent). Only 13 percent actively seek perspectives from outside parties, and less than one-third look closely at media coverage.
The survey also reveals inconsistency in ownership of oversight responsibility among board members. Almost three-fifths (59 percent) of those surveyed say that they have a formal system in place for monitoring executive performance. However, when asked how reputation is actually measured, board members revealed an ad hoc approach to oversight: 37 percent say that “informal feedback from stakeholders” is the most important factor employed in CEO evaluation; 13 percent say that formal research is important; and only 2 percent cite media coverage—often an indication of prevailing external sentiment, according to the survey’s authors—as being most important.
“It’s open to debate how a director can exercise truly independent judgment in evaluating management’s performance if the information at their disposal is coming primarily from management itself,” says Harlan Teller, Financial Dynamics’ U.S. director of reputation management. “The conflict between what directors deem important and what happens in practice extends to their measurement and monitoring of the CEO’s performance in managing reputation,”
Reponses to questions about accountability for oversight demonstrate no clear ownership of responsibility. One-half of all respondents said either the governance committee (29 percent) or the lead director (21 percent) is responsible, and another 20 percent divided their responses between the audit committee, compensation committee, non-executive chairman or head of “another committee.” A full 30 percent cited “none of the above” or “not sure.”
“It’s clear that there is a gap between the importance the board says it places on reputation management, and the investment and processes put in place to provide substantive oversight of this function,” said J.P Donlon, editor-in-chief of Directorship. “Risks to reputation have consequences. Boards should treat such risks with the same rigor they deal with any other.”
But directors link independence and integrity to good corporate governance. Thirty-nine percent of directors equate the concept of “integrity” with reputation, and they believe that the best way to convey the perception of integrity is to have boards completely made up of independent directors, with the exception of the CEO. Sixty-six percent cited independence as the most important factor in influencing the public’s perception of good corporate governance.
“Clearly board members think of ethics violations when they think of crises, which is a distinct reaction to the corporate scandals of the past several years that have dominated so many headlines,” according to Hollis Rafkin-Sax, vice chairman at Financial Dynamics. “Conventional wisdom dictates that the board’s primary role is to protect shareholder interests; however, the directors’ preoccupation with crisis management marks a significant change in board priorities. The open question is: are boards exercising independent and informed judgment, or do they need more effective tools at their disposal to ensure their confidence is not misplaced.”
Withstanding the impact of a crisis is the key preoccupation of corporate boards today, according to respondents. Crisis protection is the most critical concern of boards, followed by recruiting and retaining employees, and enhancing shareholder value.