Are Kodak's Outside Directors Wrong to Desert a Sinking Ship? - HBR

HBR Blog Network.
11:00 AM Thursday January 5, 2012
by Simon C.Y. Wong
Comments (10)

HBR FEATURED PRODUCTS

Betterness: Economics for Humans

by Umair Haque     $2.99

Buy it now »

The Four Things a Service Business Must Get Right

by Frances Frei     $6.95

Buy it now »

Eastman Kodak lost three outside directors in a single week prompted me to consider the extent to which non-executive directors flee their companies in times of trouble and why. Evidence that this is not an uncommon phenomenon and that many directors depart for flimsy reasons — such as an increasing board workload — suggest that measures are required to ensure these stewards remain committed to their firms in good times and bad.

Fundamentally, it is extremely problematic for directors to resign when their companies are in crisis because effective board stewardship — particularly from outside directors — is most needed at such junctures. Moreover, struggling firms can ill-afford the added disruptions caused by the sudden departure of board members. For directors in these situations, the University of Pennsylvania's Michael Useem maintains, "the leadership dictum is that you need to stay the course, stay in the game, face the problem, and solve the problem."

A 2008 Wall Street Journal analysis of boards in the troubled financial services, retail, and home construction sectors revealed that nearly 50 non-executive directors who were full-time CEOs or CFOs elsewhere resigned their posts that year. These directors departed mainly because they lacked the time to devote to board duties, which grew heavier during the global financial crisis. It is worth noting that this explanation is also used by directors with different principal occupations. When a respected business school professor resigned from the board of Indian IT services firm Satyam Computers soon after an accounting scandal was uncovered in late 2008, he declared that he did so because he could not devote the requisite time to "get the company back on its feet."

Furthermore, a recent academic study found that it is not unusual for directors to leave "in anticipation of adverse events to protect their reputation or to avoid an increased workload."

However, it should not be surprising to non-executive directors that board responsibilities will expand in times of crisis, whether the prospect of imminent bankruptcy, discovery of serious management misdeeds, arrival of shareholder activists, or other significant stresses. Similarly, while all directors understandably want to be associated with successful companies, it is highly disconcerting — and raises questions about their character — when they bolt during a period of turmoil principally out of a desire to preserve their own reputation.

Of course, director resignation in times of crisis is sometimes warranted and perhaps even necessary. For example, the chairman of troubled British restaurant and pubs operator Mitchells & Butlers stepped down last July because, as reported in the media, he felt the firm's major shareholders were obstructing his efforts to rebuild the board.

Drawing on my experience with boards, below are several suggestions to help protect them from disruptive director departures in tumultuous periods.

When recruiting directors, boards should focus on three things:

1.The nominations committee should carefully gauge a candidate's inherent interest in the firm and its industry. Individuals who do not exhibit strong interest in a company's business and its long-term success (but who nevertheless join the board in order to, say, advance their careers or "add a feather to their caps") may not stick around when the firm encounters severe turbulence.

2.For the same reason as above, boards need to probe the attitude of prospective members toward their director roles. Despite recent reforms, some directors continue to view board memberships as sinecures. At a large financial institution, the lead director went on a three-week mountain-trekking holiday (and let it be known that he was not contactable) during a growing controversy about the suitability of the bank's leadership team, governance structure, and strategy.

3.The nominations committee should ensure that non-executive directors have sufficient time to dedicate to board activities. The need to be available during times of crisis should be emphasized when interviewing potential candidates and reinforced in the appointment letter. A mining company's institutional shareholders became increasingly agitated when they were forced to wait nearly a month to discuss with the lead director — the CEO of a large firm who was unwilling to free up his diary — swirling rumors that the board was in discord due to disagreements on how capital should be raised to help the company weather the global financial crisis.

Once they become directors, the board should endeavor to strengthen their members' commitment to the firm — for instance, by involving them in substantive activities. A U.K. board advisor told me, "Doing real work, both collectively and individually, can help increase the commitment of non-executive directors." At the same time, emotional attachment can be deepened through social interactions, such as group visits to facilities abroad, dinners with management members, and other informal social gatherings. Passion for the company can also be bolstered by facilitating interactions between different generations of directors, including through overlapping tenures.

Boards should be pragmatic when apportioning responsibilities and organizing their activities. For example, directors who are currently full-time senior executives elsewhere could be exempted from certain board committee work or leadership roles. Similarly, directors who live far away — say, on a different continent — should be permitted to participate in some board meetings by teleconference.
Keeping the board together in times of crisis will not only bring much-needed stability and leadership to the company but may also improve its own functioning in the long-term. At an Asian conglomerate where a small group of directors successfully guided the company out of a near-death situation, the board members exhibited strong camaraderie and the boardroom environment was vibrant and challenging yet warm and friendly.

While one can never be certain whether, and which, outside directors will depart when a crisis erupts, these suggestions may increase the likelihood that boards will be able to continue to rely on incumbent non-executive directors during stressful periods.

Simon C.Y. Wong is a partner at the investment firm Governance for Owners, an adjunct professor of law at Northwestern University, and a visiting fellow at the London School of Economics and Political Science. He can be found on Twitter at @SimonCYWong.


Access Source And Its Great Content: http://blogs.hbr.org/cs/2012/01/protecting_boards_from_disrupt.html