Environmental, Social & Governance Briefs

On Governance: Should New CEOs Still Get to Pick Their Own Boards? GE says Yes.

January 04, 2018

On Governance is a new series of guest blog posts from corporate governance thought leaders. The series, which is curated by the Governance Center research team, is meant to serve as a way to spark discussion on some of the most important corporate governance issues.

Corporate boards, particularly in the United States, have some long-established traditions, even though efforts to reform governance work against some of them. The old-school board was made up of a dozen older white guys who all knew each other. They didn’t fret too much about their role in the company, because the CEO (who also chaired the board) pretty much told them what to approve. The CEO was also the one who would suggest new board candidates should any of the incumbents retire (or start asking too many troublesome questions).
 
This old-line CEO told the board which of his lieutenants should be the next CEO when his retirement neared.  And finally, once this new CEO took office, one of his perks was the power to tell some of the current directors it was time to retire so he could reshape the board to suit his needs.
 
The chief executive being free to “pick his own board” was long a common, accepted prerogative of boardroom politics. Today, though, it would seem to fly in the face of every current precept of how good corporate governance should function. We are told in every MBA class and corporate governance conference that the number one job of any board is to hire, monitor and, if needed, fire the CEO. What business, then, does that CEO have moving board members around like chess pieces to suit his needs?
 
The rise of good governance codes, shareholder activism, and newly empowered board nominating/governance committees has put the idea of a new CEO giving the boardroom a housecleaning in the shade. The executive tail has no business wagging the corporate governance dog.
 
And yet… it still happens. In 1997, one of my first articles in Boardroom INSIDER covered Steve Jobs coming back to lead Apple after his ouster earlier in the decade.  One of Jobs’ first acts was to purge the board of ineffective members who lacked tech literacy.
 
Ancient governance history? Today, twenty years later, we see a similar boardroom purge under way at General Electric. Incoming CEO John Flannery took over with a mandate for major restructuring, tightening the sprawling empire’s focus and cutting slow-growth legacy divisions. One of his first moves was to announce that the GE board would shrink from 18 to 12 members, and that three of the remaining directors would retire to make room for new members with more “relevant industry experience.”
 
No doubt GE has been drifting for a while.  This year the company missed earnings projections, and even cut its legendary dividend.  Also, there is no doubt that an 18-member board of directors, with lots of long-tenured celebrity directors like Andrea Jung and Shelly Lazarus, is both too large and out of step with current business demands.

In announcing the GE board moves, Flannery noted that the board itself will direct its own restructuring.  Its governance/nominating committee will evaluate pending talent needs (and how well current membership meets them), as part of a gradual refreshment.
 
Market analysts and the media have all applauded the shakeup as a strongly positive sign, and the move brought a jump in GE’s stock price.  Even the usual activist voices for board empowerment have been silent.
 
Perhaps the boosters are right, and there are times when a new CEO should pick his own board for the good of the company.  Apple’s board shakeup 20 years ago set it on the path to become America’s most valuable corporation. However, Steve Jobs’ customized Apple board was also the one that backdated stock option payments for him a few years later.  This benefitted him handsomely, but stirred a scandal that almost obscured the launch of the new iPhone.
 
So does letting a new CEO broom the old board of directors upon taking over ultimately help or harm the company and its governance?  The answer seems to be a qualified “maybe.”

The views presented on the Governance Center Blog are not the official views of The Conference Board or the Governance Center and are not necessarily endorsed by all members, sponsors, advisors, contributors, staff members, or others associated with The Conference Board or the Governance Center.