Boards of directors have been part of our business scene for over 150 years, but their functions have not been clearly defined and generally accepted through practice in the management of corporations. This author, who has served on and worked with boards of directors for a quarter of a century, reports here the results of his research project to measure the gap between the myths of business literature and the realities of business practice. The article not only contributes to an understanding of that layer of management known as the board of directors, but also offers a five-point program to give meaning in practice to the legal language “the board shall manage.” All business corporations—large, medium, and small—have boards of directors as required by the general corporation laws of the states in which the companies are incorporated. These laws provide, typically, that the business of the corporation “shall be managed by a board of at least three directors.” But neither does the law define and describe the meaning of “shall be managed,” nor has 150 years of legal history and litigation revealed precisely what directors do or do not do when they “manage.” Over the years, businessmen, business associations, lawyers, and scholars have turned out literature attempting to describe more detailed functions for directors, and some of these statements of functions for directors have considerable intellectual acceptance in corporate circles. But there is a disparity in the literature. Much of it describes the roles that boards should play, not those that they really do. For over a quarter century, I have observed, served on, and studied boards of directors. In the process, I have developed a healthy skepticism about the prevailing and generally accepted concepts of boards of directors. What my experience bears out has, in fact, little relationship to the classic statements concerning their appropriate functions. In short, the generally accepted roles of boards—e.g., selecting top executives, determining policy, measuring results, and asking discerning questions—have taken on more and more the characteristics of a well-established myth, and there is a considerable gap between the myth and reality. The purpose of this article, which is based on a recent research project (see accompanying ruled insert for my methodology), is fourfold. First, I shall describe briefly what I have found boards to be actually doing and note the disparity between theory and practice. Then, I shall discuss what directors do not do. Third, I shall identify the critical and controlling role of presidents. And finally, I shall offer a five-point program for more active board involvement in large and medium-sized, widely held companies. My study project covered a two-and-a-half-year period of concentrated and intensive field research interviews. During 1969, 1970, and 1971, I conducted about seventy-five in-depth interviews and held several hundred shorter discussions with top business executives. Thus this is not a statistical study dependent upon questionnaires filled out by corporate respondents. The size of the sample was such that a pattern became apparent, and I concluded that additional interviews would have added little of incremental value. However, there are certain limitations. For the most part, this study is concerned with large and medium-sized, widely held companies in which the president and the directors own little common or other voting stock. Instances are included, though, where directors own or represent the ownership of large stock interests. This study is also confined exclusively to the boards of directors of manufacturing, mining, and retailing companies. Finally, I use the title “president” to mean the chief executive officer, recognizing that in some corporations the CEO may have the title “chairman of the board.” What Directors DoIn most companies, boards of directors serve as a source of advice and counsel, offer some sort of discipline value, and act in crisis situations—if the president dies suddenly or is asked to resign because of unsatisfactory management performance. Let us look more closely at each of these areas of “what directors do.” Advise & counselI found that most presidents and outside board members agree that the role of directors is largely advisory and not of a decision-making nature. Management manages the company, and board members serve as sources of advice and counsel to the management. In addition, most presidents exploit the sources of advice represented on the board, both at board meetings and outside as well. And some thoughtful presidents, when selecting new members of the board to fill vacancies, identify the particular sets of desired qualities or areas of advice—general or specialized—which the presidents believe will add something to their management decisions. My field interviews turned up some interesting comments on the important function of the board in providing advice and counsel. Here are two typical responses of the presidents interviewed: “I think of a board as a sort of cabinet, a group of generalists, not specialists, who can advise me on all kinds of problems, new ideas, new services improvements on what we are doing, and criticisms of what we are doing. A cabinet is an assemblage of sources of advice—the cabinet name is a good one for a board.” “The only decision which we as directors will ever make in that company will be to fire the president, and things have to get pretty awful before we would ever do that. All the rest of our job is to advise the management.” Perhaps the strongest but not typical statement was provided by one president who said: “We get a little advice from the outside board members, but the management runs the company. The board rubber-stamps the action of management, and the board members are there to mollify the outside stockholders.” Since typically directors do not devote substantial amounts of time to the affairs of the companies they serve, their advice cannot be of the sort which requires lengthy and penetrating analysis. Accustomed, however, to dealing with top management problems involving sums of money and financial implications of considerable magnitude, directors, within the time constraints, can provide useful inputs to presidents willing to listen. Outside directors are especially helpful in the advisory role where their general or specialized backgrounds and experiences can be applied to the specific management problems of the company served. For example, if new loans are to be negotiated or if new financing is to be arranged, these are the kinds of problems commonly faced by those on the board, and their judgments on interest rates or terms are useful to the president. Or if the question of a company’s pension plan is under review, the experience of other top executives is another bit of useful evidence for the president working for a solution. And if a new plant location, domestic or abroad, is involved in a request for a capital appropriation, members of the board with similar recent experience can often suggest useful and sometimes new factors bearing on the decision to commit large amounts of capital to a specific location. Sometimes, but not too frequently, the advice and counsel of a board member leads to a reconsideration or modification of a management’s commitment or decision. Occasionally, but only very rarely, the advice and counsel of a board member leads to a reversal of a management commitment or decision. Provide discipline valueA second role performed by boards of directors is serving as some sort of discipline for the president and his subordinate management. The president and his subordinates know that periodically they must appear before a board made up largely of their peers. I have found that even in those situations where top managements know from previous experience that members of the board will not ask penetrating, discerning, and challenging questions, considerable care is taken in preparing figures and reports for board meetings. Something in the way of discipline results simply from the fact that regular board meetings are held. Presidents and other members of top management in describing the discipline value of boards, indicated that the requirement of appearing formally before a board of directors consisting of respected, able people of stature, no matter how friendly, motivates the company managers to do a better job of thinking through their problems and of being prepared with solutions, explanations, or rationales. One president described the discipline value of an outside board in this manner: “The fact that you know that outsiders are going to be looking at what you have done, and what you are doing, forces you to do a little better job. There is a discipline factor here. We go to a lot of trouble to make sure that what we present to the board is well thought through and an attractively presented proposal—we want to manifest that the proposal is a product of thoughtful management. “I am sure that, if we did not have to account periodically to the board, we would become a lot more casual in our operations. I don’t know whether this reaction is fact or fiction. But I think we behave differently internally, knowing that we have outside directors. The mere existence of outside directors makes us think a little bit harder, makes us organize our thoughts. It sharpens up the whole organization.” The discipline value of boards also serves as an administrative device for presidents to use in establishing standards of performance for work done by subordinates. For example, with capital appropriations on the agenda for the next board meeting, many presidents remind functional or divisional managers that market and financial justifications have to be carefully organized and documented so that there will be no possibility of embarrassing questions from board members. As an element of the discipline concept described by those I interviewed, some used the phrase “corporate conscience.” The board of directors is regarded as the guardian to ensure and to represent to the outside world that the president and his subordinates do not engage in what might be regarded by outsiders as “unconscionable conduct.” The establishment of a compensation and stock option committee, say, consisting entirely of outside directors with the president serving as an ex officio member, is assurance, at least theoretically, that compensation policies and practices do not exceed the appropriate bounds of reasonableness. Consider this top executive’s observation, which is typical of the comments of those interviewed: “The board is, in a very real sense, a corporate conscience that the management is aware that they should go to, have to go to, for approval. If management did not have this requirement, I wonder what the ceiling or limits would be on what management might do. The conscience role of the board is a device that makes sure that homework is being done, and that criteria are thought through and proposed. The conscience function is involved in capital appropriations, operating budgets, compensation decisions, and others. “The board is not really a decision-making body, but it is involved in the decision-making process as a sort of corporate conscience. The board rarely, if ever, rejects out of hand a proposal by the president, but its existence in the management scheme of things influences the president and helps keep his decisions within the bounds of “conscionable conduct.” Usually, the symbols of corporate conscience are more apparent than real, and presidents with complete powers of control make the compensation policies and decisions. The compensation committee, and the board which approves the recommendations of the committee, are not decision-making bodies. These decisions are made by the president, and the committee and board approval is perfunctory. The president has de facto powers of control, and in most cases he is the decision maker. The board does, I believe, tend to temper the inclinations of presidents with de facto control, and it does contribute to the avoidance of excesses. Thus it serves the important role of a corporate conscience. Act in crisis situationsThere are two critical states of corporate affairs in which the role of the board of directors is more than advisory. First, if the president dies suddenly or becomes incapacitated, the board has the decision-making responsibility to select his successor. In some cases, the selection process is largely controlled by the deceased president who has discussed with board members what he wanted them to do “if I am hit by a truck some day.” In other instances, board members and presidents have neglected to consider the problem of succession. Only when confronted with the unexpected death of the president have they been propelled into a decision-making function. But the board is there—and it is legally constituted to pick a successor and to ensure the continuity of an entity organized to operate in perpetuity. The drama and trauma that develop when a board of directors has thrust upon it unexpectedly the complete de facto powers of control were illustrated during many of my field research interviews. The dynamics of the assumption of all or part of the de facto powers of control by individual directors and combines of directors, in these situations, is worthy in my judgment of a separate study. Second, if the leadership and performance of the president are so unsatisfactory that a change must be made, the board of directors performs a decision-making role: here, the president is asked to resign—an important decision; and then the board must decide on his successor—an equally important decision. I have concluded that generally boards of directors do not do an effective job of evaluating or measuring the performance of the president. Rarely are standards or criteria established and agreed upon by which the president can be measured other than by the usual general test of corporate profitability; and it is surprising how slow some directors are to respond to years of steadily declining profitability. Since directors are selected by the president, and group and individual loyalties have been developed through working together, directors are reluctant to measure the executive performance of the president carefully against specific standards. Directors base their appraisals largely on data and reports provided by the president himself. Also, top executives serving as outside directors, and being exceedingly busy men, typically do not devote time to pursue through further inquiry any concerns they may deduce from the data presented to them as directors, even when the concern might extend to the performance of the president. In those situations where mounting and persuasive evidence leads individual directors or groups of directors to a conclusion that the president is unsatisfactory, I have found that one of three courses of action is usually followed: Hire a management consultant.Periodic management audits by consulting firms appear to be increasingly common and accepted by top executives even in highly successful enterprises. Employing consultants to identify problems at the president’s level and to recommend changes is used as a means of handling discreetly the unpleasant task of communicating to a president that he is inadequate. Resign from the board.This is the most common and typical response of directors who suspect or conclude that the president is unsatisfactory. Resignation from boards for a plausible reason, such as conflict of interest, enables a director to avoid facing the ultimate and inevitably unpleasant task of acting to replace a president. In addition, with public disclosure of an apparently reasonable basis for a resignation, typically there is no embarrassment to the company or to the believed-to-be-inadequate president. Ask the president to resign.Most boards of directors and most individual directors are intensely reluctant to face the unpleasant conclusion that the president of the company must be replaced. While sometimes the unpleasantness is avoided by hiring outside consultants or by resigning from the board, there are some situations in which board members who have procrastinated in taking any action find themselves obligated to face the task of asking the president to resign. These situations are relatively rare. In these cases where the board had assumed an important decision-making role by asking for the president’s resignation, I found that, by any standard, the board members were impressive in their ability and their willingness to assume top corporate responsibilities. For the most part, the outside directors remained on the board and devoted more than casual amounts of time to the company in distress. Many directors expressed regret for not having responded to the symptoms of weakness they had seen earlier, now more recognizable than before. Once having faced up to the issue of the president’s shortcomings, however, they stayed on the board even though it would have been less embarrassing not to be identified with a company with top management problems. They gave more of their time to the affairs of the ailing company, and they acted as responsible corporate citizens by assuming for the interim the de facto powers of control held previously by the president. What Directors Do Not DoThe business literature describing the classic functions of boards of directors typically includes three important roles: (a) establishing basic objectives, corporate strategies, and broad policies; (b) asking discerning questions; and (c) selecting the president. In this section of the article, I shall discuss the evidence that I collected during my interviews on each of these generally accepted roles. Establish objectivesBoards of directors of most large and mediumsized companies do not establish objectives, strategies, and policies, however defined. These roles are performed by company managements. Presidents and outside directors generally are agreed that only management can, and should have, these responsibilities. As one senior executive vice president said: “Management creates the policies. We decide what course we are going to paddle our canoe in. We tell our directors the direction of the company and the reasons for it. Theoretically, the board has a right of veto, but they never exercise it. Naturally, we consult with them if we are making a major change in direction. We communicate with them. But they are in no position to challenge what we propose to do.” The determination of a company’s objectives, strategies, and direction requires considerable study of the organization’s strengths and weaknesses and its place in the competitive environment; careful, time-consuming, penetrating analysis of market opportunities; and a matching of the organizational capacities to meet and serve the changing requirements of the market. And the market, for more and more companies, includes opportunities abroad, thus adding another complicating dimension of analysis. The typical outside director does not have time to make the kinds of studies needed to establish company objectives and strategies. At most, he can approve positions taken by management—and this approval is based on scanty facts, not on time-consuming analysis. Giving operational meaning to a set of defined corporate objectives is generally achieved by allocating or reallocating corporate capital resources. Statements of objectives and strategies are merely products of an analytical exercise until steps are taken to modify or redirect the company’s activities through new allocations of corporate capital. The managements of a few companies, I found, do not accept the idea that boards can, or should be, involved in the process of capital appropriations, even in an advisory capacity. Accordingly, their studies and approvals of capital appropriations are made at management levels and not at the level of the board of directors. In most companies, the allocation of capital resources, including the acquisition of other enterprises, is accomplished through a management process of analysis resulting in recommendations to the board and in requests for approval by the board. The minimum dollar amounts which require board approval and the quantity of analytical supporting data accompanying such requests vary among companies. Approval by boards in most companies is perfunctory, automatic, and routine. Presidents and their subordinates, deeply involved in analysis and decision making prior to presentation to the board, believe in the correctness of their recommendations, and—almost without exception—these go unchallenged by members of the board. Rarely do boards go contrary to the wishes of the president. In a few instances, boards of directors do establish objectives, strategies, and major policies, but these are exceptions. Here, the president wants the involvement of the directors, and he not only allows for, but insists on, full discussion, exploration of the issues, agreement, and decisions by the board along with himself. Ask discerning questionsA second classic role ascribed to boards of directors is that of asking discerning questions—inside and outside the board meetings. Again, I found that directors do not in fact do this. Board meetings are not regarded as proper forums for discussions arising out of questions asked by board members; the president and directors alike feel that such meetings are not intended as debating societies. In one situation, for example, an outside director, who was concerned about steadily declining earnings and who perceived no apparent management program to reverse the trend, asked the chairman and the president what was being done to correct the situation. The other outside directors also expressed their concern, and the president, obviously embarrassed, responded with unpersuasive and unimpressive replies. After the meeting, the chairman asked the initial questioner to stop by his office before leaving, and there he explained: “It is just plain bad manners to ask those kinds of questions in a board meeting. You must remember that you are challenging the president in the presence of his subordinates, some of who are insiders on the board. If you have questions about what is being done to reverse the trend, the proper way is to make a date to confer with the president privately.” Many board members cited their lack of understanding of the problems and the implications of topics that are presented to the board by the president; thus, to avoid “looking like idiots,” they refrain from questioning or commenting. Presidents generally do not want to be challenged by the questions of directors, especially if subordinates of the president are on the board or in attendance at the meeting. Despite the fact that most presidents profess that they want questions to be asked by interested members of the board, I have concluded that, while they may say this, and may even go to some trouble to make directors feel that they are free to question, actually the presidents do not want discerning questions or comments. The unsophisticated director may learn from experiencing rebuffs that the president does not want penetrating and issue-provoking questions, but only those which are gentle and supportive and an affirmation that the board approves of him. Many presidents stated that board members should manifest by their queries, if any, that they approve of the management. If a director feels that he has any basis for doubt and disapproval, most of the presidents interviewed believe that he should resign. The lack of active discussion of major issues at typical board meetings and the absence of discerning questions by board members result in most board meetings resembling the performance of traditional and well-established, almost religious, rituals. In most companies, it would be possible to write the minutes of a board meeting in advance. The format is always the same, and the behavior and involvement of directors are completely predictable—only the financial figures are different. My research disclosed few exceptions to this routine. In a handful of instances, presidents said that they do in fact want discerning, challenging questions and active discussions of important issues at their board meetings. They think of their boards as accountable and responsible to the company’s owners. There are also a few directors who do in fact ask discerning questions, the desires of the president notwithstanding. Typical garden-variety outside directors, selected by the president and generally members of a peer group, do not ask questions inside or outside board meetings. However, directors who serve on corporate boards of companies because they own or represent the ownership of substantial shares of stock generally do in fact ask discerning questions. Their willingness to query presidents is, in part, a manifestation of the split in the de facto powers of control of those companies. The large stockholder-directors are not usually on the board because the president wants them there, but because through cumulative voting procedures they can force their way onto the board. Directors, as described in the literature, represent the stockholders. Yet, typically, they are actually selected by the president and not by the stockholders. Accordingly, the directors are on the board because the president wants them there. Implicitly, and frequently explicitly, the directors in point of fact represent the president. But a large stockholder-director is not selected by the president and does not therefore represent the president; rather, he represents himself and an interest more likely to be consistent with that of the other stockholders. The attitude of the large stockholder-director generally is: “This is my money—these are my assets.” The attitude of the outside nonstockholder director usually is: “This is somebody else’s money—these are not my assets.” These differing attitudes with regard to stock ownership often are manifested in the extent to which discerning questions are asked of the president by the directors. Select the presidentA third classic role usually regarded as a responsibility of the board of directors is the selection of the president. Yet I found that in most companies directors do not in fact select the president, except under the two crisis situations cited earlier. One company vice chairman, in commenting on this function of the board, stated: “The old concept that the stockholders elect the board, and the board selects the management, is fiction. It just doesn’t apply to today’s large corporations. The board does not select the management; the management selects the board.” In some situations, formal or informal committees of outside members of boards are charged with the responsibility of evaluating candidates inside the management for the presidency. But, generally, these committees have no more control over the naming of the president than do similar committees charged with identifying and recommending the names of candidates for board membership. In both committee situations, the president with de facto powers of control essentially makes the decisions. The administrative use by the president of board committees to evaluate candidates for his successor in the presidency gives the selection process an appearance of careful evaluation and objectivity. But in most cases the decision as to who should succeed the president is made by the president himself. Certainly, the president knows the key members of his organization better than anyone else. He has worked with them closely and, typically, over a considerable period of time. He has observed them under various conditions of stress, and he, far better than anyone else on the board, can judge and predict which of the inside candidates can best fit the essentially unique set of job requirements of the company’s presidency. Board members with relatively brief exposure to company executives—whether on the board or not—base their appraisals necessarily on very inadequate evidence. When insiders appear before the board for presentations of their divisional operations, for example, or to explain a request for a large capital appropriation, the setting is artificial and synthetic. Executives, aware that the process of evaluation is going on, rehearse their appearances to communicate to the board that they have the capacities and skills needed for the presidency. And the most that outside directors can conclude from such an exposure is: “The executive gave a well-organized presentation, he answered questions well, he spoke well, and he handled himself well.” Boards of directors, I found, do serve in an advisory role in the selection of a new president—in their capacity as a sort of corporate conscience. The process of electing a new president requires a vote by the board, and the president generally observes the amenities of corporate good manners by discussing his choice with individual members prior to the meeting. Rarely does a board of directors reject a candidate for the presidency who is recommended by the president. Powers of ControlIn the small family company, the ownership of the stock and the management are identical. In an earlier study, I found that the powers of control are in the family owners, and what the board of directors does is determined by the owners.1 The owner-managers of some small companies add outside directors to multiply the inputs to policy making, policy implementation, and day-to-day operating problems. The primary function of the outside directors is to provide a source of advice and counsel to the family owner-managers, and they do not serve in a decision-making role, except in the case of the unforeseen death of the dominant family owner-manager. Even then, the real decision typically made by the president’s heirs. They have the authority to manage the enterprise, and the board is at most a legally required body which can be used for advice and counsel on management or family problems. The family owners determine what the board does or does not do. At the opposite end of the spectrum is the large, widely held corporation in which typically the president and members of the board own little stock. Here, the de jure powers of control are dispersed among thousands of stockholders who are generally both unorganized as owners and essentially unorganizable. With this absence of control or influence by the corporate owners, the president typically does have the de facto powers to control the enterprise, and with these powers of control it is the president who, like the family owner-managers in the small company, determines in large part what the board of directors does or does not do. Ownership influencesBetween the two corporate situations just cited, there are many variations and combinations of centers of control, or ownership influences on control, of the company. Complete de facto control by the professional manager-president may be diminished or influenced by the presence on the board of a person who owns, or represents ownership of, a substantial block of stock. In this situation the president’s de facto powers of control may be affected by what the owners or owner-representatives regard as appropriate functions of board members. This may constitute a challenge to the president. My research findings show that many directors who own, or who represent the ownership of, substantial numbers of shares of stock take a deep interest in the operations of the company, spend considerable time in learning the business, and insist on being involved in major company decisions. The degree of the president’s de facto powers of control in these cases is affected by the involvement of company stock owners. Some directors who own, or who represent ownership of, large numbers of shares are passive, compliant, and not involved in major company problems; thus the president’s complete powers of control are not diminished or influenced. My analysis of the situations where substantial stockholdings are represented on the board has produced no factors which make possible any reliable prediction of whether the stockholder-director will take an active and involved question-asking role. There is some evidence that if the owner of the stock had come into possession of it through his own efforts, such as an entrepreneur developing his own business and then selling it to a larger company for its shares, the acquired entrepreneur will take a very active role as a director of the acquiring company. If the outside director with large stockholdings is a second or third generation heir of an entrepreneur, his involvement as an active director is less likely. Another situation in which the president of a large-or medium-sized company does not possess the full and complete de facto powers of control is that of a retired president who stays on as a member of the board. Then, typically, the outside board members have been selected and invited to the board by the retired president, not the new president. A similar complication of relationships exists in the situation following the sudden death of the president where his successor is designated by the board of directors. The new president holds his position because the directors selected him—directors who were themselves selected by his predecessor. While the new president is demonstrating his capacities to head the enterprise, the outside directors generally share the powers of control of the company. In both cases, with the passage of time, and with the designation by the new president of new directors who are his directors, the complete powers of control will flow back into the office of the president. Generally, when the president and the directors own only a little stock, the president possesses and exercises the complete powers of control of the enterprise. But, here again, it should be noted that the president with complete powers of control could determine that the directors will, to the extent he wishes, serve primarily as sources of advice and counsel. The controlling influence of the president in determining what the directors will or will not do was illustrated by many of the discussions during my field research. The top executive of one company said: “To put it bluntly, whether a board has any function or not, it must truly reflect the nature of the chief executive officer of the company more than anything else. If he wants to use the board, he will use them. And if he doesn’t want to use the board, he will run over them pretty roughshod. Basically, the board can be made just about as useful as the president wishes it to be.” Most presidents are completely aware of their powers of control, but they choose to exercise them in a moderate manner acceptable to their peers on the board. The president communicates to his board members that he doe’s indeed control the enterprise, and while this is usually done discreetly, it is understood and accepted by the directors. Many of them, as presidents of their own companies with board members of their own, thoroughly understand the existence and location of the powers of control. Choice of new membersThe president, with powers of control, generally selects and invites directors to serve on the board. In some instances, a nominating committee of the board is created to identify, screen, and recommend candidates for board membership. Even with the presumed objectivity of a committee of outside directors, though, the president makes the decision as to new members. Again, it should be noted that if one or more existing directors own or represent the ownership of substantial stock, the president’s de facto power to select new directors may be challenged. In these cases, the stock-owning directors are interested in adding new directors of their choice, and the president is interested in new directors of his choice. Discussion and negotiation inevitably result in some sort of agreement on who should be added, and the balance of power issue continues. The stockholders, of course, unless their holdings are substantial enough to assure representation on the board through the provisions of cumulative voting or to result in an invitation by the president to serve, play no part in the selection of directors to fill vacancies or in the nomination of directors’ names to be included in the annual proxy statement. My interview discussions on the topic of who makes a good director indicate that presidents, in selecting directors for their companies, regard the titles and prestige of candidates as of primary importance. Candidates are usually chosen who are (a) in positions equal to those of the other board members or (b) in companies of prestige equivalent to that of the company being served. If existing board members are chairmen and presidents of companies or senior partners of leading financial or legal firms, potential board members with lesser titles are rarely considered. Here is one company president’s comment on the prestige of his board members: “We have a standing rule that no one can be an outside director in our company who is not the top person in his organization. If he isn’t, he can’t be on our board. I don’t care how able he is; our board as now constituted has top men as outsiders, so any replacements over the years have got to be their peers. You can’t downgrade the prestige of our board membership by inviting, say, a promising vice president to serve as a board member.” In addition to the qualifications of prestige titles in prestige institutions—both business and academic—outside directors are selected because they are noncontroversial, friendly, sympathetic, congenial, and because they understand the system. Boat-rockers and wave-makers generally are not the choice of presidents with de facto powers of control and with freedom of choice as to who should serve on their boards. While most presidents prefer to include on their boards only those who have appropriate titles and positions, there are a few but not many presidents who believe that the requirement of prestigious titles is not important. They want board members who will participate in the management of the company. Not surprisingly, these presidents are the same few who want board members who will help establish corporate objectives, ask discerning questions, and evaluate the performance of the president. Proposed ProgramToday, many business leaders are concerned about the workings of boards of directors. In addition, various publics of business corporations are increasingly aware of the gap between the myth of boards’ functions and the reality of business practice. In recent corporate disasters, hindsight suggests that it would not have been meddling in the management if the directors had in fact asked some discerning questions and had been involved in the allocation and appropriation of company capital resources. If what I have reported is what boards of directors in fact do—is it enough? I suggest it is not. For those presidents and boards of directors who do want boards to perform more than the relatively passive functions and to give meaning in practice to the legal language “the board shall manage,” I propose a five-point program. 1. Ask all insiders on the board other than the chairman and the president to resign. During my research interviews, many plausible reasons were given for having insiders on the boards—e.g., board membership gives prestige to the insiders and contributes to high morale throughout the organization; membership on the board contributes to the insiders’ education by allowing them to participate in the top-level management process; outside directors are enabled to calibrate insiders as potential candidates for the presidency; and insiders at board meetings can answer queries raised with regard to their respective areas of responsibility. I believe that these seemingly plausible reasons for having insiders on boards of directors are essentially fallacious and specious. The objectives of the reasons cited for having insiders on boards could be accomplished through other means. If the functional roles of the board of directors are to:
2. The specific functions of the board should be discussed and agreed on by the chairman, the president, and the outside board members, and reduced to writing as a charter to board activities. I found that many companies have statements of their boards’ functions, but that the boards’ job descriptions are generally broad, vague, meaningless, and usually unknown to the members of the board. Also, the statements of functions typically include “the board of directors shall represent and further the stockholders’ interests,” but the statements do not go on to describe what directors do when they represent the stockholders’ interests. Further, I found that relatively unimportant functions, referred to by some directors as “legal garbage,” are often intermingled with important functions. A model for the process of defining appropriate board functions through discussion is provided here by John D. Gray, Chairman of the Board, Omar Industries: “The job of describing the functions of our board evolved over about a three-month period. I proposed the initial draft, and then met with the individual directors in three separate geographical locations to get their detailed input. This input was finally distilled into one document, circulated again to the directors, and with minor changes, adopted. It has been so far a most helpful document.” The board’s position description in Omark Industries covered seven major areas of functions. I shall include a select few of the many roles in each area to illustrate the specific job defined:
…approve policy governing quarterly, annual, and special reports to shareholders to ensure that the contents are fair representations to the investors. …approve policy regarding tender offer strategy and determination of levels of “fight value.”
…approve changes in capital structure and basic changes in debt policy. …approve annually the maximum limits of short-term debt, receive quarterly reports on short-term borrowings, and be advised of borrowings and lines of credit by the individual bank of the parent and its subsidiaries. …approve all long-term loans.
…approve long-range corporate objectives normally initiated by the chief executive officer. …review the annual operating budget, which will have been related to the longer range objectives of the corporation. …receive annually a special R&D report (products or manufacturing processes) listing major projects by divisions. …review annually the long-range strategy of the company; confirm its direction or proposed changes of direction. …receive on request periodic compliance audits concerning conformance to major corporate policy.
…appraise performance of the chief executive officer and the chairman, and review with them their annual personal objectives; the chief executive officer will inform the board annually of his appraisal of the executive vice president. …provide for the orderly succession to the position of CEO.
…approve basic corporate benefit plans. …be promptly advised by the CEO via special letter of any position or decision likely to lead to a strike in any division.
…recognize and identify the board’s need for company information, and arrange for its timely supply. …review company performance against purpose, policies, objectives, and plans. …inquire into causes of measured deficiencies in performance.
…propose the size of the board. …fix the age limit for board membership. …recruit new members to the board, and elect them as authorized by the bylaws. …remove members from the board for just cause. 3. Establish the criteria by which the board is required to evaluate the performance of the president annually, on a formal basis. One of the findings of my research is that generally directors do not do an effective job of evaluating or measuring the performance of the president. In most cases, there are no established criteria for appraising the president beyond the general test of “I sort of look at how the company’s earnings are, what the earnings per share are, what the stock price/earnings ratio is, and in general how the company appears to be doing.” Also, I found that careful and objective appraisal of the president’s performance usually takes place only when increasing evidence indicates that the president is inadequate, and by this time the company is likely to be on the verge of disaster. Able presidents, on the other hand, typically regard the measurement of the performance of their subordinates as one of the key and essential elements of the president’s job: quotas, budgets, and goals are common elements in appraising divisional or product-line results, and the performance by subordinates is carefully evaluated against predefined criteria. Measurement of the performance of subordinate executives is commonplace. I suggest that measurement of presidents be accepted as a commonplace and important function of boards of directors. In 1958, E. Everett Smith suggested that boards of directors have the kinds of information needed to evaluate the performance of management: “I believe that if we compare the standards of performance and measurement criteria used by a well-managed multidivision company with those supplied the average board, we will find an amazing double standard. The company executives are in a far better position to appraise and evaluate division performance. “If we are not to treat the board as an impotent second-class citizen, we must develop specific criteria that it can apply not only to each segment of the business, but also to the business as a whole. By criteria I mean material that will really identify, in each segment, the key factors that control profits and the general health of the business.”2 The fact that there are distinguishing characteristics for each company in each industry requires, I believe, that criteria for the measurement of a president in a company be uniquely tailored to that particular situation. Accordingly, the definition of the criteria should be a joint effort of the president and the board of directors of each company. Generally, the development and recommendation of major corporate policies and long-range objectives are initiated by the president and recommended to the board. Similarly, the construction of appropriate criteria for the measurement of the president’s performance should be initiated by the president. Some presidents have found outside consultants helpful in designing the appropriate and relevant criteria for the measurement of top-management performance. After the president has prepared what he perceives to be the appropriate criteria, they should be submitted to the board of directors for discussion, approval, and commitment. Recommendations as to the distinctive factors by which the president’s performance is to be measured can be constructed on (a) the criteria used by the president in evaluating his subordinates and their operations, (b) the company’s annual operating budget, (c) the company’s annual capital budget, (d) market data, when available, such as share of market (e) performance data of competitors with comparable product lines, (f) financial tests, such as return on investment, profit margin, earnings per share, cash flow, inventory levels, and so on. 4. Directors should ask those discerning questions of presidents at board meetings that they would ask if they owned a substantial part of the companies they serve as directors—i.e., the questions owners would ask. One of the conclusions of my research on directors is that in most companies directors do not in fact ask discerning questions. Presidents regard challenging questions as “inappropriate at meetings,” “meddling with management,” “trying to run a company by committee,” “determining major policies without adequate data and knowledge,” and, as one president said, “board meetings are not designed as forums for debate.” Presidents generally prefer not to have discerning and challenging questions, especially at board meetings. And directors comply and accept limited and passive roles by serving as sources of advice and counsel, providing some sort of discipline value, and becoming active only when forced by the conditions of a crisis. I believe that directors willingly accept the nonquestioning, noninvolved role partly because they are not concerned about their legal liabilities as directors. Typically, corporation law provides that directors must exercise “that degree of diligence, care, and skill which ordinarily prudent men would exercise under similar circumstances.” With this standard, directors of business corporations enjoy a virtually complete immunity from liability for good-faith errors of judgment in conducting their company’s business “even though the errors may be so gross that they demonstrate the unfitness of the directors to manage the corporate affairs.”3 Some writers state that the directors’ standard of care is higher, but most acknowledge that it is minimal. To encourage directors to ask those kinds of questions an owner would ask, I suggest that directors’ legal responsibility be redefined on a higher and stricter standard than the majority view of judicial opinion currently indicates. The higher standard might be phrased, “Directors must exercise that degree of diligence, care, and skill which ordinarily prudent men would exercise under similar circumstances in their personal business affairs.” The questions a director would ask in the management of his personal business affairs should be the questions a director poses to the president. With this standard of liability, I believe directors would ask those questions owners would ask or they would resign. Directors unwilling to accept the legal responsibility of representing the shareholders—the owners—in my judgment should resign. 5. Establish compensation rates for outside directors which motivate them to fulfill active and responsible roles as directors. One reason for the passivity and the lack of involvement by outside directors is that the relatively modest compensation provides limited monetary incentive to devote time and energy to another company’s problems. Meeting fees and retainers have increased in amount during the past several years, but the amounts paid,4 as one president noted, “are still substantially below what a senior professional management consultant would charge on a per diem basis.” Outside directors, in my judgment, are today generally overpaid for what they do, and underpaid for what they should do. Significantly higher directors’ fees would motivate, I believe, able and responsible directors to devote commensurate and appropriate time and energy to the affairs of the corporations they serve. There was a time when a corporate director could regard his appointment as just an agreeable tribute to his wealth and his connections, a sign that he had entered the inner circle of the business community. If any director still thinks of his job that way, the proliferation of stockholder suits, the drumfire criticism of the militant consumerists, and the mounting complaints of minority groups should make him think again. The problem of the modem director is to define his role so that he does not meddle with day-to-day management but nevertheless knows what is going on and makes his influence felt in the determination of broad policy. It is not a problem that lends itself to easy answers. Each company is a separate case, and it is fair to ask whether a man who serves on a dozen or more boards really is doing his job on any of them. In too many recent cases—Penn Central, for example—no one has been more surprised than the directors when the management finally admitted that the company was in deep trouble. And in too many cases, consumer groups or spokesmen for minorities have hit home when they charged that no one on the corporate board was thinking about them. As a result, business today is more vulnerable to punitive legislation and regulation than it has been at any time since the 1930s. If corporate management is to survive in anything like its present form, directors will have to take on new responsibilities. They must make sure that corporate goals are consistent with the larger goals of U.S. society. And they must monitor management to see that it pursues these goals effectively, including the basic objective of earning a reasonable income and keeping the company out of the bankruptcy courts. 1.The Board of Directors in Small Corporations (Boston, Division of Research, Harvard Business School, 1948), p. 12. 2. “Put the Board of Directors to Work!” HBR May–June 1958, p. 46. 3. Everett vs. Phillips, 288 N.Y. 227, 43 NE 2d 18, 20, 1942; see also Bishop, “Sitting Ducks and Decoy Ducks,” 77 Yale Law Journal,1078, 1095 (1968). 4. See Jeremy Bacon, Corporate Directorship Practices, Studies in Business Policy, No. 125 (New York, National Industrial Conference Board, Inc., 1967), Chapter III, pp. 29–79. A version of this article appeared in the March 1972 issue of Harvard Business Review. Which best explains how the structure of the Executive Office of the President helps fulfill presidency office's role Brainly?Which best explains how the structure of the office of the president helps fulfill the office's role? The office is led by the chief of staff, who serves as a key adviser to the president. The office has multiple levels of staff and advisers who help the president in many areas.
What Executive Office of the President is led by?The EOP, overseen by the White House Chief of Staff, has traditionally been home to many of the President's closest advisers.
Why does the Executive Office of the President include?Why does the executive office of the president include press and communications staff? The president uses mass media to speak to Congress. The president uses mass media to gain support for policies. The president uses mass media to issue executive orders.
What is a major role for executive departments?Answer and Explanation: The major function of all the executive branch departments is the enforcement of law. These departments all work to enforce particular aspects of the country? s law, whether that be border security, defending the country, or distributing welfare.
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Which is the most accurate description of the executive office of the president brainly
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