What's A Director To Do?
The Monitor Company
Michael C. Jensen
Social Science Electronic Publishing (SSEP), Inc.; Harvard Business School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)
Harvard NOM Working Paper No. 02-38
The recent wave of corporate scandals provides continuing evidence that boards have failed to fulfill their role as the top-level corporate control mechanism. Destroyed companies, ruined reputations and in some cases jail sentences have created an environment in which substantial changes in the role of the board may occur. To solve the problems boards must change fundamentally their approach to the job. We recommend that boards focus on the following areas:
- Be clear about the decision rights and role of the board - being careful to see that the board holds and exercises the top-level control rights in the organization, including the rights to initiate and implement decisions such as the right to hire, evaluate, compensate, and fire the top management team, board members, and the auditors.
- Change the structural, social, psychological and power environment of the board so that board members are no longer effectively the employees of the CEO.
- Change the philosophical mindset of the board from one of careful review and compliance to one of insatiable curiosity and clarity.
- Take seriously the role of the board as the body ultimately responsible for ensuring the integrity of the organization in all matters. This means individual board members must come to understand and institutionalize the notion that honesty and integrity in our actions and our words are most valuable to others when it costs us something to adhere to them. Yet we tend to forgive ourselves the obligation to uphold these values in exactly those situations where there are high costs (whether monetary, psychological, and/or reputational) to ourselves, the CEO and others, or the company. Restoring integrity to the system will require men and women of courage and conviction on boards and in management teams to incur costs in the short run to preserve their reputations and the reputation and value of the organizations they serve.
Number of Pages in PDF File: 18
JEL Classification: G34, D23, M14
Date posted: February 17, 2004