Our newspapers are replete with examples of greedy and self-serving behaviour in the corporate world which beg the question: where was the board when this was happening? Ultimately, boards are responsible for all aspects of the company and yet time and time again some have been found wanting. Why is this?
Companies are owned by shareholders but are managed on a day-to-day basis by managers. The board of directors is an invention of 19th-century Britain when joint stock companies were created. Boards of directors primarily exist to oversee the performance of management and to make sure that managers act in the best interests of shareholders, and not in their own best interests.
Thus, one of their most important roles (but not the only one) is that of watchdog. When things go wrong, it is often partly due to the board not exercising its watchdog role properly.
Reacting to corporate scandals, regulators impose increasingly onerous governance requirements on boards and individual directors. But this doesn't seem to prevent wrongdoing. The boards of companies such as Enron, Worldcom, Global Crossing and Tyco were models in terms of their adherence to best governance practice: these boards had plenty of outside non-executive directors, the positions of chairman and chief executive were separate, directors attended meetings regularly, the board had an audit committee, and these companies had codes of ethics in place.
As the inspector of Worldcom stated: "On the surface, the audit committee appears to have met the letter of its charter and acted in good faith to carry out its duties. But the committee rarely scratched below the surface of issues that arose and allowed management to set the agenda in every respect."
With the benefit of hindsight, while we can say that these companies adhered to the classic requirements for good governance, their corporate governance in practice was not robust. Thus, it is not the rules and regulations that determine whether a board is good or bad.
At the heart of every business are people: strong and weak, prudent and imprudent, ethical and unethical. The people, and the way in which they work together, are the key determinants of good governance. What distinguishes exemplary boards is that they are robust, effective social systems.
It is not easy for investors to know if the social interaction at board level is effective. Confidentiality is a fundament requirement of business, to prevent useful information being available to competitors.
Boards conduct their business behind closed doors and are not transparent in their operations. All that is known publicly are the names of board members, accompanied usually by a brief biographical sketch. Warren Buffett has referred to this in his own unique way: "It's only when the tide goes out that you get to see who's been swimming with their trunks off."
What is the key characteristic of a well-functioning successful board? The best are those where members engage each other constructively, where board members challenge each other and managers in the organisation. Highest-performing companies have contentious boards that regard dissent as an obligation and that treat no subject as beyond discussion.
Only strong independent-minded people have the skills to engage in this way. For a board to operate successfully it must operate as a team. Teamwork involves mutual trust. The challenge for directors is to engage each other constructively, and sometimes disagree, in a manner that fosters trust.
Nowadays there is a great deal of emphasis on non-executive directors being independent. Many non-executives appear independent on paper (i.e. they have no obvious business ties to the company). But we must distinguish between appearance and reality. To me, independence means independence of mind. The personal characteristics of some directors are such that, while they appear independent on paper, they could never be described as independent-minded.
Scepticism and dissent don't constitute disagreement for its own sake but rather are the byproducts of a group of people trying do the best for the shareholders by reacting to a constantly evolving business and world.
Sir John Harvey Jones captured this when he said: "I suspect it is not necessary to say that the non-executives of Grand Metropolitan are a fiercely independent bunch who are never backward in coming forward. Your chairman and our executive colleagues are not exactly shrinking violets, so our meetings are lively and robust events.
"All of us believe that this forceful and open debate helps the board reach the best possible conclusions. We enjoy the discussions, but serious differences of view are expressed and thrashed out and, in my experience, at some time or other each one of us has contributed to swaying the debate and influencing the company's direction."
Such pro-active non-executives are not troublemakers. But they may make life around a boardroom table a little less cosy in the short term, but more reassuring in the long term.
This is the kind of company I would like to invest in. This is the kind of board of which I would like to be a member. When companies look for non-executives, are these the kind of personalities they search out, or do they look for consensual candidates who do not rock the boat?
The problem with corporate governance is us - us human beings - and our tendency (on occasion) towards dysfunctional behaviour.
People tend to surround themselves with other like-minded people. Thus, first-class people are sufficiently competent and self-confident to be comfortable with other first-class people.
Conversely, second-rate, greedy, self-serving people seek each other out (just look at the people appearing at our all-too-many tribunals currently).
The old Irish phrase "aithníonn ciaróg ciaróg eile" (one beetle recognises another beetle) captures this aspect of corporate life beautifully. No rules, no regulations can prevent greedy self-serving behaviour by such people.