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Forwarded to you by BuzzFlash:
What Should a CEO Expect from a Board?
by Kenneth Lay, Enron
Center for Business Ethics
at Houston's University of St. Thomas
April 1999
http://www.stthom.edu/cbes/conferences/kenneth_lay.html
Excerpts:
"Like any successful company, we must have directors who
start with what is right, who do not have hidden agendas,
and who strive to make judgments about what is best for the
company, and not about what is best for themselves or some
other constituency."
"The responsibility of our board-a responsibility which I
expect them to fulfill-is to ensure legal and ethical
conduct by the company and by everyone in the company."
--
What Should a CEO Expect from a Board?
I would like to begin by asking: What should a CEO expect
from a board? A short answer might be: "Giving a lot of
really good advice, but not too much of it." I'll define
that a little better as I go along, but that answer
probably covers most of what I want to say.
In addition to the Enron board and some of our affiliate
boards, I have served on various other corporate boards.
I'll be drawing upon those experiences in my comments. I
served on two boards of companies for which I was a senior
manager-Houston Natural Gas and Transco-and on the boards
of several other public corporations-First City Bank (which
no longer exists) and Texas Commerce Bank. I was on the TCB
board when the bank was bought by Chase. In addition, I
served on the Baker-Hughes board when Baker bought Hughes
Tool. So, I've been on rather different types of boards. I
am presently on the boards of Eli Lilly and Compaq, two
great companies that are in totally different industries
and face very different problems.
My experience, and probably that of most people, would
indicate that every CEO expects something different from
his or her board. There is no one model for the perfect
board. During the last few years, there has been a lot of
debate about the right type of board. But many people,
including some of our institutional investors, seem to
think that there's one model that everybody should follow.
It seems to me that they've now begun to back off from that
notion a bit. Each company, management team, and CEO not
only deserves but, in fact, needs a different kind of board
than that needed by other companies and CEOs. Similarly,
the expectation of current CEOs regarding the board are
bound to differ from those of their successors.
Still, there is little doubt in my mind-indeed, no doubt-
that a strong, independent, and knowledgeable board can
make a significant difference in the performance of any
company. The board cannot do it alone, but it can make an
enormous difference. Let me draw upon my experience at
Enron. I will look specifically at our governance
procedures, which reflect what I, as CEO, expect of a board
and of our corporation. First, you have to consider what
the company is looking for in its directors. Of course, the
CEO, as well as the board, is very much involved in
choosing appropriate board members. The process of building
an effective board typically reflects what the CEO thinks
the company needs at that point in time. My needs at Enron
have changed enormously since 1985, and they are changing
today.
In reference to the qualifications of new board members,
Enron's corporate governance guidelines emphasize "the
qualities of strength of character, an inquiring and
independent mind, practical wisdom and mature judgment." No
doubt, this list says a lot. At the same time, it does not
say very much. Nevertheless, these are the qualities we
look for in a board member. It is no accident that we put
"strength of character" first. Like any successful company,
we must have directors who start with what is right, who do
not have hidden agendas, and who strive to make judgments
about what is best for the company, and not about what is
best for themselves or some other constituency. Judgment
becomes very complicated in cases of labor and shareholder
issues. And when I say "company," I mean all of its
constituencies, including employees, customers,
communities, and obviously, shareholders.
Putting it in the terms used by today's popular management
consultant Steve Covey, we look first and foremost for
principle-centered leaders. That includes principle-
centered directors.
The second thing we look for are independent and inquiring
minds. We are always thinking about the company's business
and what we are trying to do. We want board members whose
active participation improves the quality of our decisions.
We look for diversity as well. In my opinion, diversity is
not just a varied mix of sex, race, religion, and all the
other characteristics. It also extends to a variety of
experiences, which is very important for any board. On the
Enron board, we have a director who is the former dean of
the Stanford business school currently the Senior Professor
of Accounting at Standford. He serves as chairman of our
audit committee. Another director was formerly a member of
the British House of Lords and House of Commons, as well as
Energy Minister. In addition, we have one of the most
prominent business leaders in Hong Kong, who is in business
around the world and involved very actively in all kinds of
public and business issues. Yet another director is the co-
founder and former president of Gulf and Western, and a
very active entrepreneur and investor. Two directors are
CEOs of large U.S. corporations, one high-tech and the
other now in lodging, although when the latter came on the
board, he was chairman of a large financial services
company. Another board member is the former head of the
Commodities Future Corporation. She is of Asian descent and
has a Ph.D. in economics.
We also have a former professor of economics and a former
head of General Electric's Power Division worldwide. At the
time he retired, that division represented forty percent of
G.E.'s total worldwide business. Another senior executive
who runs an investment fund and has a Ph.D. in mathematics
chairs my finance committee. We have the former president
of Houston Natural Gas, the former head of M.D. Anderson,
the former head of a major energy and petroleum company,
and a former Deputy Secretary of the Treasury and Ph.D.
economist on the board as well.
This board truly embodies a broad spectrum of experiences.
We are also trying to recruit an African-American who heads
a worldwide financial services business and one of the
largest financial institutions in South America. So the
message is simple: try to get directors with the
experiences and cultural insights your company will need as
it becomes increasingly global. The board should be diverse
in order to bring to the table a wide range of experiences
not only in business but also in many other fields. Board
members should be uniquely accomplished. Most importantly,
they should have achieved distinction themselves in their
chosen line of work. And I believe our board satisfies
those criteria.
Finally, we look for individuals who have mature judgment-
individuals who are thoughtful and rigorous in what they
say and decide. They should be people whom other directors
and management will respect and listen to very carefully,
and who can mentor CEOs and other senior managers.
Once such a board is in place, what does a CEO-and in
particular, this CEO-expect from these principled, wise,
and experienced directors? Again, our corporate governance
guidelines are simple and straightforward. The
responsibility of our board-a responsibility which I expect
them to fulfill-is to ensure legal and ethical conduct by
the company and by everyone in the company. That
requirement does not exist by happenstance. It is the most
important thing we expect from board members.
Second, the board should ensure that we choose our senior
officers wisely, compensate them appropriately, and, when
necessary, replace them, including the CEO. Board members
approve corporate strategy and major management
initiatives, particularly major capital investments or
changes in the strategic direction of the company. They
provide general oversight of the business. They select,
compensate, and evaluate directors and board processes.
I hope you have noticed that there was absolutely nothing
in that list of responsibilities that would indicate the
board is expected to manage the company. It is not. That's
the role of management. The board can replace a CEO with
whom it is unhappy. And that has happened in many cases. I
have participated in such replacements, including a highly
publicized change in a company on whose board I serve. But
the board cannot, and ought not to, assume the role of the
CEO.
So I have now come full circle from where I started. What a
CEO really expects from a board is good advice and counsel,
both of which will make the company stronger and more
successful; support for those investments and decisions
that serve the interests of the company and its
stakeholders; and warnings in those cases in which
investments and decisions are not beneficial to the company
and its stakeholders.
And let me conclude by acknowledging that it is not an easy
task to get all of this just right.
http://www.stthom.edu/cbes/conferences/kenneth_lay.html
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