The doofus factor
How can you tell a good board of directors from a bad one?

The Economist | Sep 17th 2011 | NEW YORK | from the print edition

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THE directors of Yahoo! were “so spooked by being cast as the worst board in the country” that they fired Carol Bartz as chief executive “to show that they’re not the doofuses that they are.” That was Ms Bartz’s typically blunt verdict, offered to Fortune after she was dismissed with a phone call by the internet firm’s chairman, Roy Bostock, on September 6th.

She would say that. Yet Ms Bartz’s criticisms of the board have been sympathetically received. Firing a chief executive by phone smacks of hasty, panicky decision-making. And Yahoo!’s board already had a poor reputation, having turned down an offer from Microsoft that valued the firm at several times what it is worth today.

It is not just Yahoo!’s board that is feeling the heat. The directors of HP, another stumbling Silicon Valley giant, have been accused of serial ineptitude spanning the appointment and dismissal of Carly Fiorina as chief executive, the firing of her successor, Mark Hurd, and the selection of his replacement, Léo Apotheker. As the phone-hacking scandal escalates at News Corporation, shareholders accuse its board of dozing on the job. BP’s board has been slammed for its oversight of the firm’s handling of last year’s Gulf of Mexico oil spill, as well as this year’s failed deal with a Russian oil firm. And so on.

All this is a consequence of a series of corporate-governance reforms during the past 20 years intended to empower non-executive directors in their oversight of executives. Before these changes, the only criticism of boards that was taken seriously was that they were hand-picked yes-men (plus a few yes-women), chosen largely for their docility and willingness to pay the boss a fortune. Today boards are often chided by shareholder activists—as Yahoo!’s board was by Dan Loeb, an outspoken hedge-fund manager—creating a temptation to do something decisive.

During the past decade the average tenure of chief executives has fallen to 6.6 years from 8.1 years, according to a recent study by Booz & Co, a consultancy. The average tenure is even shorter for chief executives recruited, like Ms Bartz, from outside the firm. Departing bosses can play a big role in recruiting internal successors. But blame for poor outside appointments falls squarely on independent directors, perhaps encouraging them to change their minds at the first sign of failure.

It is hard to tell from the outside whether a board is any good. New guidelines requiring directors to be independent of the chief executive and to have at least some relevant qualifications have largely ended absurdities such as the octogenarian actress (as seen in “Caddyshack 2”) who sat on the board of Lehman Brothers. Today only a handful of big firms have the sort of board that seems hand-picked to be loyal to the boss, chief among them being News Corporation, says Paul Hodgson of GMI, a corporate-governance ratings firm. Mr Hodgson describes recent changes to News Corporation’s board as “cosmetic” and points to an unusually large number of directors who are corporate insiders and thus likely to be loyal to the chief executive, Rupert Murdoch.

News Corporation is one of ten firms in the S&P 500 that particularly worry GMI. Other media firms with well-paid chief executives also make the list, including Viacom, CBS and Discovery Communications. So do Coca-Cola and Nike.

The board of Yahoo!, by contrast, raises “no red flags”, says Mr Hodgson. Indeed, it seems something of a model board, with an independent chairman and a good mix of long-serving and new directors. It made most of Ms Bartz’s share options subject to tough performance triggers and negotiated a relatively stingy termination agreement. That reflects well on the Yahoo! board: it made sure that Ms Bartz stood to make a ton of money only if she made a ton of money for shareholders.

There is growing demand for boards to undergo a formal evaluation process, to assess both the performance of each individual board member and how they work together as a group. The European Union is considering new regulations that would require an independent evaluation of the board every three years. Kevin Kelly, the boss of Heidrick and Struggles, a firm of headhunters, says that a surprisingly large number of American directors tell him privately that they would welcome something similar. So, no doubt, would many shareholders.