Corporate Governance has become a hot topic in the wake of scandals at Enron, WorldCom, and others in recent years. The consultants and SEC have moved in, as a result, with a predominantly "tick the box" view to concocting the "right" mix of directors on a given board. Sufficient "independence" is seen as a must by most experts.
Warren Buffett has his own criteria for what makes an excellent director. They are as follows:
- Business savvy
- Truly independent
Simple but powerful - classic Buffett.
I like the way that he describes the fourth characteristic as "truly" independent. Independence has become the most cliched term in this new era of governance and, because it suffers from so many different definitions, the most useless.
What makes a great director is how he or she conducts him/herself in the boardroom. Do they ask tough questions - even of the CEO who appointed him/her to the board (the one, as Ralph Whitworth says, who brought them to the dance)? Do they push for answers when they are dissatisfied with the initial response to their questions. Do they admit their ignorance in a certain area but still ask for clarification, not worried about looking bad in front of their peers?
These are all process issues. The debate in corporate governance matters has zeroed in on structural definitions. That's a shame. What I like about Buffett's list is that -- even though a list, by definition, has to focus on structural characteristics -- they lend themselves well to how a director will conduct him/herself in the boardroom behind closed doors. If you were a fly on the wall of a boardroom consisting only of directors meeting Buffett's four qualities, chances are good that there would be a real spirit of debate and constructive criticism, as well as collegiality -- the nirvana of corporate governance proponents.
In a 2-year McKinsey and Korn/Ferry study of governance I was a part of at Columbia Business School, we found, after running regressions on hundreds of governance-related characteristics as predictors of long-term increases in shareholder returns, that only one stood the test of this type of analysis: percentage of outside directors who own meaningful stock in the companies on whose boards they sat -- where they had purchased the stakes instead of receiving options/grants. This certainly creates an "owner orientation." The paper covering this study is here.
As we move into proxy season, all boards and heads of Governance Committees would do well to review Buffett's list and measure their own set of directors against it.