Directors of Failed Companies

Question: What does one do after losing a position on the Board of Directors of a failed company?

Answer: Why, join another Board of Directors, of course!

At least, that’s the case for a number of former Directors of companies like A.I.G., Bear Stearns and Lehman Brothers — companies at the heart of the financial crisis. See this story from the NYT: Companies May Fail, but Directors Are in Demand.

Does this make any sense?

The first issue to consider is whether it’s prudent for other companies to recruit directors from failed companies. After all, they were members of the teams that were supposed to be steering those ships juuuust before they hit those icebergs. But failure doesn’t imply that every member of the team was a dud, and any director who has been through a company’s collapse has arguably learned from the experience. At least one expert quoted in the NYT thinks that’s plausible:

“Directors of these financial institutions may or may not have been asleep at the switch, and if they were, they had a lot of company,” said Michael Klausner, a corporate law professor at Stanford. “Leaving that question aside, they may well have gained valuable experience that will make them good directors today.”

It’s also worth pointing out that there’s no clearly-established, strong connection between board effectiveness and corporate success. (Consider: even a well-governed company will die if its products suck or if the market for its product turns sour.) So it’s plausible that a failed company can have a good board. But in the cases we’re concerned with here, there seems to be consensus that boards didn’t do terribly well. But still, a board might be made up of a dozen directors, and there’s only so much one great director can do if surrounded by turkeys. So it’s certainly plausible, at least, that there may have been individual gems on even the worst boards among those governing failed companies. In terms of talent, each deserves to be considered on his or her own merits.

What about ethically? Is there any ethical reason not to draft the former directors of the likes of A.I.G., Bear Stearns and Lehman? Well, to start, see above. Quality governance is itself an ethical issue. (See also my recent blog entry on board competence.) So a board’s Nominating Committee has an ethical duty to recruit talented people. Is there any ethical reason not to recruit those talented people? Although I suspect many people’s intuitions will say there is a problem, there, I’m not so sure. Blacklisting even the talented directors of failed companies could only be punitive in intent — and punishment needs to be case-by-case. The onus then is on Nominating Committees to do their due diligence, and to satisfy themselves — and their shareholders — that this particular former director of a failed company behaved neither incompetently nor immorally. How many of the directors named in the NYT story could pass that test? I could not begin to guess.

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