1035
n
Liaisons and intrigues
So no verdict here just yet. Presidential cabinet ministers were
more likely to receive board invites than senators, who were
more likely to be approached than congressmen. I think this
starts to lean towards an “inuence” explanation for board
invites rather than an “advice” one, but if you’d really like to
jump to their defense I guess one could still argue that cabinet
ministers simply might make for better advisors.
However, another clear nding was that these people would either
get asked for a board very shortly after leaving their government
position, or not at all. Senators and former cabinet ofcers would
usually be snapped up in the rst year after leaving ofce. This
could hardly be because after a year they would suddenly make
lousy advisors; it’s much more consistent with the fact that their
ability to inuence government decisions quickly deteriorates
after leaving ofce. And it seems consistent with the idea that
they get offered the job in return for services already delivered . . .
Finally, Richard and colleagues examined what happened in the
case of a government change; that is, if the party in power (in the
House, the Senate, or the White House) shifted from Democrat
to Republican or vice versa. The effect of this was clear; the
ex-government ofcial, associated with the party no longer in
power, would see his invites dry up rapidly. He had just lost his
attraction as a potential board member, because if the wrong party
comes to power, you see your power to inuence evaporate and,
with it, your value as a potential board member. Clearly this points
at an “inuence” argument; companies ask ex-government ofcials
on their boards to bend political decisions in their favor. And I’m
afraid this puts these ofcials rmly in the “barely legal” category.
Boards of directors: cliques and elites
Let me entertain you a bit more in the shady world of boards
of directors. And show you how they form a business elite that
operates as a self-governing clique.
In the US, in the 1980s, shareholders (especially institutional
investors) began to advocate that company directors should
Business Exposed104
take certain measures that restrict top managers from having a
ball at shareholders’ expense: that is, undertake strategic actions
that are in their own interest but not in those of the company’s
shareholders. Yet, after making some initial inroads, two decades
later, this reform process stagnated. For example, the portion
of large US companies with an independent board chair or an
independent nominating committee for new board members
(two of the things advocated by the investors) was only slightly
higher in 1999 than in 1989.
How come? Why had this governance reform stagnated? To
answer this question, Professor James Westphal – currently at
the University of Michigan – conducted an elaborate study. He
collected data on 417 rms, interviewed scores of top managers
and directors, obtained surveys from 1,098 directors and 197
CEOs at multiple points in time, and came up with an intriguing
answer. He found that the top managers and board members of
the US’s biggest companies together form an “elite”, which acts
very much like “the clique of popular kids in high school”. Let
me explain.
Specically, Jim tracked directors’ voting behavior when any of
the following four measures were being proposed in the company
(which each limit top managers’ power):
1 CEOs cannot concurrently also hold the seat of chairman of
the board (so that the board can operate independently).
2 The company should have a nominating committee to
appoint new board members, rather than the company’s
CEO controling this process.
3 The director at some point had voted to dismiss the
(underperforming) company’s CEO (a measure clearly not in
the interest of the CEO!).
4 The company should revoke a so-called poison-pill
construction – a mechanism that makes it difcult for a
rm to be acquired against top management’s will (so that
even when top management is doing a poor job, and the
company is underperforming, they still can’t be ousted by
new owners).
1055
n
Liaisons and intrigues
Then, Jim examined what had happened to the directors that
had voted in favor of adopting one or more of these (“contro-
versial”) measures . . .
First, what you have to realize is that people who hold board
memberships are also often members of the boards of other
companies. If a particular board member, at some point in time,
had voted for one of the above measures, which remove privi-
leges from top managers (i.e., members of the elite) and give
them to investors (who are not considered part of the elite),
their fellow directors at other boards would subsequently start to
give them the cold shoulder. The board member would become
unpopular with the rest of the in-crowd, and be treated as a
traitor.
The questionnaires and interviews (conducted with both the
“unpopular board members” themselves as well as with their
former “friends”) clearly indicated that the other board members
would start to engage in subtle behavior intended to punish the
deviant person, such as neglecting to invite him to an informal
meeting, not asking his opinion or advice in formal meetings,
not acknowledging or building on his comments in discussion,
engaging in exclusionary gossip whereby they would talk about
other people and events with which the director was not familiar,
and so on. Basically the good old pretend-you’re-not-there kind
of stuff.
For example, board members said that the deviant persons
“can expect to be ostracized”, and “people are less interested
in working with them”. One director said, “The directors [who
had voted for one of the four changes] get treated differently – I
think they get put on notice a bit”, while another commented,
“It will hurt you. You won’t get thrown off the board, but you
denitely won’t get treated the same. In a way you get treated
like the enemy – or at least a suspect”. One director, who had
once voted in favor of one of the measures, related his own
experience: “After we red the CEO I got the cold shoulder
from colleagues at another board . . . I didn’t get invited to an
important meeting.”
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