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In 2010, Eric Jackson, an activist investor and hedge fund manager, averred that Goldman’s board was too cozy and too lacking in financial know-how to diligently oversee top management. He claimed the board was packed with honchos who led companies that had paid large fees to Goldman. Jackson pointed to Indian steel magnate Lakshmi Mittal and former Fannie Mae chief James Johnson as cases in point. The problem with these choices, Jackson said, is that “these people seem to be favorably disposed to senior management’s way of thinking,” and are therefore unlikely to act as a check on CEO Lloyd Blankfein and his team. Colin Barr of Fortune argued that the bank’s system of corporate governance was behind the times. He pointed out that Lloyd Blankfein continued to serve as chairman and CEO, even as the trend in recent years had been toward independent board leadership.

After all, one of a board's main functions is to oversee and evaluate the CEO as well as the other top executives. The duality of chairman/CEO is the epitome of a structural or institutional conflict of interest; a CEO who is also chair of the group whose job it is to evaluate the CEO is presuming to evaluate him or herself, in effect. The sheer existence of such an obvious conflict of interest can be viewed as presumptuous. Furthermore, the arrangement itself is an incentive to engage in duplicitous subterfuge. A board of directors is by definition independent of the management because the board’s function is to oversee it.  Overseeing and being cozy are like oil and water.  A “trend” away from conflating the two minimizes the decadence in the problem.  Instead, corporate governance ought to require independence.

When Armstrong was chair/CEO of ATT, I asked him whether giving up the chairmanship wouldn't enable his board to better evaluate him as there would not be the suspicion of a conflict of interest. He replied as though he were president of the United States, saying "the buck stops here."  He went on to say that he had to have complete control or he could not rightly be blamed if his strategy (which was broadband at the time) didn't work.  If his board said no to part of his strategy, it would not be fair to blame him for the failure of his entire strategy. Of course, he could have presented his strategy to his board and if it objected to part of it, the resultant strategy, it could be agreed, would not be considered to be his; he would be evaluated on how well he implimented it. The notion that any sort of check on power renders the power compromised or impotent ignores the basic difference between a board and a management. Managers work within broad strategic guidelines that are set as a matter of policy by a board, and managerial implimentation can indeed be evaluated without compromising it.  In effect, Armstrong wanted to go beyond managing to the property-rights goal-level of owning.  That he was overreaching is all the more reason why an independent board would have been a valuble commodity for ATT.

To be sure, it is difficult to counter the influence that a management has on account of its position vis a vis the company and its board. As a starting point, people having former ties to the management, or even hand picked by the CEO, ought to be barred from serving as directors. It should go without saying that a CEO ought to be barred from serving as the chair of the board.  Conflating these two roles is tantamount to suggesting that a CEO can (and should) oversee himself, which is nonsensical. For there simply to be a mere trend away from this duality essentially “normalizes” that which ought to be approached as an oxymoron--a contradiction in terms. That such a phenomenon would be allowed to exist at all points to the power that CEO's have to define social reality for society. Such power is very dangerous, especially if left unchecked even in the name of "the buck stops here."

Source: http://money.cnn.com/2010/04/20/news/companies/goldman.board.fortune/index.htm

I contend that Robert Benmosche, CEO of AIG, had an incorrect understanding of corporate governance when he told Harvey Golub, then-chairman of the board, on July 14, 2010, “One of us should stay and one of us should go.” He should have, “Please let me know if the board would like me to go.” Put bluntly, the CEO works for the board, not vice versa. The previous May, Benmosche told Golub, “We can’t work together. I need a partner who I can bounce ideas off and give me advice.” However,a CEO and a chairman do not work together as partners. Rather, the chairman—and the board more generally—act on behalf of the stockholders to oversee the management, which the board has hired. In other words, a CEO is an employee whereas a chairman is not. Benmosche’s comment is actually rather presumptuous.

Benmosche’s upside-down approach to corporate governance is evident from the way he went about trying to sell AIG’s biggest overseas life insurer, AIA, to Prudential. Rather than being surprised that Golub did not support the sale, he should have taken note of Golub’s surprise that he had not informed the board earlier. As another example, rather than being annoyed that the board didn’t push Treasury’s pay czar harder to sign off on his $10 million pay package, Benmosche might have asked the board if they supported the proposed compensation.

One of the principal jobs of a corporate board is to assess the CEO (and hence the management) and to fire him or her if the board decides it would be in the stockholders’ interest. The CEO works for the board, not vice versa. It is not a partnership arrangement. It is the CEO’s responsibility to act within the support of the board, rather than to threaten its chair for not playing ball. Benmosche illustrates the arrogance that come occur when an employee is over-compensated and spoiled.  Benmosche should have been grateful to the AIG board for having agreed to a compensation package of $10 million rather than critizicing them for not essentially working for him in pressuring the Treasury.

From this case, we can extract the following lesson. A CEO should not chair the board whose task it is to assess him or her. Such duality is a contradiction in terms—effectively attempting to interiorize within the CEO accountability that is external (i.e., interpersonal). As Benmosche had already turned to Robert Miller, who replaced Golub, for advice and found him to be supportive, AIG may have essentially installed a puppet—hence compromising the board’s role in overseeing the CEO.

I once asked Armstrong when he was both CEO and chairman of ATT whether he saw any conflict of interest in his chairing of the body tasked with assessing him. He replied that the buck stopped with him—that he needed the authority to integrate cable, computer and telephone technologies into broad-band. However, in hiring him, the board should have signed off on his strategy, hence giving him all the authority he needed to implement it. In effect, Armstrong was over-reaching in claiming that such authority was not sufficient. When his strategy failed, the external accountability function of the board was compromised.

In general terms, CEOs are too powerful with respect to “their” boards.  In being an enabling partner rather than a parent, too many boards are unwittingly undercutting their raison d’etre. To the extent that the managements of banks contributed to the crisis in September, 2008, corporate governance with real accountability can be seen as critical not only to our financial system, but to the economy itself. We can ill-afford too many spoiled adult-children.

Source: Joann S. Lubin and Serena Ng, “Battle at AIG Board: You Go, or I Do.” The Wall Street Journal (July 16, 2010), pp. C1, C4.