The Role of the Board of Directors in Publicly Traded Companies

The influence of the board of directors over publicly traded companies is a topic of significant interest in the business world. While the dynamics can vary widely from one company to another, changes in recent years have highlighted a growing trend where boards are no longer blindly obedient to their CEOs. This article explores the various dimensions of board influence and the factors driving this transformation.

CEOs and Their Influence

The relationship between the board of directors and the CEO is complex and multifaceted. In some cases, CEOs wield considerable power, influencing not only the daily operations but also the composition of the board itself. Companies where the CEO holds a significant control stake, such as those founded by charismatic leaders, can see boards that are more willing to support the CEO's vision. For instance, Bill Gates jokingly claimed that at Microsoft, he could get a board meeting by simply calling a friend, underscoring the high degree of influence a controlling stake can have.

Powerful CEOs and Their Tactics

Other CEOs are adept at power games, utilizing their influence to appoint board members who are more than willing to endorse the CEO's agenda. These board members often seek to enhance their own resumes by being associated with a successful company and are less likely to challenge the existing leadership. This strategy can be particularly effective in maintaining stability within the company hierarchy.

Founder CEOs and Their Dominance

Many publicly traded companies, especially those with a strong entrepreneurial foundation, are led by founder CEOs who maintain significant control over the stock. In such cases, the CEO often wields considerable authority, and board meetings may not be a regular occurrence. The board's role can become more of a ceremonial one, with decisions often being made by the founder and their core team. This dynamic, while common, can sometimes lead to stagnation, as independent thinking and external perspectives are less common.

Activist Boards and Their Evolution

Despite the traditional power dynamics, there has been a notable shift in recent years towards more activist boards. Activist investors, such as Carl Icahn, have played a significant role in this evolution by targeting companies with underperforming management. These investors purchase a large stake in the company and then lobby for changes, including the ousting of ineffective leadership. This trend reflects a broader change in corporate governance where boards are more willing to challenge and replace underperforming management.

Case Study: Hewlett-Packard and its Multiple CEO Changes

A prime example of this shift towards more activist and independent board practices can be seen at Hewlett-Packard (HP). HP has had four presidents in its first 50 years, and since the retirement of Lew Platt in 1999, the company has experienced six CEOs in just 15 years. The majority of these changes were initiated by the board, often due to poor stock performance. Importantly, in some cases, CEOs were removed for their failure to meet the financial expectations of investors, demonstrating a growing willingness of boards to take decisive action when necessary.

Conclusion: The Evolving Role of the Board

The evolving role of the board of directors reflects a shift towards more accountable and independent governance in publicly traded companies. The influence of activist investors and the growing importance of meeting the demands of investors for strong financial performance are driving this change. Boards are increasingly taking a more active role in overseeing the performance of their CEOs and taking necessary actions when the company's interests are at stake. This trend aligns with best practices in corporate governance and contributes to long-term stability and success in the business world.