America's corporations have been a successful model emulated all over the world. They have generated fantastic wealth and innovation. Yet recently, the model has come under attack, due to a series of high-profile scandals, including Enron, Arthur Andersen and more, which washed away billions of dollars of stock value, eliminated thousands of jobs and washed away retirement funds. Yet one of the fundamental problems behind this all affects not only the companies involved in the scandal, but corporations throughout America. I have seen it first-hand. And it can be fixed.

Typically, a corporation is run by a CEO. The CEO reports to a Board of Directors. Other than approving budgets and CEO compensation, for the most part, the Board limits its actions to keeping or removing the CEO. What information does the Board use to make this all-important decision? The information provided by the CEO himself! Which means that if the CEO lies, conceals or is incompetent, the Board can be misled into wrong decisions, such as keeping a CEO who lies. Conversely, if the integrity of a CEO is brought into question, the Board has a very hard time establishing whether the CEO is trustworthy or not, and may decide to sacrifice the CEO without establishing whether his/her integrity was compromised.

So how does this get solved? Quite simply, by establishing alternative channels of information flow from the company to the Board of Directors. The Board does usually have broad powers, and can request information from others than the CEO, but if it does not exercise these powers, they are of little use. Often, employees do not even have contact information for the Board of Directors, or even know Directors' names. Furthermore, if information is provided in a form visible to the CEO, employees' willingness to expose facts that may be damaging to the CEO is compromised out of fear for their jobs. Thus, Boards of Directors should establish a confidential channel for employees to communicate concerns about the company. Further, to encourage information flow, Directors themselves should initiate contact with senior staff members periodically.

Alex Bäcker, Ph.D.

July 18, 2006

Read the follow-up note at Move over, CEO: Here Come the Directors.