Lambert here: One of those sensible measures that just never seems to happen…
By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Originally published at New Economic Perspectives.
The Wall Street Journal recently published a summary of a study of “desired director traits.”
A survey of 369 supervisory directors from 12 countries by search and advisory firm Russell Reynolds Associates asked which behaviors they thought are most important to creating a board culture that drives effectiveness and company performance.
The Ideal Director’s Traits
The study found that the five most highly valued traits in a director are, in descending order:
- Courage
- Willing to constructively challenge management
- Sound business judgment
- Asking the right questions
- Maintaining an independent perspective and avoiding “group think”
The first two traits are essentially the same – courage. Traits three through five are closely related to each other. The fifth has an element of courage as well, the courage to fend off “group think” and the CEO’s views and maintain an “independent perspective.”
Reality: CEOs Want Directors Who are “Sedated Chihuahuas”
I confess that I do not believe the study about the ideal director. More precisely, I do not believe that CEOs think directors with these traits are ideal. Indeed, I think these are precisely the traits that CEOs most fear. Warren Buffett agrees.
The typical corporation has a compensation committee, and believe me, they don’t ask Dobermans to be on it; rather, they want Chihuahuas who’ve been sedated.
It’s an unequal negotiation [between the board and the CEO]. The CEO really cares, but to the board, it’s play money.
How CEOs Can Prove Me (and Warren Buffett) Wrong
I would love to be proven wrong about the traits that CEOs value in directors. There is a simple, direct manner in which they could prove me wrong. The way that CEOs could prove me wrong would greatly improve the integrity and effectiveness of the firms they run, so this is a win-win-win.
Whistleblowers exemplify each of the five most useful traits. Two of my co-founders of Bank Whistleblowers United (BWU), Richard Bowen and Michael Winston should be among the most heavily recruited people in the world to become board members at Fortune 50 firms if the answers that the directors gave in the survey reflect the true views of CEOs.
Richard Bowen was a Citigroup SVP leading a team of hundreds of loan underwriters. His team found that the lenders selling Citigroup roughly $100 billion in mortgages annually were doing so through fraudulent “reps and warranties.” Citigroup then fraudulently resold the same mortgages, making the same type of reps and warranties about the loans that it knew to be false. Bowen warned Citigroup’s senior managers, including Bob Rubin, of this massive fraud and cautioned that it could create massive liability for Citigroup. Instead of acting to stop the massive fraud on which Bowen blew the whistle, Citi’s management attacked Bowen and ended his career at Citigroup. The fraud incidence grew to 80% because top management refused to heed Bowen’s warnings. Of course, their bonuses also grew because they refused to heed Bowen’s warnings.
Michael Winston was a C-suite level officer at Countrywide who blew the whistle on their loan underwriting fraud to the controlling managers, including the CEO. He warned that the practices would cause catastrophic losses. Countrywide’s (and then Bank of America’s) management destroyed his career at Countrywide and Bank of America.
Recall the top five traits of the ideal director.
- Courage
- Willing to constructively challenge management
- Sound business judgment
- Asking the right questions
- Maintaining an independent perspective and avoiding “group think”
Bowen and Winston exemplify courage. They persisted in trying to protect their banks even when they knew that it was leading the bank’s managers to destroy their careers. They “challenged management” “constructively” at the highest level. Their business judgments were correct both in terms of the bank’s safety and soundness and integrity. They blew the whistle because they “asked the right questions” – and acted properly on the answers they got. They were overwhelmed by senior managers who embodied a toxic “group think” that led to harmful and dishonest business practices. Even under immense pressure to conform, including the destruction of their careers, they maintained “an independent perspective.” They spoke truth to power.
Bowen and Winston consistently acted in the best interests of the bank even when they knew that the controlling management was harming the bank in order to benefit the top managers. Lots of managers and directors brag about how tough they are. Bowen and Winston went through the crucible and revealed that their spines were forged out of the strongest and most indestructible of metal alloys formed by that crucible. They do not brag. They simply walk the walk.
CEOs are All Talk About Wanting Courageous Directors
In economics, we are taught to focus on “revealed preferences” – what you actually do, not what you say, reveals your true beliefs. Not a single CEO has asked Bowen and Winston to serve as directors. I am, of course, only using Bowen and Winston as examples of the hundreds of whistleblowers who have proven themselves to be off the charts on these five ideal traits. Like Bowen and Winston, the vast majority of senior financial whistleblowers are unemployable in finance precisely because they exemplify the top five traits directors are supposed to possess.
Will Mr. Buffett and Mr. Munger Reveal Their True Preferences?
In order to recover from their scandals, Wells Fargo and Moody’s desperately need independent directors and senior managers that exemplify these five ideal traits. In both scandals not a single director or top manager displayed the five ideal traits. Warren Buffett’s firm, Berkshire Hathaway, effectively controls both of these firms. Buffett and Charlie Munger, his top colleague who shares Buffett’s disdain for directors who are “sedated Chihuahuas,” can signal (1) that they seriously intend to clean up the scandals at both of the leading firms in the field of finance and (2) will no longer tolerate filling the top managerial and board of directors ranks of both firms with sedated Chihuahuas.
Neither Bowen or Winston will act like a “Doberman.” Both gentlemen have a calm, polite style. Neither seeks to intimidate, much less snarl. But they are people of proven integrity, courage, and skill. They were forced out because they were correct in their warnings and were devoted to the best interests of their firms and their customers. They were forced out because they spoke truth to power.
Mr. Buffett and Mr. Munger, you have enormous accomplishments. It is time to reveal your true preferences and serve as corporate leaders setting a path that is good for firms and whistleblowers. I would be happy to put you in touch with Mr. Bowen and Mr. Winston. You would not be doing them a favor by hiring them for top positions. They have proved their exceptional worth. They are everything you say you want in a senior manager or director. They are your kind of people, and you will be proud, as I am, if you become their colleagues and friends and you will be delighted by the contributions they make. It is a tragic, insane waste to take the people who have demonstrated the ideal traits of managers and directors – and render them unemployable in such roles.
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“Sedated chihuahuas”. More like “sedated teacup poodles”
They all have brown noses.
“Mr. Buffett and Mr. Munger, you have enormous accomplishments. It is time to reveal your true preferences and serve as corporate leaders setting a path that is good for firms and whistleblowers. I would be happy to put you in touch with Mr. Bowen and Mr. Winston.”
Don’t hold your breath, Mr. Black. Unless you look good blue.
Unfortunately Buffett and Munger’s true preferences have already been revealed by their actions. They just have a bigger and better bullshit machine that most corporate execs.
Genial cowards and followers get ahead far more often than leaders and independent thinkers. Welcome to the post-truth society.
Good luck with Black having any influence on Buffett.
from a few years ago:
https://www.nytimes.com/2014/04/26/opinion/nocera-buffett-punts-on-pay.html
“As Buffett would later acknowledge, the Winters letter prompted him to take a closer look at Coke’s equity compensation plan. And, sure enough, he came to the same conclusion as Winters: It was excessive — “you can give away too much of a company,” he told Becky Quick of CNBC on Wednesday, in the wake of the annual meeting. But he didn’t divulge his views to anyone on the Coca-Cola board. And when it came time to vote with Berkshire Hathaway’s 400 million shares, he abstained.”
“Quick, who is one of Buffett’s favorite journalists, seemed stunned when he told her what he had done. She pressed him for his rationale. Essentially, it was cowardice.”
Wow! Buffett needs them on the Berkshire board.
As Bill Black notes, CEOs want a servile board, not one that will ask hard questions and if the time ever comes, blow the whistle. They do it because they want to get away with their pilfery. If someone told the truth, that would be the end of the CEO’s career and they could kiss goodbye to any hopes of compensation.
We are a society that shoots the messengers, that retaliates against those that whistleblowers, and that suppresses the truth. Judge people by their actions.
Buffet is not the man of moral courage that he is often portrayed as, I am afraid. Gifted in that he was able to consistently beat an index fund, something very few financial managers can do, but not a man of moral courage.
Many years ago I was at a lecture given by Meshulam Riklis, who was head of a company known as Rapid-American Corporation.
https://en.wikipedia.org/wiki/Meshulam_Riklis
When asked what he looked for in a Board of Directors, he responded with “Twelve men who can say “Yes””
Perhaps it would be updated to current times as “Twelve men and women…..”
Nice words from Robert Kennedy, but they should not blind us to what an utter scumbag he was. Never forget that he worked for Joseph McCarthy and led his brother’s terrorist campaign against Cuba.
http://www.counterpunch.org/2011/06/27/bobby-kennedy-was-no-hero/
Really great article. In my experience, the companies that most need to do this are those with atomised shareholdings and are essentially a management club. Buffett can make it happen where he is a significant shareholder, but the management clubs are, absent takeover, unassailable.
Buffett has an unearned reputation among business people as a white hat, but he is the heir to a political dynasty who got his start in Washington DC with his dad in Congress. No less crooked than a Trump or a Koch.
But the fantasy is always way better than reality until it isn’t anymore.
“I confess that I do not believe the study about the ideal director. More precisely, I do not believe that CEOs think directors with these traits are ideal. Indeed, I think these are precisely the traits that CEOs most fear. ”
“Not a single CEO has asked Bowen and Winston to serve as directors.”
Well, why would they?
“In order to recover from their scandals, Wells Fargo and Moody’s desperately need independent directors and senior managers that exemplify these five ideal traits.”
Does anyone believe that a company’s welfare, much less its reputation, is the prime consideration of its CEO & directors?
” It is a tragic, insane waste to take the people who have demonstrated the ideal traits of managers and directors – and render them unemployable in such roles.”
Interesting to see that upper level management’s treatment of internal dissenters isn’t really so different from the rest of the American workforce.
It seems that free market libertarian ideology has triumphed: all are grasped by the iron invisible hand of rational self interest, and greedily, even desperately, exploit their institutions for financial gain. These agents should be happy, and indeed, they seem to be, except when caught out. Why someone who authored a book titled “The Best Way to Rob a Bank is to Own One” seems to be surprised at this is curious. One question among many is, what would motivate anyone put the welfare of their organization above their own narrow self-interest? Qualities such as creative drive, a sense of justice, or pride in stewardship, perhaps satisfaction in competence come to mind. These motivations, falling under the rubric of integrity, have been slapped aside by said hand, except for a few quaint reactionaries like Bowen and Winston.
Bill and the rest of us must confront the question a posed (first?) by Chernyashevsky and those who argue for reform. Now what?
On the series MASH, the insipid Frank Burns famously noted, “It’s nice to be nice to the nice.” Corporate board Compensation Committees LIVE by this axiom. I.e., they will turn to compensation consultants, and then offer their CEO the highest compensation recommended. Why? Because (A) the CEO will love you forever, (B) you’ll have a permanent well-paid Board Director’s position with that company, and (C) every other comparable company’s board will want to invite you to join their board as well (more ca-ching) so that you can vote THEIR CEO a big fat raise, too. This is the American corporate meritocracy in a nutshell. Being a “sedated chihuahua” pays exceedingly well.
More support for the members in the good ole boys club, looks like to me.
This seems to me a minor variation on Ralph Nader’s awful “Only the Super-Rich Can Save us”.
Ralph was a little frustrated that year. One can see why. So he tried something new, but it was unreadable. I certainly hope that he sticks to non-fiction.
Directors are chosen for their malleability. The Chairman or CEO recognises a flaky manager who has the two requirements for promotion – too stupid to organize a corrupt deal and too timid to express his own opinions.
Such people are common in business. Their value system has the family at the top – that’s paying the mortgage, school fees and generally keeping up with the Joneses – and once they attain the level of pay needed to fund their family lifestyle, there is little they would not do to maintain it.
In an ideal world we would not discuss the attributes of the ideal director because every director would be assumed to live by them. The fact that Russell Reynolds Associates have gone to the trouble of this survey shows that its pie in the sky, another bit of the cloaking disguise that obscures the reality of commercial endeavors.
Bill,
Did you send this letter to Buffet? He may not have see it here on the site. Reformulate a little as a personal letter and send it with snail mail. Ego knows…?
Sorry, that was who knows, not ego knows.