What Didn’t Work: Tongue-Tied at the Top
THE BETTER PATH
At American University and the Smithsonian Institution, similar governance missteps avalanched into full-blown crises. In the absence of board-wide discussions, board members assumed that other, more senior members were keeping an eye on executives. Management also conspired to keep trustees in the dark about important decisions regarding compensation and expenses by controlling the input of external sources. And board dynamics—ruled by contention at American University and excessive efficiency at the Smithsonian discouraged open, honest discussions. This thick brew of weaknesses enabled the leaders of both institutions to live larger than they should have, and to do so longer than they should have.
But during their times of crisis, American University and the Smithsonian reacted differently. In contrast to the American trustees, the Smithsonian regents acknowledged the deficiencies in their oversight and, finally recognizing the depth of their problems, acted decisively to change leadership and reform their governance.
The American board moved to reform governance as well, but more slowly. Where the Smithsonian regents looked at each other and said, “We all have a problem,” the two sides of the American dispute looked at each other and said, “You are the problem.” American might have recovered much faster, and with far less damage to the university, if its trustees had found a way to resolve their differences more quickly and privately.
Boards hire the best leaders they can find and, having done so, are inclined to trust and support them. In most cases, this works out. But strong, active, independent oversight is needed to assure that leaders do not go astray. This includes the type of good governance that has become so common in post-Enron corporate boards: full board discussions of important issues, including leadership compensation; regular executive sessions with only the outside directors, external auditors, and legal counsel present; open lines of communication between officers such as the CFO and chief legal counsel; and a culture open to whistle-blowers.