Outsiders and other changes in that old corporate 'club'
Cambridge, Mass. — The public has yet to catch up with one important change in the business world, says Alexander B. Trowbridge, president of the National Association of Manufacturers. It is the reform in "corporate governance" -- how companies are managed by their boards of directors and top executives.
"Corporate boards are often seen as clubby, nice, comfortable groups which do the bidding of chief executives," he noted in an interview. "It is really not the picture today. A board is a lively area nowadays."
Mr. Trowbridge, who took over his association's top salaried slot Jan. 2, points to these changes in corporate boards in recent years:
* More directors come from outside the corporation.
Until the early 1970s, most boards were dominated by corporate salaried officers. However, a recent survey by Korn/Ferry International, management consultants, found that the average number of "inside" directors is 4; the average of "outside" directors is now 9, and rising.
Such outside directors, not being dependent on the chief executive for their living, are normally freer to be independent in policy judgments.
* Corporate directors are of more diverse background.
The Korn/Ferry surveys show that over seven years there has been a 26 percent increase in the number of female directors, a 17 percent increase in the number of academicians, a 9 percent increase in former government officials, and a 12 percent decrease in the number of commercial bankers. Further, the number of lawyers who represent the corporations they serve as directors is down 17 percent.
* More boards have set up nominating, audit, and public-policy committees.
A survey of 263 large companies done by the Yale University School of Organization and Management showed that 58 percent had separate panels to recommend candidates for directors. Mr. Trowbridge comments: "The 'ol' boy' network, if it truly ever existed, is no longer dominant."
Further, some 26 percent of these committees are recommending candidates for such posts as president and chief executive officer. A Korn/Ferry study suggests that within two or three years almost every major US company will have established a nominating committee.
A survey by the New York Stock Exchange found that 92 percent of 993 companies responding had audit committees -- committees to ensure that auditors are doing their job in detecting any corporate financial hanky-panky.
A Conference Board study found 105 major companies with public-policy committees that, presumably, help the companies become more responsive to issues such as the environment, the consumer movement, safety, and so on.
Mr. Trowbridge, who was a relatively young secretary of the Department of Commerce under President Johnson, admits that some of these reforms have come about as a result of the revelations in the 1970s of corporate bribery, illegal political payments, and other misdeeds.
"A lot of these problems are being addressed," he said. Therefore, he regards the push to pass a "Corporate Democracy Act of 1980" through Congress as an "unwarranted intrusion into the private sector."
That law, applying to any company having either 5,000 employee or $250 million in assets or sales, would strictly define corporate structure, organization, and activity, including that of the board of directors and its committees. It would call for additional reporting on equal-employment opportunity, environmental control, safety and health, and overseas operations. It would set federal standards for plant closings and establish new civil and criminal penalties for "white collar crime."
Mr. Trowbridge complains that "you would have a regulatory overload of the worst type." He adds: "For the government to try to manage anything as delicate and complex as the governance system of a corporation would deny that corporation the flexibility to compete, to prosper, and, in some cases, even to survive."
With such strong opposition by organized business, such a law is not likely to pass in the short run. Much probably depends on whether business continues with its efforts at self-reform.
A long-term trend could be the appointment of trade union members to corporate boards. The United Automobile Workers president, Douglas A. Fraser, was elected to the board of directors of Chrysler Corporation Tuesday as a result of collective bargaining and certain wage concessions to the troubled company.
Mr. Trowbridge argues that this is a "special case," in response to Chrysler's financial problems. A union executive on the board "would quickly get into problems of conflict of interest and trying to wear two hats," he said.
Mr. Fraser, however, told "The MacNeil/Lehrer Report" on public television Tuesday that the spread of union directors "was almost an inevitable development." He also said: "The labor movement in the United Sttes is coming to the realization that they cannot be effective by challenging [corporate] decisions after they have been made. They have to be where the decisions are made."
Some nations in Western Europe have moved far in labor representation on boards. The US could eventually follow.