What it’s like to be on the board of a Fortune 500 company
jayshah.me
jayshah.me
This points to a problem with due diligence and/or how board members of Fortune 500 companies are chosen. Can anyone elaborate on how this happens?
I get the impression from looking at corporate websites that many board members include former officers of the company, investors, and experienced leaders from adjacent (but not competing) industries. It sounds kind of insidery, which can lead to all kinds of problems and conflicts.
Their finding was that the board of directors is a difficult thing to change from the outside -- in typical corporate bylaws, the board typically approves who's on or not on the ballot. It seems likely, given the number of people on multiple boards, that there's a mutual back-scratching system in place.
And even if it's just one board a retired accountant serves on, the salary averages around $250k. It sounds like a cushy gig, and anyone who rocks the boat risks the CEO voting their shares (and the company's) to fire that director.
Other functions they serve is to protect the organization from unwanted influence. The board ultimately votes on things like, when and who to sell the company to. By weighting the board with people you know will vote a certain way, you protect against things like hostile takeovers. (This along with other rules that many companies have, like only being able to replace 2 board members per term).
In large companies, if you say own 10% of the shares, you really have a massive amount of voting power with a fraction of the shares, because all the with say 5 shares of a stock, aren't going to bother to send in their ballot when voting on board members etc. By weighting the board with insiders etc., you are helping to ensure that a rival or some other organization isn't buying shares through subsidiaries and then making a play before anyone notices.
Pretty sure that's actually a George Carlin line, from a relatively famous routine of his. Many, many clips, but here's a random one: https://www.youtube.com/watch?v=cKUaqFzZLxU
Which explains why companies are like they are -- if the board had a fiduciary responsibility to employees first and shareholders second, maybe workers would be better off.
Oh look, it’s New York City’s MTA [1] and NYPD.
Our society puts consumers first, shareholders second and workers like fiftieth. Moving workers up seems reasonable. Skipping them ahead of shareholders or consumers has, historically, been a predictable failure.
[1] https://en.m.wikipedia.org/wiki/Metropolitan_Transportation_...
If the workers were by definition the shareholders, you wouldn't have to worry about which came first.
There are plenty of employee-owned companies. Lots. I mean, they're not all that successful, mostly, but that's hardly relevant.
Which said laws were preventing this?
OTOH, if it's a desirable social norm, then it's perhaps insufficient for law to fail to prevent it; it may be desirable for law to encourage or even require it as a precondition for the protections associated with the corporate form.
People abandoned them, first in small numbers, and then of course the left no longer wanted anything to do with them, and they started getting sabotaged by (leftist) governments ...
And of course, now half of them are referred to as those settlers. It's not the same thing of course, but because of land prices they pretty much have to be, unless they're "historical".
TLDR: most of the existing ones failed and because of that everybody hates the new ones.
Let's not go there. Let's just skip it this time around, ok ?
The board in this case should have a fiduciary responsibility to the two employees over the investors? Really?
50 people aren’t going to get together to dream up a two person shop.
I'm under the impression that in Germany, which has a highly productive economy, workers have seats on the board.
I understand from the Pod Save America people that taking notes is usually avoided at the White House, since they are required to be part of the permanent record and can be subpoenaed. Destroying notes is not allowed, so it's best to not take them in the first place.
Naturally the current crowd have their own ways.
http://www.cnn.com/2017/09/21/politics/sean-spicer-donald-tr...
The whole situation with Michael Wolff is a little worse than staff just taking notes considering he kind of just kept showing up at the White House and got a couple hundred interviews over half a year.
Everyone would expect a journalist not employed by the White House to keep notes.
Those darn meddling activists!
>See Jay, it used to be that way but its changed in the last ten years because the activists [investors] have gotten more involved. It’s a real job. You really have to stay in touch with the company and understand what its doing.
said the guy on 4 boards
You may have heard the old saying about relationships: "If Momma ain't happy - ain't nobody happy". I think the same thing goes for a firm's relationship with their customers. If the customer isn't happy, there's no repeat sales and no positive word-of-mouth advertising, leading to decreased sales and revenue, leading to reduced shareholder value.
"If the employees aren't happy, nothing is going to get done."
"If your suppliers aren't happy, you aren't going to have anything to build your product with"
"If the government isn't happy, they are going to shut you down"
In the abstract, they are all important. Practically, if you try to focus on everything at once, you aren't going to get anything done. One of the most important skills in any job is figuring out which areas to focus on, and the answer to this is always going to differ depending on your specific circumstances.
We can play this game all day folks.
A fantastic example of this is Comcast. It is regularly voted America's most hated corporation in the country, yet because of its unique leverage in the areas that it operates, this poor customer satisfaction rating just doesn't matter. They're still able to satisfy the shareholders.
Then I switched to Comcast for TV and it all went down the tubes. Random outages (sometimes daily), substandard speeds, Netflix speeds suffering (or stuttering) at peak times, etc.
Who knows whether this just reversion to the mean, or the techs botching the install. Even "reddit trick to email the Comcast VP" didn't fix it (though that did get a quick response).
Comcast is ludicrously expensive in my neighborhood where they are the sole broadband option. It's so bad the city council is looking seriously at muni fiber.
1Gbps download, 500Mbps upload, 10 USD/mo. How cheap is Comcast, again?
It's not a failure of the Board of Directors to think this way. Its sole purpose is to provide shareholder value within the existing legal framework. Like they said in the article, those on the Board who don't produce value get removed.
It flies in the face of the whole point of the Board! It blows my mind.
Which only makes sense if you think about it briefly. If sharks were not well mannered, they would all be missing big hunks and covered in gruesome scars. If two sharks fight, someone is going to get maimed.
I have no doubt these are very polite, well mannered things. But not because they live in fear of being disagreeable. Instead, it is because if someone on the board cocks an eyebrow, people tremble.
Kind of like military bases where people mind their manners because lots of folks there know how to kill you. So, no, you generally don't go around being a blatant disrespectful asshole for lulz.
Why investors put up with it is a better question. I think the implicit antitrust of index funds has something to do with it, few investors want more competition. https://www.theatlantic.com/magazine/archive/2017/09/are-ind...
For someone interested in how large corporations function and the power dynamics among the top, do any of you folks have any other recommended reading?
If you can think of a better phrasing that I could use that covers the above issues, I'd like to hear it. And if you'd read https://news.ycombinator.com/newsguidelines.html and only post in the spirit of this site going forward, I'd appreciate it. Other links to take a look at are https://news.ycombinator.com/newswelcome.html and http://www.paulgraham.com/hackernews.html.
Do me a favor and tell me that best interests are something else than money, please...
Long term profitable enterprises do not asset strip, fail to invest, or destroy the market for a short term gain. These are all things which inside a 5-10 year planning cycle, many enterprises will willingly do, for apparent short term profit. Destroying the environment destroys future capital. Failing to employ women (51% of the population) for fair renumeration ignores competent staff, and destroys goodwill from half your market who in fact, make 75% of the significant purchase decisions in a domestic context.
Think about it.
15%, 7%. These are positive numbers. They're profit.
Profitability is inherent in anything which strives to increase value in the wider sense. You shouldn't invest in remediation of the environment directly as a retirement strategy, I agree. its solely cost. But you could chose to invest in a company which ethically contracts to perform the remediation. Now, you are both sides of the equation if (for instance) you live in Love canal, and its remediating the years of toxic waste, you benefit from the health outcome. So, what "cost" will you be prepared to pay in local taxes to fund the company you directly invest in, to earn profit to remediate?
Money and markets are great tools, but they aren't gods; they aren't the answer to all questions.
If you want boards of directors to prioritize carbon neutrality and similar goals, you have to translate that into money. Tax the carbon and price the negative externalities. If you don't do this, and just hope all business people make decisions from their heart, you will always be let down.
A short-term approach would look only to the current price of stock, regardless of all other considerations, justifying such things as massive layoffs, selling off core business assets, etc.
The extent to which those factors are NOT priced into the stock, they typically won't be included in the "best interests".
> You need to have a cohesive thought process to move the company forward.
> if a board member isn’t performing well, we get rid of them
> [I’ve] sat on boards with some amazing people who have done some amazing things in the world.
What a wonderful club. It doesn't sound like one conducive to dissenting opinions and disagreement. With so much at stake - so many jobs, so much money, and such an impact on communities - it seems that harmony would take a back seat to asking difficult, challenging, critical questions. The interviewee doesn't mention any of that happening. Also:
> Each year, all of our names are put up for voting by the shareholders. Shareholders say yes or no and vote [to keep the director]. If the shareholders vote yes, we have automatically put our name in for resignation and the board determines if they are going to accept [the resignation].
Shareholders almost never vote no. Effectively, the system above means that the board determines its own members. Again, the board member who challenges consensus or engages in threatening oversight might not last long (or be invited to join another board).
It confirms other things I've read about boards, but certainly someone knows more than I do ...
You're not going to hear about the affair or addiction or whatever dirt you're looking for. But it'll still be educational just to know the time they spend on things and what perspectives people try to maintain.
Honestly, this area is such a crazy mystery to the working class (including most white collar workers like myself) that I'm grateful to the mystery guy for giving the interview.
> This is like a kid asking their parents how the marriage is going.
Only to a limited degree. A good journalist asks challenging questions and gets their interviewee to talk. The board member was anonymous, after all, so they could have spoken more openly and even generally about these kinds of problems. The interviewer asked easy questions and the board member painted a nice picture. (In fairness, I don't have a right to expect more (or anything at all) from some guy's blog; it's not the NY Times; so a genuine thank you is owed to Jay Shah!)
The role of shareholder should be that of stewardship for the steward (the CEO), and both the board and their charge are in positions of servant leadership towards customers (first priority) and employees (second). Focusing on both those points creates the financial success needed to recoup investments.
I guess it’s because the level of capital that is required for modern endeavors is such that it is usually impossible to do full buyback like Dell did, for example. In part, it’s also because we have designated the investment itself as an asset as opposed to a loan. So even if a company wants to do full buyback it’s market cap is a moving target usually prohibiting that.
To understand this, imagine you got loan from your uncle for $100k to buy a house. But then your uncle sells your liability to another person for $200k because house prices are on the run. Now suddenly you must pay $200k if you really want to own the house. But then the cycle continues with people selling your liability at higher and higher price so one day you wake up and be happy that your house is now $10M but you can never truly be its owner unless you actually pay $10M. This is the magic and power of capitalism.
In antiquity, it was sometimes loathed upon even demanding interest on a loan because it was like stealing from someone else’s fruits of labor and making income through no or little effort of your own (aka passive income). But that prohibited the utilization of capital and people saw that there was nothing sinful in collecting interest on your capital as a reward for taking risk. Capital is an asset just like your house is an asset and demanding rent on is perfectly legitimate.
But then people with capital took one step further. Instead of demanding just interest, they started demanded ownership share of your endeavor as well. This was again loathed upon as the people landing money now also got all the rights and privileges in the creation of a person who actually did all the work. But soon people saw that this increased flow of capital even more. Investors now were suddenly more willing to participate in risky propositions. An entrepreneur can raise order of magnitude more capital than any other of time in history.
But then people with capital took one step further. Why can’t they sell your loan liability as an asset to someone else? This meant that original principal given to an entrepreneur as a loan now had undefined value. It was only determined by the wish and whims of buyer of his liability. This also meant that entrepreneur was freed up from any expectations that original loan would be paid up. Investors would instead be just happy with continuous flow of dividends and speculating how he will do in future. The loan became thus permanent. Soon need for larger and larger capital grew such that majority of ownership ended up with investors and the entrepreneur become the employee of the investor. This again allowed even higher order of capital collections. And that’s how we got here.