Horse-Sense Governance

Some believe that a self-regulated corporate governance system of checks and balances monitored by independent boards of directors is what failed. I don’t believe it was a system failure, rather, it was an execution failure on the part of directors, individually and collectively, to effectively discharge their stewardship duties. In many recent corporate failures, an accountable, engaged, and informed board of directors could probably have prevented a full-scale crisis.

Most state laws hold that directors and officers owe three fiduciary duties to the corporation and its shareholders. (By the way, “fiduciary” refers to “a holding of something in trust for another” or something “founded in trust and confidence.”) These duties are:

• The Duty of care, which requires that directors and officers act with the care that an ordinary, prudent person in a like position would exercise given the same circumstances;

• The Duty of loyalty, which requires them to put the interests of the corporation above their personal interests; and

• The Duty of good faith, which requires that they make informed decisions while considering the potential risk of harm to the corporation.

One would think that the framework provided by these statutory duties, combined with all the recently added laws and regulations, would make corporate governance a no-brainer. However, I’m reminded of how my mother, a southern belle from Arkansas, would describe people who thought they had it all figured out. She’d shake her head, frown, and say, “Well, son, he may have a lot of book sense, but he sure doesn’t have much horse sense.”

You see, following rules and regulations does not replace following the common sense or good judgment of engaged, experienced, and ethical people. When corporate directors provide “check the box” stewardship instead of following their internal moral compass, they stray from the path of business excellence.

After more than three decades of serving on more than 40 boards, I’ve developed a list of horse-sense duties that go beyond simply following government regulations. You won’t hear about horse-sense duties from legal advisors or in corporate governance seminars, but they’re what might keep you out of the news and out of jail.

• The Duty of good judgment: Too many times, directors rely on analytical data for decision making. Trust your instincts as well. Most directors are accomplished leaders who achieved success by trusting their common sense. There is no substitute for your own sound reasoning.