Why Bad Directors Aren't Thrown Out

An anonymous reader writes "For publicly-owned companies, the CEO gets most of the spotlight. If the company is successful and the stock goes up, the CEO gets the credit. If the company stumbles, the CEO gets the blame. But an article at the NY Times points how the board of directors for most companies seem to get a free pass, even when their decisions or their CEO selections consistently go wrong. 'Last year, there were elections for 17,081 director nominees at United States corporations, according to the service. Only 61 of those nominees, or 0.36 percent, failed to get majority support. More than 86 percent of directors received 90 percent or more of the votes. Of the 61 directors who failed to get majority approval, only six actually stepped down or were asked to resign. Fifty-one are still in place, as of the most recent proxy filings.' The article uses Hewlett-Packard as an example; the past several years have seen poor CEO choices, the abominable Autonomy acquisition, and billions in write-offs for other failed endeavors. Yet HP's directors were all re-elected."

The deck is stacked in director's favor

[John3]

Director elections are stacked in favor of the incumbents due to the way the elections are structured. The directors nominate candidates for the board, usually through their governance or nominating committee. It's in their interests to keep the status quo and nominate themselves to be the only choices on the ballot. Nearly every corporate ballot (proxy ballot) has just enough director nominees to fill the available slots so there really isn't a choice. Corporate governance is a slow process and companies don't really want a lot of turnover on the board. In most situations this is a good thing, for investors and for the company as a whole.

However, this process does have the effect of protecting directors when things go south as it takes a real grass roots movement from stockholders to get other names nominated for the director slot. Most commonly you'll see this when a large holding company decides to pool their stocks and distributes an alternate proxy.
 

Eerily familiar

[fustakrakich]

This sounds a lot like why corrupt politicians who impose bad policy constantly get reelected and appointed to office. For instance, we still have people like Rumsfeld, Kissinger, and the rest of that wrecking crew exerting their influence, damn near fifty years on. Must be a psychological issue.

Not news. It doesn't matter

[Anonymous Coward]

In The Trial of Socrates, I.F. Stone wrote, "The "destruction" Socrates predicts for the bad ruler is little or no consolation to the ruled." All you have to do is recall the destruction of Germany, first at the hands of the New York Fed and the Versaille Treaty, then at the hands of the Nazis, to know how true this really is. After WWII Germany was in ruins... but hey, they we were rid of Hitler!

Stop investing in feudalism and start leading your life like it mattered, and you wouldn't have to listen to the inevitable crap as if it were news. We don't have to continue to swallow the same old crap from conservatives whose paramount consideration is there own wealth & power.

This isn't news, it's history repeating itself in the endless loop of greed, avarice and will to dominate rather than learn. Apparently, glory is a concept that reincarnates itself to the detriment of most anyone who thinks they deserve to live more grandly than the previous asshole.

Obligatory Stupidity

[Jeremy Erwin]

Normally what one does when confronted with bad corporate governance is to disinvest. But Hewlett Packard is in the Dow Jones Industrial Average, so "index funds", which are popular because they extract minimal fees, are obligated to invest in HP.
Activism, it seems, is not in an index funds nature, and so the proxies are routinely signed, keeping bad board members on the job.

Re:This is news?

[hedwards]

The problem is that most investment these days is done on a short term basis, people rarely hold their shares long enough for more than the next quarter to matter. I personally hold for much longer, and I refuse to buy into a company where the people running it need to be replaced. If I lose faith in them, then I sell my shares.

I suspect that's a lot of what's going on, if you don't have faith in the board of directors, chances are you sell your shares. And as such, it would be expected that in the overwhelming majority of cases the board would get to keep it's job.

For people who aren't in it for the long term, I'm sure they're even less likely to care much less vote the bums out.

Re:They just can.

[rtfa-troll]

It was a dynamic market, and they didn't see Smartphone Apps becoming the driving force.

There is only one diagram you need to understand [blogs.com] (from this informative article [blogs.com] to see that this is bullshit. When Steven Elop came into Nokia, Nokia's Smartphone market share was increasing [blogs.com]. Nokia may have had a problem coming five years out, but at the moment they were doing fine.

The irony of this was that, if Elop had just left Symbian and Meego alone, he would probably have had a better chance of driving Windows phone to success than he has now. Just look at how current Nokia phones are a generation behind the competition in terms of weight and features and think how much better they could be if Nokia just had the purchasing power for decent components. Have a look at how the user interface of many of their phones doesn't feel like anyone ever tested using it. Think what a difference it would have made if they didn't get rid of all their UI experts who would have been able to identify and start to fix all the problems in Windows 8.

Re:The reason why there are bad directors

[whoever57]

The reasons why there are bad directors is because they really don't matter.

They appoint the CEO and decide his remuneration. That's probably their most important job and, as the article states, HP's board has failed at this task.

They probably can do little positive for companies, but bad decisions can have a big impact.

Re:They just can.

[SpzToid]

To further illustrate your point, about what would have happened had Nokia not adopted Elop's Nokia/Microsoft partnership, allow me to quote from the same source you cited have already cited, (mobile-industry analyst Tomi Ahonen)

This is the year Tizen will ship. Tizen at least initially will feature Samsung's top phones, so imagine the Galaxy S4 but running an evolution of what we saw with MeeGo on Nokia's award-winning N9. And the beauty with Tizen is the carrier community around it, starting with NTT DoCoMo which promises to start to sell Tizen phones in Japan this year. Tizen's launch will be seen as the perfect case study of contrasts, how can Samsung now, as world's largest smartphone maker and world's largest phone maker, with the help of carriers, switch from the world's most used smartphone OS (Android) to its new OS developed with Intel (Tizen). And the intention is to launch new smartphones in parallel with the existing system but introduce first Tizen phones at the top end of the price pyramid, as flagships. This is exactly what Nokia had in its strategy prior to Elop selecting Windows. Nokia, as world's largest smartphone maker back then, and world's largest phone maker, with the help of carriers, was intending to switch from what was then the most used smarpthone OS (Symbian) to its new OS developed with Intel (MeeGo). The intention was to launch new smartphones in parallel with the existing system, and introducing MeeGo smartphones at the top of the price pyramid, as flagships. And contrast that with what Elop did at Nokia - as world's largest smartphone maker, against the wishes of carriers, abandoned world's bestselling OS platform, forced change to the smallest, developed solely by the evil empire, Microsoft, known as the widow-maker of mobile who bankrupts all its partners. The new phones were not introduced in parallel but to replace Nokia's existing platform and the launch was not at the flagship, but in mid-price level. Wrong, wrong, wrong, wrong, wrong wrong and wrong. But yes, now we'll see how Samsung does it 'right' - remember, my dear readers, as you see Tizen phones and their reception and support by carriers - and think, this could have been Nokia in 2011 when the N9 on MeeGo launched.

http://communities-dominate.blogs.com/brands/2013/03/preview-of-the-smartphone-wars-bloodbath-year-4-smartphones-galore-this-year-will-be-pretty-stable-w.html [blogs.com]

Re:The reason why there are bad directors

[ron_ivi]

CEOs have a lot of experience at driving companies in the ground and asking for bailouts.

And unfortunately innovative bail-out strategies are more important skill for US business than running a company that actually invents cool stuff.

The detroit automaker bailouts proved that. Rather than let them fail so the dozen small US automakers with near-production-ready electric cars and motorcycles could compete (and buy the factories and hire the talent they need in the big-3-bankruptcy sales), the government keeps bailing out the "too-big-to-fail" automakers who proved they can't invent a decent car if their very existance depends on it.

Good thing (for them) that it doesn't. Bailouts are a far easier way to get big bonuses than doing actual good work.

Re:The reason why there are bad directors

[TheRaven64]

That's only part of the story. Ford was in favour of the bailouts, even though they didn't take them, because if GM and Chrysler had gone out of business then a lot of other companies that supplied parts to GM and Chrysler would also have gone out of business. Many of them also supplied parts to Ford, so Ford would have suffered a sudden supply chain shortage and they didn't think that they'd be able to survive this. That's what 'too big to fail' means: that if the company fails, then it will affect significantly more than just that one company. Ford was in the strange position of not being able to survive the sudden failure of their competition.