We don’t come to the subject of corporate boards as antagonists.  Yet even with our experience in the business world and our MBA education, we couldn’t understand how boards came to operate the way they do, and how they’ve come apart. We could easily see how remote and impenetrable they would appear to most of the millions of shareholders who depend on them—in spite of the fact that boards are elected by shareholders and are legally required to represent their interests.

Certainly, most individual shareholders are passive. They don’t read annual reports, they don’t vote in board elections, and they don’t question or challenge corporate leadership. Why? Because, until recently, they trusted American business and investment. They trusted that if they put their money into companies, their investments would grow, and that those directors would make decisions with the shareholders’ best interests in mind. Not only has the current economic wreck broken people’s bank accounts and retirement funds, it has shattered something even more essential: the trust that executives and boards work openly and responsibly, and that they serve someone beyond themselves – shareholders, taxpayers, employees, customers, suppliers, creditors, or communities.

We wanted to know more about how boards have contributed to this problem and to find out how the relationships among shareholders, directors and CEOs have gone awry. Our initial inquiry into why so many boards seem to have failed led us quickly to this realization: there is little consensus or comprehension about how boards work, let alone about how to repair their failings. It is as if the American economy has been driving a race car without having the slightest idea of how a steering wheel works—not to mention the brakes.

We spoke with scores of board members, CEOs, consultants, accountants, lawyers, recruiters, shareholder activists, government officials, investors and academics. We pored over the history and literature of corporate leadership and traveled the country to see the impact boards have had. To understand what directors think, we read surveys and attended conferences where board members spoke among themselves. We were surprised at how many directors and CEOs were willing to talk with us frankly, both on and off the record, about their experiences. Over time, we came to realize that they, like all of us, want to be understood—especially now, when they are under attack.

We have tried to present examples that highlight representative issues and portray corporate leadership in all its complexity, instead of as a simplistic morality tale of good versus evil. The common themes that emerge from these stories go well beyond the usual bromides about power corrupting, pride preceding a fall, and history repeating itself when its lessons go unheeded. Rather than focusing only on the failures, we have looked as well at companies and boards that have succeeded in representing their shareholders and providing models for others. Finally, we have presented a comprehensive set of measures that we believe could bring lasting reform to our dysfunctional culture of corporate leadership. 

When you mix power with vast amounts of money, dominant personalities, the adrenaline of high-stakes challenges, the complexity and whip-fast speed of modern enterprise, a global arena, and the very human vulnerabilities of avarice and ambition, you have the explosive force that powers the present-day corporate world. In the best case, that energy is channeled and governed, and the results can drive economies to great heights. At its worst, this force is allowed to run out of control and imperils the wealth and welfare of entire nations. The best device for channeling and governing it should be—and needs to be—the board of directors.

Facts and figures

* Chesapeake Energy’s stock fell $33 billion from its high during 2008 and the company had underperformed its competitors since 2002, yet the board bailed out the CEO from his personal losses with a $75 million bonus, bought his antique map collection for over $12 million and awarded each of themselves $842,000 in restricted stock and 40 hours of personal use of the corporate jet.

* Companies can spend unlimited amounts of shareholders’ money to lobby against reforms that would strengthen shareholder rights and it’s almost impossible for shareholders to elect a director that the board itself did not nominate – or to get rid of one who is incompetent.

* A Bank of America director questioned the CEO’s $76 million pay package in a year when the bank was laying off 12,600 workers and found herself dropped from the board without notice a few months later.

* The General Motors board gave CEO Rick Wagoner a 64 percent pay raise — to $15.7 million – in 2007, when the company lost $38.7 billion. The company went bankrupt two years later at a cost of $52 billion to shareholders and what is currently estimated to be at least another $50 billion to taxpayers.