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Corporate Boards Fail Again!

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Once again the results are in and once again they show that executive compensation in the U.S. has escalated dramatically. It has gone up more than corporate earnings, inflation, the stock market, and the pay of almost everyone in the country, not to mention the world. Who is responsible for the continuing escalation of US executive compensation? It is easy to identify the "guilty parties." It is the boards of corporations. They continue to create executive compensation pay programs that increase executive compensation.

It is not only easy to identify who the culprits are, it is easy to identify why they perform as they do. It is in the self-interest of many board members. Board members in most corporations serve, at least partially and in many cases primarily, at the pleasure of the CEO. Further, among them are executives in other companies. As a result, when they vote in favor of large compensation packages for their CEO, they benefit in two ways. First, they gain favor with their "boss." Second, they raise the overall compensation level of US corporate executives. The result of this escalation is that the "market pay rate" for executives becomes significantly higher every year. This enables them to justify higher pay for themselves when they deal with their corporation and its board.

The problems with U.S. corporate boards are not limited to their tendency to overpay senior executives. It is troubling, but it is just one of the ways in which they act in a way that can harm their shareholders and the societies in which their corporations operate. The over payment of CEOs is a symptom of a more fundamental problem with many US corporate boards. They are more interested in serving their short-term self-interest than they are in serving the long-term interests of society. This is reflected in their failure to act aggressively and rigorously on issues of sustainability and employee well-being. It is also visible in their over-focus on short-term earnings and quarterly operating results rather than long-term sustainable profitability and organizational effectiveness.

There is no easy solution to the problems that exist with US corporate boards, but there is one obvious fix that is needed. Corporate boards in the US need to have a much more diverse membership. Numerous critics have pointed out that they are white male-dominated but that valid criticism does not go far enough. Typically, they are not only white male-dominated, they also fail to have members who have expertise in human capital management, environmental sustainability, and social issues. Further, they lack members with organization design and organization change experience and expertise, even though we are in a world where rapid and continuous change requires an agile corporation. The bottom line is that the US needs to institute board membership processes that create boards that are more diverse in their expertise, gender, and race.

Crossposted from Forbes.com.