Trustees Are Not Thermometers

Fifth in a  Series: Time to Talk About the Public Interest

The TakeAway: In the United States, key to our political form of representative self-governance is the idea of good trusteeship, of stewardship, of wise statecraft. The same holds for corporate governance. Being a director means the ability to think big and long-term, as well as focus on the here-and-now, to balance multiple and competing interests with good judgment and an ethical outlook. The fiduciary challenge, then, for trustees and directors (similar to that confronting judges, because “judgement” is core) is to make public decisions that fulfill both the immediate obligations contained in a charter or mission statement, and the broader public interest obligations attendant to human health and well-being.

The primary assumptions governing the role of trusteeship and directorship became neutered within the past 100 years as a result of the rise of the modern bureaucratic state and the corporate form, the ascension of scientific management and neoclassical economic theory, and the professionalization and technological transformation of financial services.

Yet being a trustee carries with it representative responsibilities to “the other” or “others,” so the threshold question becomes: Which “others” are we talking about, and whose interests are being protected and advanced?1

Put another way, are trust beneficiaries to be viewed as economic units alone, with little interest in anything other than the size of a dividend check or a payout? Or might they also be viewed in more human terms, as individuals with lives led much as trustees themselves do, who breathe the same air, are vulnerable to illness and disease, to the same eruptions in the earth’s ecosystem or social systems?

Much like trustees and directors, are not beneficiaries also dependent upon a civil order that is literate, safe, and respectful of human dignity and creativity? Indeed, might not these very same beneficiaries be qualified to vote? Are they not—as are we—citizens, too? Do they watch television, surf the Internet, read books and newspapers, listen to music, or admire (perhaps even create?) works of art? Do they seek to learn, or (to use that hackneyed phrase), develop their full potential, not just in childhood or adolescence, but throughout their lives?

What we are talking about here are whole human persons, with needs and wants, aspirations and dreams. Just as a civic stewardship ethic looks at investment performance not only empirically but in normative terms as well, restricting itself not just to financial performance but also addressing ethical and social matters, so, too, does it call for a trustee role that sees beneficiaries and shareholders as something more than economic units. They are human persons living as best they can in a natural world, possessing frailties and vulnerabilities that trusteeship is intended to protect.

Whatever the terminology—trustee, director, custodian, guardian, or curator—its essence remains the same: one is acting in the interests of someone else, and that “someone” and “those interests” simply cannot be reduced to coins and paper. At the end of the day, there is little qualitative difference between the human concerns of trustees and directors and the human concerns of those they are supposed to serve and protect.

Trustees, Directors, and the Public Interest │ The fiduciary challenge, then, for trustees and directors (similar to that confronting judges) is to make public decisions that fulfill both the immediate obligations contained in a charter or mission statement, and the broader public interest obligations attendant to human health and well-being.

Doing this well involves both a grounding in the particularity of privately-held core beliefs and commitments (call it “character”), and a broader conception of what we share in the public square, a place where common rules and common understanding, supported by situational ethics, legal precedents, and the political art of compromise, come into play.

Trustees and directors are not thermometers, reflecting the temperature of prevailing opinion.

Nor are they bodyguards, whose only aim is “to preserve and protect”.

The aim of trusteeship—indeed, of being trustworthy—is to preserve the health and long-term interests of those being served, but also to shape and transform the world in the name of the good.

In other words, all trustees are citizens with a bigger brief, even if not all citizens are trustees.

By extension, all shareholders are citizens, too, even if not all citizens are shareholders.

In A History of Nonprofit Boards in the United States, historian Peter Dobkin Hall of Harvard’s Hauser Center for Civil Society (formerly the Hauser Center for Nonprofit Organizations), points out that original notions of trusteeship, whether public or private, reflected substantial civic commitments, so much so that there was no distinction between public and private domains.

Current corporate and nonprofit governance is rooted in practices dating back to the nation’s founding, Hall says. The charter creating the Massachusetts Bay Company, which created the first American board, “made the rights and privileges of the private [land] grant equivalent to those of the state.”

In addition to the idea of “perpetual succession” (the right of corporate members to appoint their successors and elect officers), the fundamentals of trusteeship, in American terms, reflected what was to become the foundation of democratic civil society in years to come.

Although these democratic structural features were constrained by “powerful informal norms of deference” to citizens who were more wealthy, white, male, and educated than anyone else, the idea of self-governance, with an elect group entrusted with the responsibility for balancing individual and collective interest, came to characterize two of the pillars of public life.

Hall tells us that “like property rights, the roles and responsibilities of boards of directors and the organizations with which they are associated—as well as the broader legal, governmental, and economic settings in which they operate—have evolved and changed over time.”

Yet throughout the development of philanthropic and voluntary associations, our constitutional government, and the business firm, one thing has remained constant: All can be interpreted as public enterprises that are engaged in public service, to the extent that they derive their legitimacy from the governed, and because, “values and convictions—a sense of stewardship—[are] central to any and all.”

Indeed, whatever the organization might be, it exists in and draws sustenance from the complex web of modern life. Boards, and board members, thus become “‛boundary-spanners’ for whom board service joins private and public values [exercising] unique dual roles as managers of the internal cultures and the external environments of the entities they serve. As such, they are strategically situated to have a broadly powerful and transformative influence on the world of which they are a part.”2

No Metrics, Just Judgement │ In our pluralist society, there is no predominant model of trusteeship beyond its broad policy setting and oversight role. Some years ago, at a Ceres annual conference held in Boston, Holly J. Gregory, one of the nation’s leading experts on board behavior and corporate governance, and a partner at New York’s Weil, Gotshal & Manges LLP, talked about the fact that directors’ legal mandate is broad and vague, leaving a great deal of discretion for interpretation.

In order to act prudently and in the corporation’s best interests, directors need to exhibit good faith, a degree of care, and the qualities of “an ordinarily prudent person in a like position, under similar circumstances.”

Directors should “reasonably believe” that their actions are in the best interests of the corporation as they go about the process of selecting, monitoring, evaluating, compensating, and, when necessary, replacing senior management; reviewing and approving strategic and long-term plans (which involves understanding risks); monitoring corporate performance against these plans; reviewing and approving material capital allocations, financial standards, and policies; ensuring financial control and reporting / disclosure integrity, ethical standards, and legal compliance; monitoring constituent relations; and organizing the board.

Gregory’s remarks included a thumbnail sketch of the Report of the Blue Ribbon Commission on Risk Oversight: Board Lessons for Turbulent Times, produced by the National Association of Corporate Directors (NACD).3 The report outlined the fiduciary responsibilities directors have for overseeing adequate risk management, which can help prevent future corporate scandals. A prerequisite is a corporate governance framework enabling informed and sound judgments.

Other requirements include understanding the specific risks facing organizations board members serve, and ensuring that there is a process in place to alert them to the occurrence of those risks. Boards should ensure that management has identified the specific material risks the company faces, including short-term and long-term risks, as well as intrinsic and extrinsic risks. Directors “should be ‘risk-minded’ as they review [organizational] reporting, operations, and compliance,” while being “sensitive to the impact that specific risks may have on each group of stakeholders, including employees, customers, suppliers, and local community groups.”

Moreover, boards should ensure that continual reevaluation of risk management practices occurs, and that “processes are in place to comply fully with relevant laws and regulations.”

Yet these responsibilities rely on good judgment, and good judgment relies on a sense of what’s right, and what’s right, as mentioned before, isn’t always codified in a checklist.

Editor’s Note: This is the 5th installment of MurnPost’s Time to Talk About the Public Interest series. Part 1 appeared on 8/13/2013, here. Part 2 appeared on 8/16/2013, here. Part 3 appeared on 8/19/2013, here. Part 4 appeared on 8/23/2013, here. The series is based on a long essay entitled “Loose Canons and Apocalypse Now: Unveiling the ‘Ethics’ in the Fiduciary Ethic” submitted to the IRRC Institute Award competition on Post-Modern Portfolio Theory. It was written in November 2012.

³ Report of the NACD Blue Ribbon Commission on Risk Oversight: Board Lessons for Turbulent Times, Washington, DC: National Association of Corporate Directors, 2006.