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Lotterman: Directors have responsibility in governance

Where were the directors? While the focus is on William McGuire, who has stepped down as chairman and chief executive of UnitedHealth Group, not enough attention is being paid to that company’s board of directors. What were they doing while McGuire set new records for abusive executive pay?

Why did they gaze on serenely as he arranged to pay himself $1.8 billion? Didn’t anyone question the unprecedented level of options McGuire got? What did they do to earn their keep over the past decade?

But as U.S. House Speaker Dennis Hastert says, "Woulda, coulda, shoulda." Monday-morning quarterbacking is easy. Would any of us have been more vigilant or outspoken if we were on UnitedHealth’s board? Probably not, and therein lies the problem.

The freshman econ view of corporations is simple. A corporation’s stockholders own the business. They elect a board of directors to oversee the company’s operations and maximize the long-run value of their shares.

The directors, in turn, hire key managers who run the company day to day, always focusing on shareholder value

MBA-level courses point out at least two problems. The "principal agent" problem is the first. Agents, or the hired managers, face their own motivations that frequently are at odds with the objectives of the principals or owners. Stockholders want maximum return on their investment. The CEO might want to get a big bonus before leapfrogging to another company.

The second catch is an "information problem." Key decision-makers often lack essential information needed to make decisions. Moreover, self-interested managers can filter information flowing to their boards. The "fog of war" hanging over business battlefields might be deliberate.

Both problems lead to waste of resources. Both hurt stockholders directly in lower long-term value for their stock.

Both also hurt the general public indirectly. Society gets fewer useful goods and services when resources are used inefficiently.

Directors must carefully structure compensation packages that align managers’ incentives with those of the stockholders.

The real world is even more complicated. Directors face their own sets of motivations that don’t jibe with those of bread-and-butter shareholders. There is a lot of pressure not to rock the boat.

Corporate boards are self-perpetuating in a cultural sense as well as a legal one. An existing board chooses its own replacements through a nominations committee. Moreover, the CEO has great influence in board decisions, including who gets named to be a director. New directors seldom challenge existing practices or assumptions, particularly those regarding the CEO.

While directors represent stockholders, they have more direct and ongoing contact with managers.

That can compromise their integrity. McGuire had undisclosed business with a director on UnitedHealth’s compensation committee.

So the job isn’t easy. But if you ask whether McGuire ever would have gotten $1.8 billion in potential eventual compensation at an annual meeting of stockholders, the answer seems to be a resounding no.

There is no easy solution, but as long as the corporate governance problem remains unfixed, the general public and individual stockholders will pay a price.

Economist Edward Lotterman teaches and writes in St. Paul, Minnesota. Write him at