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Senator HARTKE. The next witness is Chancellor Bryan F. Smith, from the University of Dallas.
STATEMENT OF BRYAN F. SMITH, UNIVERSITY OF DALLAS
Mr. SMITH. Mr. Chairman, my name is Bryan F. Smith, and I reside in Dallas, Tex. I am a lawyer
by profession and I was employed by Texas Instruments Inc. from June 1, 1951 until July 9, 1975.
During that period í served in several executive positions, including corporate secretary, principal legal officer, and principal financial officer.
In 1972 I was elected a member of the board of directors and I continue to serve as a general director, a term I shall define later.
On March 1, 1976, I also became chancellor of the University of Dallas, a private university with about 1,800 students.
I am a member of the board of Preston State Bank of Dallas, Mary Kay Cosmetics of Dallas, Engraph, Inc. of Charlotte, N.C., and the French American Bank of New York.
For several years I have been interested in the organization and operation of industrial boards and I participated in a major reexamination of the role and functioning of the Texas Instruments board. The study began in 1966 and its various phases took almost 10 years.
I have been a participant in several conferences dealing with boards of directors, and I am a consultant to a research program underway at Harvard Business School, where the objective of the work is to find ways of improving effectiveness of board operations by exploring operations of the overall board, including the flow of information to the board, charter and operations of board committees, such as audit committees, compensation committees, and the education of board members.
Mr. Chairman, I appreciate the opportunity to appear before you to discuss the role of boards of directors in American corporations.
Peter Drucker, the management specialist, has recently cautioned:
It is becoming increasingly clear that top management will not--and in the large corporation must not-be permitted to operate without an effective and strong board. The alternative to top management's developing an effective board for its own needs and those of the enterprise, is the imposition by society of the wrong kind of board, especially on the large corporation. (P. F. Drucker, Management: Tasks, Responsibilities, Practices 630, 1974).
Some members of corporate management have undoubtedly been awakened by rustlings of growing litigation against directors under the Federal Securities Laws, and by fiduciary standards established by the Employee Retirement Income Security Act of 1974.
Reaching a conclusion as to the director's role is the key step in understanding a director's responsibility and potential liability.
Dean Courtney C. Brown, formerly the dean of Columbia University, has observed :
One basic reason for the short-comings of boards of directors is that their functions have not been clearly defined and especially kept separate from those of the management.
The Board of Directors is the appropriate unit for the establishment of broad policies and procedures, and for reviewing performance. Management is the agency delegated by the board to make those policies and procedures effective, subject to board review." (C. C. Brown, Legitmacy, Objectivity and Vitality of the Board of Directors of the Large Company. pp 3-4, 1974.)
Having in mind the role of the board, and the advisability of keeping it "separate” and “independent” from executive management, the challenge is how best to organize and people the board. Obviously, each organization has its own considerations. No single approach will cover all situations. The issues to be resolved, however, would likely be common to most organizations: For example, size of board; criteria for selecting directors; time requirements; directors' fees; relationship among the board, its chairman, and the company's president; and retirement policies.
In 1966 at Texas Instruments, when our sales were $580 million, our then chairman, P. E. Haggerty, recognized the difficulties presented by the increasing demands on executive management and saw the strengthening of the board as a salutary step.
In an internal memorandum, he stated, in part:
TI will relatively soon be a $1 billion corporation. The growth in its size and complexity places increasingly intensive demands on its chief operating executives and makes it difficult for such executives to spend the time necessary to study, to think quietly about, and to comprehend the importance of this rapidly changing internal and external environment.
I suggest that several factors such as these make it desirable and necessary to do some real pioneering in the structuring of a board of directors. I think by grappling with the problem and deliberately structuring our Board and its operating procedures, we can provide a badly needed coupling between the rapidly changing external and internal environments.
As a result of our subsequent study, we have developed a written statement of policy covering composition, operation, and compensation of the board, including committees. In our view, that policy can best be implemented by a board ranging between 8 and 12 members.
The fundamental principles are: (1) In addition to the chairman and president, the TI board will be composed of general directors, officers of the board, and directors. I will describe the characteristics of each in a moment.
(2) Board members who are employees ordinarily will include only the chairman of the board, whose time commitment to TI activities may range from full-time to part-time; the president, whose time commitment to TI is full-time; and from time to time one or more "officers of the board" whose time commitment usually would be parttime, but in exceptional instances could be full-time. (Occasionally, another full-time operating officer, such as an executive vice president, may also be elected to the board, for example, while serving as chief operating officer or during a transition period prior to his service as an "officer of the board" or general director.)
(3) The president is usually the chief executive officer, although the chairman could serve as such during a transition period seldom expected to exceed 2 or 3 years.
(4) The chairman of the board is usually the chief corporate officer, but only by virtue of his responsibilities as chairman of the board. As such, he might be considered not an administrator, but the professional leader of the directors.
(5) Interim periods aside, the president, as chief executive officer, does not report to the chairman, but rather to the entire board. This
is to emphasize that, while the board headed by its chairman, is responsible for company policies and performance, it has delegated to the company's executives, headed by the chief executive officer, responsibility for the detailed management of the corporation.
Most board members will be general directors. They are not employees of TI—although they may have been in the past-and must assume board duties—including membership on committees, chairmanship of committees, and optional additional activities in TI's interests-with a minimum time commitment of approximately 30 days per year.
While the basic time commitment for a general director is a minimum of approximately 30 days, depending upon need, availability, and interest, it could be 40, 60, 80, or in unusual circumstances, even more days. Compensation will vary accordingly.
Currently, there are nine general directors. Three were previously officers of the board and TI employees. They, as well as our former chairman, Pat Haggerty, retired as active employees under the retirement policy I will describe later, and were then elected general directors. One general director, Erik Jonsson, was a founder of TI in 1930 and retired as chairman of the board in 1966. The remaining four are outsiders in the conventional sense.
Officer of the board was formerly the title for general directors, but now it is reserved for a board member who is an employee other than chairman or president and who also devotes principal amounts of time to his duties as a director.
The other category is director. Ordinarily, there will not be more than two or three persons serving in this category. They are available for scheduled board meetings and activities and for limited committee duties. Such directors could be individuals with little or no previous TI association, but usually already will have an intimate knowledge from prior TI association. Directors in this category are expected to spend 15 days per year on TI business. This might be the case for a new director for a period of time long enough for him to arrange personal time commitments so he might later serve as a general director or during a period when a general director finds it necessary to reduce temporarily his time commitment. In other cases, a person might serve as a director in anticipation of his retirement from the board.
A primary consideration in selecting an individual as a general director, director, or officer of the board is his ability to bring to the board a dispassionate point of view. An individual whose working experience has been entirely outside of TI normally would have such a viewpoint toward TI and its operation. Although the general director, director, or officer of the board whose working experience has been largely within TI may be an objective individual, it is only reasonable to expect that his long experience in the TI culture, where personal commitment to goals is strongly emphasized-particularly goals he himself has helped to establish-would tend to develop some strong personal bias.
To assist such a board member to develop and maintain a more dispassionate perspective toward TI, the selection of an individual as a board member and his acceptance anticipate that he will enter into activities outside of TI which will supplement his experience in TI in a meaningful way. Such activities should expose him to environments in which a diversity of view points would be expressed, where the performance of individuals in quite different endeavors from TI's may require evaluation, and possibly where some of the approaches developed in TI might be tried and further evaluated.
A written statement of policy describes the functioning of the board and its committees. Among other things, it states that it is a basic policy of our board to organize the use of directors' time to insure that they are always adequately knowledgeable about TI plans, operations, and performance.
The activities of the board include attendance at monthly and special board meetings, attendance at corporation planning meetings, and occasional visits to TI plant and office locations. However, in determining the appropriate amount of time to be spent in such activities, careful organization is required.
TI's typical monthly board meeting lasts for a full day and begins with a discussion of the financial operations of major entities within the corporation compared to the plans which had been established for them and approved by the board.
In the period between board meetings, to assure a desired coupling, and flow of information between the board and the operating organization, TI expects most board members to attend at least some of the quarterly financial reviews. These are reviews of activities in and performance of product groups and are held quarterly by the appropriate operating organization. Attendance by directors at such reviews provides primarily the opportunity to become acquainted with TI key personnel, their operations, and the environments in which they must succeed. It also serves as a way for the board members who are members of committees to fulfill their responsibilities by asking that subjects be added to the quarterly financial review agenda where appropriate, such as reviewing results of capital expenditures authorized in a prior period.
An additional activity in which a general director may participate is serving as a director of one or more TI subsidiary corporations. Such service expresses the TI board's interest in the affairs of its subsidiaries and its concern about how subsidiary corporation activities may be viewed by various publics, including governments-often in countries other than the United States—to which those subsidiaries are exposed.
In addition to the expected attendance at the strategic planning conference, which is held in the spring of each year and lasts 3 to 4 days, the directors are encouraged, and have received the full cooperation of the management, to discuss informality, outside the normal board or committee meeting, specific items of interest, such as product development, marketing or financial matters. Obviously, if this is carried to extremes, it can have a disrupting effect on the management, but it has been found in experimenting with the policy for the last 2 years that we have been able to achieve an appropriate balance from both sides which in turn has been a very useful and constructive interchange.
These techniques have been favorably utilized, particularly by two of our outside directors, who have characterized the techniques as the incentive to achieve a more detailed understanding of the company's business and its people.
Mr. SMITH. What I have been trying to say is that before, as you say, setbacks have taken place, there has been a lot of activity, a lot of evaluation, self-evaluation by individual boards, board members, that has been going on for some time.
These things move rather slowly: But my experience indicates that they are moving gradually toward improvement. And I am very hopeful that the voluntary effort will be successful.
I am also impressed in that context by the effort of the SEC starting in 1973 to promulgate guidelines for directors, and the abandonment of that effort during the chairmanship of Ray Garrett.
As he said at the time, in slightly paraphrased fashion, he said we are not trying to tell directors what to do in every circumstance in which he finds himself, but we are eager to tell them to take seriously what the law has in fact long required of them.
And I think this is the kind of spirit which I am hopeful is going to prevail.
Mr. CUNNINGHAM. You think the promulgation of rules or legislation in that spirit, general direction to the boards, rather than something very specific, is appropriate !
Mr. SMITH. I am sorry, I am not sure I understood your question.
Mr. CUNNINGHAM. You seem to be endorsing the SEC's efforts in this area.
Mr. SMITH. No; quite the contrary.
Mr. SMITH. I think that the effort to promulgate the guidelines failed because it was very difficult to specify each and every situation in which a director was going to find himself, and not being able to cover that, they felt that the individual director or the board should be correspondingly governed by the laws as they exist, and his own code of conduct.
Mr. CUNNINGHAM. Go ahead and continue with your testimony.
Mr. SMITH. In another context, one of the other outside directors said:
In other words, the full board of Texas Instruments becomes as deeply involved in all the affairs of the corporation as the normal corporate executive committee does. This is not a matter only of the time spent on corporate affairs, but in fact that the time is spent traversing all activities of the corporation.
The psychological rewards derived from the in-depth involvement permitted by service on the board are correspondingly great. Such rewards are quite apart from monetary compensation or professional enlightenment, but derive very directly from the feeling that one is a genuine part of the team and that one's comments and opinions are not merely respected but are sought out as essential ingredients in the formation of policy.
A very important aspect of board practices at Texas Instruments is the determination of the committees of the board and their staffing. Current committees are the objectives and policies committee, the compensation committee, the audit and finance committee, the shareholder relations committee, and by the administrative committee. Also, the board has appointed the trust review committee, which has both directors and nondirector management members.
The administrative committee, for example, was established to undertake those administrative activities deemed to be too time consuming for handling by the full board. It is, however, not in