Sound-Mindedness in Corporate Governance

Introduction

Modern-day business environments are incredibly challenging both in the physical and intellectual manner. Companies engaged in the process of fierce completion need to be able to adapt to a plethora of outside factors very quickly in order to maintain their competitive edge and remain ahead of the others (Tricker, 2015). This is especially true for large companies in the public offering sector. The need to appease hundreds of shareholders while being constantly scrutinized by governmental financial institutions as well as stock market entities, such as the Wall Street, NASDAQ, and others, puts great pressure on a company’s board members.

Corporate directors and board members are responsible for determining the direction of a company, ensuring that it is aligned with that direction, and providing both long-term and short-term gains. High-ranking officers of companies that make up the Fortune 100 list effectively become public figures as the media is looking for any bits of information they provide in order to assess their position in the market more accurately. With this amount of pressure and attention, sound-mindedness becomes the primary psychological criterion for corporate directors and board members to possess. The purpose of this paper is to demonstrate why sound-mindedness is important for the successful corporate governance.

Duties and Responsibilities of Board Members

Members of a directorial board in a Fortune 100 company are typically hired professionals tasked with governing the company as fiduciaries on behalf of its shareholders. Some of their duties include hiring executive officers, managing dividends and options policies, determining compensation, setting goals, supporting executive duties, and managing resources (Tricker, 2015). As such, the demand for a board member’s time is typically high, as many of these members are typically involved in the life of the company in one way or another.

Board members are expected to be remarkably intelligent and engage in the process of lifelong learning in order to update their knowledge and be aware of the newest notions, practices, and technologies. Lastly, due to the increased attention from corporate media, board members are inadvertently supposed to act as liaison officers should they be required to answer questions posed by the journalists or any other interested parties.

Under state corporate law, the duties of board members are defined as follows (Joneydi & Zare, 2015):

  • The duty of care. Board directors are expected to make decisions with all due haste and deliberation.
  • The duty of loyalty. Board directors should protect the interests of the company’s shareholders.
  • The duty of candor. Board directors should provide accurate information on time to shareholders whenever it is necessary.

Sound-Mindedness and Lack Thereof: Tesla Company Debacle

As it was already stated, being a board director is a very challenging and time-demanding position, which requires an individual to maintain high standards of physical and mental acuity. Time management, sleeping schedule, and work-life balance are very important for maintaining sound-mindedness.

In addition, other board members are required to do their share of work and perform their duties accordingly. In organizations where most duties are reliant on a single or a couple of leading board members, there is a possibility of the situation going astray, as exhaustion and overexertion are likely to affect the sound-mindedness of the leader in the long-term perspective.

An example of that can be seen in the recent scandal with Tesla board of directors: Elon Musk, its CEO and Chairman of the director board published a tweet in which he stated that Tesla was going from public to private company again, with funding secured (Higgins, 2018). This message alone created massive turbulence in the stock market and attracted the attention of the SEC. The company suffered from blowout as a result. Mr. Musk and his company had to pay a fine of 40 million dollars in total, half of which he paid from personal funds (Freedman, 2018).

According to the media, Mr. Musk’s health was undermined by his extensive working schedules and poor sleeping regimen, which, in turn, had a poor effect on his mental acuity and emotional stability (Fucci, Scannielllo, Romano, & Juristo, 2018). This story explains why sound-mindedness is so important for board directors, as one ill-thought Twitter message can cause significant problems for the company. The relatively poor performance of Mr. Musk’s other ventures, such as SpaceX and SolarCity (Voigt, Buliga, & Michl, 2017), can also be attributed to his long-term sleeping and mental issues.

Conclusions

Sound-mindedness is the primary requirement for board members to fulfill their fiduciary duties. Directors and board members have significant liabilities in regards to a company, which are reduced only by the exculpatory, indemnification, and insurance provisions, which shield them from responsibility, be that juridical or financial, should acts of negligence be unintentional or performed in good faith. A lack of sound mind and judgment, however, makes it likely for a board member to cause serious trouble for a company. Since practically all companies on the Fortune 100 list are publically traded ones, the amount of attention to them is extraordinary. As proven by the situation with Tesla and Elon Musk, sound-mindedness is required at all times, even when writing a Twitter message.

References

Freedman, W. (2018). Tesla CEO in firing line following Twitter storm. Global Finance. Web.

Fucci, D., Scannielllo, G., Romano, S., & Juristo, N. (2018). Need for sleep: The impact of a night of sleep on novice developers’ performance. Web.

Higgins, T. (2018). Elon Musk stirs controversy on Twitter in wake of SEC settlement. The Wall Street Journal. Web.

Joneydi, L., & Zare, M. (2015). Directors’ liability under the doctrine of piercing the corporate veil: The directors’ liability for corporate debt. Comparative Law Review, 6(1), 85-105.

Tricker, B. (2015). Corporate governance: Principles, policies, and practices (3rd ed.). Oxford, UK: Oxford University Press.

Voigt, K-I., Buliga, O., & Michl, K. (2017). Business model pioneers: How innovators successfully implement new business models. New York, NY: Springer.