America's Best & Worst Boards

By Lear, Robert W.; Yavitz, Boris | Chief Executive (U.S.), October 2001 | Go to article overview

America's Best & Worst Boards


Lear, Robert W., Yavitz, Boris, Chief Executive (U.S.)


GOVERNANCE

Chief Executive's ninth study finds good governance is good business, but some companies still don't get it.

It's not easy being a member of a bad board today. You're reviled in the business press, your company's stock price is probably in the tank. You duck calls from institutional investors pressuring you to change, but it's harder to hide than it was eight years ago when we first began picking best and worst boards for Chief Executive magazine.

Back then, agreed upon criteria for separating the good from the bad did not exist. We drew up a series of factors called "The Hallmarks of an Effective Board" based on our work with the National Association of Corporate Directors and our corporate governance courses at Columbia Business School.

Used for each board analysis, these hallmarks call on companies to diversify their boards, to limit conflicts of interest, and to encourage stock ownership by directors, among other criteria. They now appear on www.chiefexecutive.net. (So do the names of the directors on this year's best and worst boards.) We've also stuck to two fundamental beliefs. First, a strong board is key to a successful company over the long term. Second, the boardroom is one of free enterprise's last bastions and we like it better with its occasional problems than if it were restricted by a load of detailed regulations.

When we first started this project in 1994, we had no difficulty finding a myriad of companies whose boards didn't meet our criteria. It was harder to find companies that had begun to adopt forthright corporate governance practices.

Now we find that most good-sized companies have converted to our board composition criteria.

Unfortunately, some companies, such as a number in the so-called new economy, remain blind to corporate governance. Their problems might have something to do with this oversight.

Others selectively adopt good governance criteria. For instance, at Lucent and Xerox, better board action probably would not have stopped problems at these companies, but it might have alleviated their severity. Each company has good products and services, hard-working people, and ambitious goals. But their boards -- either too busy or too small - seem unable to cope with the complex problems facing them.

Other firms and CEOs pay lip service to corporate governance. It is hard to tell from a proxy statement or an annual report alone how independent the board has become. We cannot go into the boardroom to witness directors' participation in corporate affairs.

As a result, we now pay much more attention to the board's structure. Does it have a functioning corporate governance committee and written principles? Who appoints committee chairman and members -the CEO or the board itself? Is there a formal board process for evaluating the CEO's performance?

We are sensitive to nuances in the proxy statement's letter from the Compensation Committee. We consider how directors are paid and how much, and we look for unusual perks. We look at the company's performance vs. its peers.

In general, corporate governance in America is thriving, and helping companies find safe passage through complex business issues. AA Our best board picks show this. Directoys at two of our selections, Verizon and Texas Instruments, guided major transformations.

A strong CEO alone can run a company effectively for a while with a weak board, but at high risk. But those companies with a competent CEO and an experienced, talented, and independent board have established the basis for long-term success.

The Five WORST BOARDS

Meager-sized Board Misses Lucent's Major Problems You have to feel sorry for Henry Schacht, interim CEO at Lucent Technologies, and his board. Just about everything that could go wrong went wrong. This includes the removal of Richard McGinn as CEO; the depressed credit rating; the resignation of a high-profile CFO; and the failure of merger discussions. …

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