How Boards Deal with Lazy Directors

Article excerpt

Though their numbers have been under downward pressure in recent years, they are still far from an endangered species: Deadwood directors who occupy seats on corporate boards but rarely bother to attend meetings or keep abreast of company matters.

Because most companies lack any formal mechanism for regularly culling and restocking their boards, corporate governance experts say, even notoriously disengaged directors might hang on for years, routinely renominated every proxy season simply because fellow directors are loath to embarrass their own by dropping them from the proxy ballot.

Over the last decade, some companies have tried to keep their boards fresh and involved, by adopting mandatory retirement ages or imposing "term limits" of 10 or 15 years' maximum tenure. About half the companies in the Standard & Poor's 500 now have one rule or the other, according to the Investor Responsibility Research Center, a group that studies corporate governance.

While they have had some effect, though, such measures have been criticized as arbitrary and ill-aimed, removing the best directors as well as the worst.

"All too often, companies use term limits as a substitute for thorough evaluations," said Donald S. Perkins, a former chairman of Jewel Cos. who has served on a number of corporate boards.

Lately the focus has shifted to another approach, familiar to many a middle manager but still new in the clubby world of the boardroom: Performance evaluations.

Few companies have yet taken the idea as far as International Multifoods in Wayzata, Minn. The company's three-pronged policy calls for each of the company's eight directors to confidentially evaluate the board as a whole, the other seven directors individually, and themselves; the compiled evaluations are considered by the company's nominating committee when directors' three-year terms expire. Still, the effort by International Multifoods seems to represent the future.

"We're seeing two things," said Roger Raber, chief executive of the National Association of Corporate Directors. "Companies are moving more toward board evaluations, as opposed to term limits. And more are going toward a peer review process, in which board members evaluate each other individually, instead of just evaluating the board as a whole."

Promoting a healthy level of board turnover has taken on greater urgency as more companies find themselves selecting younger directors, often turning to candidates in their 40s, corporate governance experts say. Against this background, many companies cast a critical eye on mechanical solutions like term limits.

Term limits are now used by only about 8 percent of for-profit companies, but interest in director evaluations is growing, according to a recent survey of Fortune 1,000 company directors by Korn/Ferry International, a executive search firm. One in five respondents said their companies already evaluated directors individually, but 73 percent said they should.

But corporate governance experts are divided over board evaluations. Some critics say they are often conducted in ways that undermine their effectiveness.

"I see some pretty funny schemes going on at boards, where the evaluations are done as if to see who is the best-liked person in the room," said Jay Lorsch, a business professor at Harvard University who has served as a consultant to some 25 boards over the last four years. …

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