The Best and Worst Boards of 1996: Measuring Corporate Governance
Lear, Robert W., Yavitz, Boris, Chief Executive (U.S.)
More and more companies have seen the light about corporate governance and are implementing formal policies such as CEO and board evaluations. But a dismaying number choose to remain in the dark.
By all rights, nearly every American public company should have embraced the idea that its board should comprise a majority of independent directors who participate effectively in their organization's corporate-governance processes. After all, for decades, the Securities and Exchange Commission, National Association of Corporate Directors, institutional shareholders, business writers, teachers, and consultants constantly have clamored for all companies to improve their board structures and procedures.
However, apparently some CEOs and directors don't read, don't listen, or just don't care. This is the conclusion we reached in our fourth time screening several hundred proxy statements before choosing our Best and Worst Boards of 1996. While the strong trend toward "enlightened corporate governance" continues-with many more boards appointing governance committees, issuing corporate-governance policies, adopting formal CEO and board evaluation programs, and taking a chunk of their pay in company stock-we still found, to our dismay, a number of companies whose CEOs and directors seem to have thumbed their noses at such strategies. Often, such companies are found in the entertainment and financial industries and are likely to show heavy stock holdings by top management or family members. They are also likely to be headed by highprofile, publicly visible CEOs, who may-sooner or later-fall into the trap of believing their own press clippings.
The boards of such corporations usually are composed of several insiders and/or directors who do business with the company. Generally, there is little evidence of effective, independent participation by the directors in board affairs. It is difficult to see how independent and small shareholder interests are properly represented.
The five companies we selected as having the worst boards represent some interesting variations on this theme. Some of these boards are exceedingly small, others quite large. They come from a variety of industries-gaming, steel, food, aluminum/forest products, and retail-and are products of very different histories. They are all dominated by CEOs who can readily muster majority support from insider or beholden directors.
We do not pretend to use scientific, statistically accurate methods in our study of America's boards. We talked to
dozens of corporate observers-Chief Executive magazine readers and other CEOs, academics, investors, shareholders, and writers-and asked their suggestions as to both good and bad performers. We read news stories and saved clippings. Altogether, during the past year, we screened about 250 companies with more than $250 million in revenues. We examined all our potential candidates' 1995 proxy statements covering the 1994 calendar year before making our choices.
The criteria for determining what constitutes a "good" or a "bad" board (see sidebar, "The Hallmarks of an Effective Board") are continuously refined, but our fundamental principles remain much the same as they were four years ago when we began this exercise. As in our previous three analyses, we didn't rank these boards. because each is unique in its own composition, structure, and presentation.
ln this year's review, we found perhaps 100 companies or so that would have been serious candidates for our five best boards four years ago. Thus, much progress is being made, and it is spread across a majority of the corporations we analyzed. Still, some others haven't seen the light yet-some of them leading companies that should know better and provide a corporategovertance model for their less successful brethern. And though their corporate-goverance policies may not have affected their performance to date, if you walk a tightrope for a while, there's always a possibility you will fall off. …