Directors must update operating procedures

USA Today (Society for the Advancement of Education), August, 1996

Ineffective governance by a corporation's board of directors may lead to sagging stock prices and financial malaise for the company. Yet, many corporate boardrooms still function the way they did 20 to 50 years ago, University of Illinois researchers point out. Such outmoded operating procedures seriously may limit their ability to govern effectively, maintain Howard Thomas, dean of the university's College of Commerce, and Donald O'Neal, professor of management.

In a three-year study of corporate boards, they surveyed and interviewed more than 80 chief executive officers and corporate directors from 40 companies, ranging in size from $10,000,000 to $17,000,000,000 in gross sales. Among their findings:

* Directors often aren't held accountable for their decisions. The performance of individual directors rarely is evaluated, and then only informally. The board's performance also is assessed infrequently, and there is no procedure that enables the shareholders to ask a board member to step down, even if he or she is performing inadequately. The most frequent reason directors leave is because they have reached the board's mandatory retirement age.

* Establishing diversity on corporate boards remains difficult. When a director leaves, the identification of candidates for the empty seat is restricted almost totally to referrals from the chairman and incumbent directors. The incumbent directors' personal, social business, and professional networks are the primary source of board-seat candidates.

* The use of outside sources such as executive search firms to locate candidates largely is confined to situations in which the board actively is seeking to increase its diversity by hiring a woman or minority.

There are signs, however, that boardrooms are on the brink of a minor revolution. Thomas believes that pressure from Wall Street and institutional investors such as the California Public Employees' Retirement System, the nation's largest pension fund, already has started a chain reaction that eventually will alter the character of many corporate boards.