Boards on Trial - five best and five worst corporate boards for the year

Chief Executive, The, Oct, 2000 by Robert W. Lear, Boris Yavitz

The best boards evaluate their CEOs -- and themselves -- in hard-nosed fashion. The worst are asleep at the switch, ineffective, and weak. Here are our picks for this year's five best and five worst and what each did, or didn't do, to make the grade.

When we first approached this task, nine years ago, it wasn't hard to find companies with weak and ineffective boards. They often came hand-in-hand with dominant or heedless CEOs whose mistakes were left unchecked and with dormant corporations clinging stubbornly to an outmoded past. It was comparatively easy to cherrypick some progressive boards who stood for better corporate governance. They were innovators in diversity, director independence, board structure, and endorsing shareholder interests.

A great deal has changed since then. But, as the French say, "Plus ca change, plus ca meme chose." The more things change, the more they stay the same.

Dramatic improvements in corporate governance have swept the American economic system in recent years. Board actions considered heretical a decade ago are now routine. Today's boards evaluate their CEOs in hard-nosed fashion and, when one doesn't measure up, he or she is replaced in short order. They evaluate themselves as well, and most directors now seem to take their governance responsibilities seriously.

A lot of credit goes to the S.E.C. and Arthur Levitt. Today's proxy statements are far more specific and revealing than those of the '80s and early '90s. The facts of executive and director compensation are now clearly laid out. Board committee structures are described. Details of executive contracts are disclosed. The audit committee procedures have been expanded and stiffened. A do-nothing or captive board has difficulty hiding from its shareholders, the press, and prospective investors.

Credit also goes to the enlightened CEOs and directors who voluntarily put through so many corporate governance improvements over the last few years without regulatory reforms. Designed to make the operations of boards more effective and efficient, these have been the most productive efforts of all. Yet, they've made our task of picking the best and worst boards more complex.

Our hallmarks of good corporate governance (see box, page 46) have changed little over the years. But while many more companies approach our qualifications without great difficulty, merely going through the motions of instituting a corporate governance procedure does not, in itself, make for a good--much less a best--board. A good board is developed through years of patient recruiting and internal give-and-take as the deliberative processes of corporate governance are refined. As viewers of the passing corporate scene, we can't go into the boardrooms and personally witness how this evolution takes place. But we've been in enough board meetings to understand what's happening. And when we read or hear about a company doing exciting things in corporate governance, we take a closer look.

Over the years, we've also been able to point the finger at a number of companies--such as Cendant, Rite Aid, Conseco, Disney, and Apple--well before they were forced by their shareholders to make major corporate governance changes.

On the whole, the state of American corporate governance health is much improved. Our reading and research, plus the responses collected by Korn/Ferry International in their recent survey of directors, give us confidence that stockholders are better served in American boardrooms than anywhere else in the world. The crusade continues, however, as thousands of new firms, CEOs, and directors are anointed each year. With today's swelling ranks of Internet companies and huge global expansion, the task of installing good corporate governance systems remains extremely challenging. The learning process is a long one, but it's worthwhile.

The Five Worst Boards

WHY ARE some boards asleep at the switch? Why do they fail to notice red flags? To take action when the handwriting looms large on the wall, readily readable to shareholders, analysts, and the media?

Four of those singled out as this year's worst are boards of companies that posted poor performance for at least two years. Two of the four stumbled under new CEOs. The third has a seesawing performance history coupled with a loss of credibility and a reputation for excessive CEO compensation. The fourth has a long record of poor performance under the almost total control of a single family. The fifth company, by contrast, enjoyed enviable profitability and growth, yet shows early rumblings of investor unease with its corporate governance and implied long-term prospects.

We believe our probing of these weak boards--and the factors that cause boards to sleep on the job--can serve as a useful lesson to those directors and CEOs alike who are committed to effective boards and good governance.

Toys 'R' Us--Tremors at the Top

1. After many years of impressive performance, Toys 'R' Us has fallen on hard times. The return to stockholders has declined dramatically both in absolute values and as compared to the S&P 500 and the S&P Retail Composite Index.