The best and worst boards of 1995: evaluating the boardroom - includes related articles - Governance

Chief Executive, The, Nov, 1995 by Robert W. Lear, Boris Yavitz

THE TREND TOWARD INDEPENDENT, PARTICIPATIVE BOARDS CONTINUES TO EVOLVE AT MOST COMPANIES, BUT SOME STILL JUST DON'T GET THE MESSAGE: GOOD CORPORATE GOVERNANCE IS GOOD BUSINESS.

Some say the third time is the charm. We'd hoped that when we set out this year to evaluate the work of America's corporate boards, we'd find that the lessons of the past few years had been so well learned that there would be few, if any, candidates for the "worst board" title. Unfortunately, once again, we turned up numerous companies that are still clinging to the anachronisms of dependent directors, tyrannical managements, and fuzzy governance guidelines.

Granted, many more candidates this year qualified as strong boards, and many fewer as weak ones. Companies increasingly are rearranging their board structures and practices in line with more "enlightened" corporate-governance procedures, according to recent director surveys conducted by the National Association of Corporate Directors, The Conference Board, and Korn/Ferry International. This trend is gaining momentum as entrenched executives retire and new director voices are heard.

Nonetheless, we are not corporate-governance "Pollyannas." Far too many companies still only pay lip service to improving corporate governance. And far too few formally and thoroughly evaluate their CEOs, their boards, and their individual directors. While the picture is brighter and much progress is being made, corporate America still has a long way to go.

The first time we evaluated U.S. boards, using 1992 proxies, we concentrated largely on board composition. We hypothesized that unless a company started with the proper mix of board directors, it greatly reduced its chances of achieving good corporate governance. For example, we picked W.R. Grace as one of our worst boards, a choice born out by subsequent events, including the ouster of Chief Executive J.P. Bolduc in a firestorm of publicity.

The next time, using 1993 proxies, we focused on board organization. Good composition alone, we felt, was not enough; a logical committee structure and board procedures had to be in place. For example, although it had been vilified by corporate-governance critics in earlier years, General Motors appeared on our best board list because of the company's forthright efforts to improve board policies and practices.

Now, using 1994 proxies covering the 1993 calendar year, we have further refined our approach. Best boards must demonstrate some proactive evidence of positive corporate governance, while the worst ones must show a basic disregard for the structures and procedures currently advocated by most critics.

Our methods of selecting the best and worst boards are not scientific. We asked scores of corporate observers - Chief Executive readers and other CEOs, directors, academics, consultants, investors, shareholders, and writers - to give us their nominations for both good and bad performers. During the past year, we monitored news stories for other possible candidates. In all, we screened about 200 companies with more than $250 million in revenues and studied in depth the proxy statements of potential candidates before making our choices. In the process, we refined our criteria for determining what constitutes a good or bad board (see sidebar). As in our previous two analyses, we didn't rank these boards, because each is unique in composition, structure, and presentation.

The five companies we selected for their weak boards vary in size, product/service, and market. But they are remarkably similar in their coterie of insiders, their lack of board performance appraisal, and their dominant management. At least one had no CEO succession plan in place, while another turned a blind eye to its chief executive's abuse of power and perks. Directors of such companies should beware; they may be next in the hot seat.

THE WORST BOARDS

MORRISON KNUDSEN

Any roster of bad boards in the last year or so that did not include Boise, ID-based Morrison Knudsen would be incomplete.

The highly publicized mishaps of the Morrison Knudsen board and its CEO include a classic laundry list of corporate-governance sins:

* No outside directors who had ever run or managed an industrial business.

* Most directors either business affiliates or personal friends of CEO William Agee or his wife, Mary Cunningham Agee.

* No board meetings held at corporate headquarters for more than a year.

* Absentee residency of the CEO and purported over-use of the company plane.

* Excessive attention given to the CEO's compensation.

Regrettably, we did not review the 1993 Morrison Knudsen proxy when preparing this article last year. If we had, we would have selected this engineering, construction, mining, and rail concern as one of our worst boards well before the barrage of publicity. The 1993 proxy ran 43 pages, 38 of which concerned the compensation programs of CEO Agee and the top officers. It was no surprise that Peter Ueberroth, chairman of the Compensation Committee, resigned from the board last November.