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Corporate Governance At The Crossroads

Few things have changed as much in the past 10 years as corporate governance. We have witnessed an astonishing makeover …

Few things have changed as much in the past 10 years as corporate governance. We have witnessed an astonishing makeover in the ways corporate boards are composed, structured, and operated. We are seeing corporate directors shift from a passive to an active role. There have been great changes in the way board actions are publicized and reported.

This has not been a universal revolution, since most of the changes have  been voluntary and not regulatory; rather, I would call it an evolution. Many CEOs, directors, and boards have resisted the changes; this is possible in a free society. However, it is just a matter of time-as old CEOs and directors retire, and a new generation comes in-until virtually all companies conform to most of the more generally accepted corporate-governance practices now being adopted. By the same token, we should recognize that corporate governance will continue to change dynamically in the next 10 years. It is fairly easy to predict some of the forthcoming changes.

I say this because I recently served on a 50-person National Association of Corporate Directors’ Commission to review corporate-governance practices in several critical areas. Chaired by Boris Yavitz, former dean of

Columbia Business School and an experienced director, the commission comprised a fairly balanced group of corporate directors, CEOs, consultants, academics, institutional shareholders, lawyers, and association members. Although demographically disparate, we came to a consensus on recommendations regarding what those responsible for corporate governance should plan to do in the next few years. We agreed that:

  • All companies should institute a formal, continuing CEO evaluation by independent hoard members. This review should consider corporate financial results as well as the CEO’s performance as measured against previously established criteria and objectives. A chairman who is not the CEO should be evaluated separately.
  • The board should evaluate itself on the effectiveness of its structure, procedures, and review processes. When the board finds its own performance lacking, it should take steps to bring its corporate-governance policies to a higher standard. €. Corporate boards must evaluate individual directors’ performance and replace those who are ineffective.
  • Boards need to give more attention to selecting, training, and compensating directors, so that, in time, they can do a better job of evaluating the CEO and themselves.

These are not “pie-in-the-sky” recommendations. Some companies are doing these things right now and doing them well. The issuance of the NACD report last month should kick-start many plans.

Getting started is the hardest part. One way is to organize a board committee on corporate governance, also known as the committee on the board or the committee on board operations. Some companies prefer to expand the nominating committee’s charter and duties to include the desired facets of corporate governance. Others use the compensation committee, often renaming it the organization and compensation committee.

Companies that have a separate, non-executive chairman may wish to have him or her coordinate the corporate-governance program. Others find that the appointment of a “lead director” can start the ball rolling or that executive sessions attended only by the independent, outside directors also work.

In some instances, it may be useful to hire a consultant or facilitator to get you started. This should be someone who has had experience as a corporate director and is up-to-date on corporate-governance procedures.

One simple and obvious time to start the process is when a new CEO comes on hoard. The new CEO is usually more malleable and agreeable to changes. I don’t think it makes a great deal of difference if the new CEO is recruited from the outside or is the result of a long-planned, internal management-succession program. Requirements for CEO evaluation should be written into the job description from the start-and it is an appropriate time for the board to volunteer its own evaluation program.

I also have found that things go best when the CEO, rather than the board, takes the lead. The CEO then can participate harmoniously in the establishment of goals for his or her own evaluation; the board feels much more comfortable in doing it; and the CEO can more equably ask the board to review itself. As a matter of fact, it is sometimes wisest for a senior director to “suggest” to the CEO that he or she volunteer the idea to the board. Then everyone is happy, and everyone wins.

Corporate governance is at a crossroads now. If we act forthrightly to do our job better, we will stave off unnecessary and unwanted government regulation and gadfly carping. If we ignore the clear signals being given, we are asking for trouble. It’s probably that simple.

Formerly the CEO of F.&M. Schaefer (19721977), Robert W. Lear is chairman of CE’s advisory board. He also teaches at Columbia Business School, where he is Executive-in-Residence. He is an independent general partner of Equitable Capital Partners and holds directorships with Cambrex Corporation Inc.; Scudder Institutional Funds; Korea Fund; and Welsh, Carson, Anderson, Stowe Venture Capital Co

About robert w. lear