TOUCHSTONES FOR CORPORATE GOVERNANCETo The Editor:Participating in your stimulating corporate governance roundtable recently and reading Chief Executive’s article, “America’s Best [...]
May 1 1994 by Chief Executive
TOUCHSTONES FOR CORPORATE GOVERNANCE
To The Editor:
Participating in your stimulating corporate governance roundtable recently and reading Chief Executive’s article, “America’s Best And Worst Boards” (CE: April 1994) provided some food for thought on this controversial topic. The discussion and article brought to mind a letter I wrote to the Harvard Business Review a few years ago, describing how a board of directors works.
At that time, corporate governance had just emerged as a new and important issue. My letter was written to counter the danger of overreaction prevalent a decade ago, but many of the points I made still hold true today. Two in particular I think were not expressed clearly at the roundtable. First, a hyperactive decision-making board can be just as bad as a passive, rubber-stamping board. At Sealed Air Corp., we believe the board’s function is to shape major corporate decisions. Such decisions include those involving significant changes in the organization’s strategy, resource allocation, risk levels, culture, and value system. The board’s firsthand knowledge of the information on which to base decisions is necessarily limited. Therefore, except in the case of rare dramatic decisions-such as replacing the CEO or selling the company-a good director remains sensitive to his or her limitations of time and specific company/industry knowledge and also realizes the importance of board/management harmony.
The shaping process at Sealed Air works as follows: A chief executive who is sensitive to the thinking of his or her board knows intuitively what courses of action would be unsatisfactory to the hoard and typically cuts off such proposals at an early stage. If the CEO is unsure of the board’s reaction-or even if he or she is sure but wants to garner maximum support-he or she can discuss proposals with individual directors and modify them accordingly. Generally, this concludes the shaping process, but sometimes an additional step takes place at the board meeting. The CEO may try to incorporate new views and opinions into the proposal. If the new views are inconsistent with it, he or she withdraws the proposal. At this point, the executive must decide whether to change the proposal and repeat the process of checking it out informally or drop the proposal completely.
Besides adhering to the belief that a board must shape corporate decisions, I also advocate that all decisions must be unanimous. We believe an intelligent director has something to contribute to every important decision. If even one director is unwilling to vote in favor of an action, we know something is wrong with it.
Having served on the boards of Sealed Air Corp., Public Service Enterprise Group, UJB Financial Corp., Formica Corp., Rockaway Corp., Loctite Corp., and several private companies, I agree with the conclusions of “America’s Best And Worst Boards” regarding board structure and procedures. As authors Bob Lear and Boris Yavitz note, keeping board size relatively small with a low outsider/insider ratio and a demographic balance of independent directors will go a long way toward maintaining an effective and successful board.
T.J. Dermot Dunphy
President and Chief Executive
Sealed Air Corp.
Saddle Brook, NJ