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 / Spring 2003 / Issue 30(originally published by Booz & Company)


Corporate Governance: Hard Facts about Soft Behaviors

Companies should develop training regimens for directors, and nominating committees should gain potential board members’ commitment to engage in such schooling as a prerequisite for election. Other stock exchanges should follow the NYSE’s lead and institute training requirements.

Focus: How Pfizer Makes Directors Effective

When Robert Burt took over as chairman of the Pfizer audit committee, the retired CEO and chairman of the FMC Corporation headed back to school … as the only student in his class. For four hours following each of his next three Pfizer board meetings, he was tutored by senior managers from the divisions of internal audit, investor relations, tax planning, treasury operations, budgeting, corporate communications, and a host of others. A lead partner from KPMG LLP, Pfizer’s external auditor, sat in on every session. Not only did Mr. Burt learn a lot about his new role, he built relationships with the people reporting to him.

Pfizer has long been lauded for its commitment to maintaining a strong board. Such governance experts as Richard Koppes, formerly with CalPERS, Nell Minow, editor at the Corporate Library, and Patrick McGurn, vice president at Institutional Shareholder Services, have repeatedly cited the company as a role model for board best practices. In 2002, Pfizer won the Wharton/Spencer Stuart Board Excellence Award.

One of Pfizer’s hallmark strengths is the way it cultivates and trains both new and veteran directors. The governance committee of the board — not the CEO or senior management — recruits candidates for board positions. In fact, three recently hired directors were unknown to the CEO prior to joining the board, says Terence Gallagher, chief executive of Corporate Governance Associates in Scarsdale, N.Y., and the former Pfizer vice president who launched its corporate governance department in the early 1990s.

The governance committee deliberately chooses directors from diverse backgrounds. Today, Pfizer’s board includes current and former CEOs from a range of industries, along with a former congressman, a Nobel Prize winner, and a university president.

Pfizer CEOs from Edmund Pratt to William Steere to current CEO Henry McKinnell have developed the tradition of reaching out to directors over the years to solicit their advice. In fact, Constance Horner, chair of Pfizer’s governance committee and a guest scholar at the Brookings Institution, praises Mr. McKinnell for being “alacritous” in putting items raised by directors on board agendas.

The real making of a Pfizer director begins when he or she first joins the board. All new directors undergo an intensive orientation that immediately welcomes them into the fold of senior management. Ms. Horner, as an example, frequently has one-on-one dinners with Karen Katen, CEO of Pfizer’s global pharmaceutical business. “The rubric is social, but the outcome is a help to me in understanding the company better,” Ms. Horner says.

Director training does not end with orientation; it’s a continuing process. An internal group is charged with forwarding directors’ information from third-party sources. Moreover, all directors are encouraged to make facility visits. Robert Burt says Pfizer paid him $1,500 when, while on vacation, he took time to visit the research facility in Sandwich, England, where scientists developed Viagra, among other drugs.

Pfizer also organizes group trips. “Collegiality is ... extremely valuable,” Ms. Horner says, particularly in times of intense activity. When Pfizer acquired Warner-Lambert Company in 2000, Pfizer’s CEO drew on input from all his directors to make decisions on compensation, personnel, accounting, and other issues. Ultimately, the hostile deal turned friendly, but before it did, Pfizer, remarkably, relied on its board to choose a slate of seven directors for a new Warner-Lambert board.

Board effectiveness, according to Ms. Horner, depends on the quality of the individual directors, on the relationships among them, and on the joint work of the group. Pfizer has fostered an environment that encourages the right result in all three of these areas. In so doing, not only has it attracted good directors, but it has also kept them eager to contribute. Says Mr. Burt: “The thing that makes [the Pfizer board] superior is everyone wants to come and be successful.”

— B.B.

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  1. Jay A. Conger and Edward E. Lawler III, “From Meek to Mighty: Reforming the Boardroom,” s+b, Fourth Quarter 2001; Click here.
  2. Sanjai Bhagat and Bernard Black, “The Non-Correlation Between Board Independence and Long-Term Firm Performance,” Journal of Corporation Law, University of Iowa College of Law, Winter 2002
  3. Gurmeet Kaur, “The Stock Market Link,” Investors Digest (Malaysia), May 16, 2001
  4. Steve Lin, Peter Pope, and Steven Young, “Are NEDs Good for Your Wealth?” Accountancy, September 5, 2000
  5. Ira M. Millstein and Paul W. MacAvoy, “The Active Board of Directors and Improved Performance of the Large Publicly Traded Corporation,” Columbia Law Review, 1998; Click here.
  6. Dawna L. Rhoades, Paual L. Rechner, and Chamu Sundaramurthy, “Board Composition and Financial Performance: A Meta-Analysis of the Influence of Outside Directors,” Journal of Managerial Issues, Spring 2000; Click here.
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