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Published: February 14, 2003

 
 

Corporate Governance: Hard Facts about Soft Behaviors

Inspired by the example of the Dayton family in the 1960s, the Target Corporation board committed to many enlightened governance practices more than 20 years ago, says the company’s executive vice president, general counsel, and corporate secretary, Jim Hale. Target CEOs have long made a habit of bringing issues to the board before resolving a course of action. He recalls some years ago when the board dealt with the issue of whether to conduct a stock buyback. After presenting the question to the board, Mr. Hale argued one point of view for 10 minutes, and then the CFO argued the other for another 10. “It was a way to get the various issues out on the table,” says Mr. Hale. The board ended up postponing the decision on a buyback, but when they finally addressed it, the directors had formed an opinion based on healthy debate, not dictate.

“Our view is: If we have a really good board, we use the board,” Mr. Hale says.

Watch the Time
In today’s increasingly complex and global business environment, the demands placed upon board members are unprecedented. As industries deregulate, new markets emerge, mergers are made, and subsidiaries implode, board directors are increasingly pulled in multiple directions. These special circumstances are added to all the normal demands of board membership — meetings, training, evaluations. It’s little wonder that companies are having a difficult time fielding qualified candidates to fill their board seats. A lot more people are saying no.

To participate constructively in strategic and other board discussions, directors we’ve spoken to report that they spend time not only attending meetings, but also studying the issues beforehand, participating in site visits and informal gatherings, and conferring privately with the CEO and other executives. Korn/Ferry’s Charles King estimates that audit committee members will spend as much as 300 hours per year per company fulfilling their board obligations. Other board members will commit between one and two days per month, roughly 100 to 200 hours per year, barring a crisis.

Although boards may shy away from setting strict numerical limits on members’ other directorships, they should establish participation benchmarks for directors. Continued membership should be contingent on the faithful fulfillment of obligations.

Activists are calling for a limit on the number of directorships held by any one individual. Although a regulatory fix is probably not the answer, they have a point. It’s hard to deny the worldwide rise of professional directors who cannot possibly have the time to prosecute their obligations to multiple boards. Here, as in other components of board performance, information availability and transparency is surely part of the answer. All board members should know about the extent of one another’s additional commitments. If a director is considering an additional directorship, the nominating committee should know about it in advance, and perhaps even have the option of accepting the directors’ resignation from the current board.

Measure Board Performance
A board’s scrutiny should apply not only to the company’s performance, but to its own performance. On this point, perhaps surprisingly, most directors concur. For example, in a survey Booz Allen conducted of directors of Australia’s 100 largest companies, 77 percent believed that substantial scope exists for improving the practices of boards. When asked about individual director contribution to board effectiveness, 89 percent said it varied significantly; 66 percent believed boards required better processes for self-assessment and evaluation; and 83 percent felt boards should have policies to replace nonperforming directors in an orderly fashion. A Booz Allen European survey revealed a similar consensus.

Yet very few companies have in place mechanisms for defining or measuring the performance of the board either as a unit or at the individual director level. In research with the Conference Board, we could identify only 13 incidents of directors’ being removed for performance reasons, among 546 companies studied.

 
 
 
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Resources

  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.