What does a great board look like? Is it agroup of star business personalities, orone that lives up to the highest standardsof good corporate governance? Is it the board of acompany that consistently beats analysts’ estimates,or one that has deftly handled adversity and CEOsuccession? The answer is that there are no answers.
Corporate governance experts and board advisersagree that there is no recipe for building a greatboard. A group of exceptional business stars mightbe highly dysfunctional behind the closed door ofthe boardroom, while a diverse group of largelyunknown, but highly experienced individuals couldbe running the best board in America. Becauseboards are made up of a group of people, it is in thathuman interaction and chemistry that great boardsare made. The sum is greater than its parts.
“It is difficult to identify the best boards,” saysPatrick McGurn, executive vice president and specialcounsel at the ISS unit of RiskMetrics. “You canhave a board that looks great on paper and then yousee the work product and how they react when aproblem emerges and it’s another story,” he says.
There are boards that have all of their governancebest practices checked off: They have separated thechairman and CEO role; they have nearly all independentdirectors; and they score high marks fromcorporate-governance ratings firms, such as RiskMetricsand The Corporate Library, but there is no guaranteethat they will perform at a high level. Ric Marshall,chief analyst and co-founder of The CorporateLibrary, a governance research and ratings firm, saysthat governance ratings are an important gauge ofboard-effectiveness, but they don’t necessarily identifythe best boards. “A great board is magic. It’s humanchemistry and the right kind of experience. Thereare no formulas or recipes. A great board is born inand of itself,” says Marshall. In fact, a board thattakes a check-the-box mentality and lives by the letterof the law is unlikely destined for greatness, hesays. “In my experience, the most compliant boardsare usually not bad boards, but they are also rarelythe best boards.”
Then there are boards that are full of superstars.Consider the board of Procter and Gamble: in additionto its highly regarded Chairman and CEO A.G.Lafley, the board boasts such luminaries as ErnestoZedillo, the former president of Mexico; John F.Smith, the former chairman and CEO of GeneralMotors; and Rajat Gupta, former managing directorat McKinsey and one of our selections to the BoardroomAll-Star team (See “Boardroom All-Stars,”page 22). It also includes the current or formerCEOs of Archer Daniels Midland, Boeing, Verizon,and eBay. How would you like to have Apple’sboard? In addition to Chairman and CEO SteveJobs, the smallish board includes Al Gore and AvonCEO Andrea Jung (both Boardroom All-Star selec-tions), as well as Eric Schmidt, CEO of Google, andthe CEOs of J. Crew and Genentech, and the chairman and former CEO of Intuit.
While these boards might be among the best—their companies certainly have the results to back itup—there is no guarantee that top talent will makefor an outstanding board. Sometimes a dream teamof stellar individuals doesn’t click, like the 2004 U.S.men’s Olympic basketball team that, by all accounts,had the best players in the world but finished with abronze medal because they couldn’t play as a team.“One thing that boards do wrong is to go for thebiggest name or the best athlete available, to steal asports cliché, instead of filling the specific need thatthey have,” says McGurn.
Hard to See
Identifying great boards is not be as hard as identifyinggreat board members, since the company has atrack record that you can follow. But Drew Hambly, acorporate governance analyst at Moody’s, says thatthere are lagging indicators for great boards, but fewleading indicators. By that he means that you can’treally tell a great board until it does something great.
“They are living organisms,” adds McGurn. “Agreat board is made by the care and feeding of theboard by the board itself. How do they do successionplanning? Do they complete regular and robust evaluations?Are the right people in the committeechairs?” he asks. “You need the right structure and theright people. You can’t have a great board withoutboth of those things.”
Charles Elson, a professor and director of theWeinberg Center for Corporate Governance at theUniversity of Delaware, says that there are manygreat boards that fly under the radar. “There are greatboards you never hear about because they very quietlyand professionally address the problems that crop upand they take care of them before they develop intobig problems.” A board that Elson thinks fits thismold is Colgate-Palmolive.
Ira Millstein, a senior partner at law firm Weil,Gotshal & Manges who has counseled numerousboards on issues of corporate governance, includingGeneral Motors, Disney, and Westinghouse, says itis nearly impossible to tell a good board from the outsidelooking in. “You have to observe them inaction,” he says. “A board might look terrible to anoutside observer because they don’t have enoughindependent directors, but when you get in theboardroom, you find that they work great together.”
Good Governance
While good governance structure doesn’t guaranteea great board, it can help improve the chances that aboard will function well. Marshall says top-notchboards need two essential elements, independenceand a good ownership structure, to have high governancestandards. “The degree of independence frommanagement is absolutely first on the list,” says Marshall.“You can’t have a board that’s focused on oversightand effective checks and balances of managementpower unless it’s an independent board.”
Elson agrees that corporate governance scoresaren’t essential, but that measures of independenceare important. “They don’t predict corporate performance,”he says. “But the higher the score, themore likely a board will act as a circuit breaker andhold management accountable.”
Millstein says that while it’s difficult to identifygreat boards, there are some hallmarks of excellence:
- Does it have independent leadership? A separateindependent chairman is almost essential, hesays. Second best is a lead director.
- Does it have a meet-alone policy? Non-executivesshould meet alone as a matter of policy, not justin an emergency, he says.
- Does the board appraise and evaluate itself?Millstein says a good board isn’t afraid to do a selfevaluationwhere the members comment on eachother’s abilities and performance.
- Does the board deliver value to shareholders? “Ifyou want to determine if the board is performing wellyou have to look at if they are adding value,” he says.
- Does it have quality directors that are not overboardedwith other jobs? “You want to see people onthe board who have the experience, not a goldentiara of a board with diamonds and rubies that don’tknow the industry,” says Millstein. “You don’t wantshow-piece directors. It is more important that theyknow the business and have time to devote to it.”
- How does the board deal with compensation? Isthe CEO’s pay package filled with too many shorttermincentives? He also looks at the compensationconsultants to see if they are independent or if they areadvising management on other things.
Overcoming Adversity
Many board watchers say that boards thathave succeeded in the face of adversityend up better for it. “Adversity makes forbetter directors,” says Marshall. He saysThe Corporate Library keeps a list ofdirectors who have been through scandals,bankruptcies, and other problems.To be sure, in some cases the boardlooked the other way and the adversitydeveloped out of the existence of a weakboard. But in many other cases, the boardrose to the challenge, cleaned house, andput the company on solid footing.
“A great board is one that acts quicklyto terminate a poor-performing CEO,”says Elson. They might also move against aCEO that runs into a personal problemthat creates a distraction for the company.One such situation he cites is the board ofBoeing, which Elson says acted courageouslyto oust former CEO HarryStonecipher for a violation of the company’scode of conduct.
Millstein agrees that good boards areones that have been tested: “I love boardsthat have gone through adversity,” he says.Governance experts say that the sign of agood board is also one that doesn’t overreactto adversity. “You don’t want theboard making knee-jerk reactions,” saysElson. “A great board approaches a difficultsituation with calm and clarity and followsdue process.”
Five Exemplary Boards
While this is not intended as a list of thevery best boards—we agree with Ira Millstein,that unless you are in the boardroom,it’s nearly impossible to decide which is thebest—governance experts and boardadvisers do have their favorites. What followsis a sampling of boards that reflectsome of the qualities that go into boardroomexcellence, and some of the companiesmost often mentioned in our conversationsabout great boards. Each, in theirown way, has demonstrated leadershipthat is required of boards if they are to bean adviser to and monitor of managementand an advocate of shareholder value.
1. Boeing
Boeing defines the board that has survivedadversity and is stronger for it. In2005, the Boeing board opted to removeCEO Harry Stonecipher after his relationshipwith a female employee was discovered,in violation of the company’s recentlyadopted code of conduct. “That took alot of guts and they are better off for it,”says Elson. Such “courageous terminations”are a sign of a great board. TheBoeing board installed James McNerneyas CEO, who has done a good job of puttingthe aircraft company’s problems inthe past. Last year Boeing beat analystsestimates, delivered a record number ofplanes, and built a healthy backlog oforders for more.
James McNerney Jr., chairman and CEO;John H. Biggs, former chairman andCEO, TIAA-CREF; John E. Bryson, chairmanand CEO, Edison International;Arthur D. Collins Jr., chairman and CEOof Medtronic; Linda Z. Cook, managingdirector, Royal Dutch Petroleum; WilliamM. Daly, chairman of the Midwest regionfor JPMorgan Chase and former U.S. Secretaryof Commerce.; Kenneth M. Duberstein,chairman and CEO, The DubersteinGroup; General James L. Jones, retiredSupreme Allied Commander, Europe;Edward M. Liddy, chairman of Allstate;John F. McDonnell, retired chairman ofMcDonnell Douglas; Rozanne L. Ridgway,former assistant secretary of state forEurope and Canada; Mike Zafirovski,CEO, Nortel
2. Colgate Palmolive
In September 2007, Colgate received thehighest rating of 10 from Governance-Metrics International. It scores a 97 CorporateGovernance Quotient on ISS’s 100point scale. On three separate occasions,it has been ranked among the top 10boards in the United States by BusinessWeek. But perhaps it is its record of longtermperformance that is so compelling.The share price has appreciated by anaverage of 17 percent in the last twoyears, and more than 11 percent for thelast 5. Add in the roughly two-percentannual dividend, and the results are stellar.Nearly all of our governance expertsnamed Colgate a great board. Without aton of name recognition, Colgate definesthe work-horse board.
Ian M. Cook, president and CEO; JohnT. Cahill, former chairman and CEO, ThePepsi Bottling Group; Jill K. Conway,professor, Massachusetts Institute ofTechnology; Ellen M. Hancock , formerpresident of Jazz Technologies; David W.Johnson, chairman emeritus of CampbellSoup Co.; Richard J. Kogan, formerpresident and CEO of Schering-PloughCorp.; Delano E. Lewis, senior fellow,New Mexico State University; J. PedroReinhard, former executive vice presidentand CFO of Dow Chemical; Howard B.Wentz, Jr., former chairman of Tambrands;Stephen I. Sadove, chairmanand CEO, Saks Inc.
3. Goldman Sachs
The board of Goldman proved itself perhapsmore than any other company in thepast year by helping the Wall Street giantavoid the subprime trap that many of itscompetitors fell into. Allstate ChairmanEdward Liddy, who sits on the board ofGoldman, says the board demonstratedgreat leadership. “They stayed away fromsome of the more exotic financial instrumentsthat have caused others such losses,”he says. Of course you are only asgood as your last success, but right nowGoldman is the envy of Wall Street and itsboard—one of just two major banks alongwith JPMorgan to have a separate riskcommittee—is at least partially to thank.
Lloyd C. Blankfein, chairman and CEO;Jon Winkelried, president and co-COO;Gary D. Cohn, president and co-COO;John H. Bryan, retired chairman and CEOof Sara Lee; Claes Dahlbäck, senior adviser,Investor AB; Stephen Friedman, chairmanof Stone Point Capital; William W.George, professor at Harvard BusinessSchool and former CEO of Medtronic;Rajat Gupta, former managing director ofMcKinsey & Co. ; James A. Johnson, vicechairman of Perseus, LLC; Lois D. Juliber,vice chairman of Colgate-Palmolive;Edward M. Liddy, chairman, Allstate; RuthSimmons, president, Brown University
4. Tyco International
If you had a clean slate to build a boardfrom scratch, it might look a little like Tyco’s.After the Dennis Kozlowski nightmare ended,Ed Breen took over as CEO and his firstorder of duty was to ask all the board membersto resign. Breen brought in a newboard full of individuals with high qualificationsand reputations for integrity. Theboard, which upped Tyco’s GMI score froma dismal 1.5 in 2002 to a near perfect 9.5 in2006, oversaw a successful breakup of thecompany in an attempt to unlock value thatfinalized in July of 2007. (Another turnaroundstory that could be on this list isWaste Management.)
Edward D. Breen, chairman and CEO;John A. Krol, lead director, former chairmanand CEO of DuPont; Dennis C. Blair,retired Commander in Chief of the U.S.Pacific Command; Brian Duperreault, formerchairman of ACE Limited; Bruce S.Gordon, former CEO of the NAACP, andformer president of retail markets at Verizon;Rajiv Gupta, former chairman andCEO of Rohm and Haas; H. Carl McCall,former comptroller of the State of NewYork; Brendan R. O’Neill, former CEO ofImperial Chemical Industries; William S.Stavropoulos, former chairman and CEOof Dow Chemical; Sandra S. Wijnberg, formerCFO of Marsh & McLennan; JeromeB. York, former chairman of Micro Warehouse
5. Schering-Plough
Another example of a successful turnaround,Schering-Plough’s board broughtin Fred Hassan in 2003 and began a longprocess to transform the company. Theboard is stocked with current and formerCEOs of Fortune 100 companies. SaysMoodys: “The board’s commitment tonew leadership and a long-term turnaroundplan has paid off.” Recent investigationsinto the company’s Vytorin productwill certainly test the board again.
Fred Hassan, chairman and CEO; HansBecherer, former chairman and CEO ofDeere & Co.; Thomas Colligan, former vicechairman of client services at PwC.; C.Robert Kidder, former chairman and CEOof Borden Inc.; Philip Leder, Harvard MedicalSchool; Eugene McGrath, former chairmanand CEO of Consolidated Edison; CarlMundy, retired General, Commandant ofthe U.S. Marine Corps; Antonio Perez,chairman and CEO of Eastman Kodak;Patricia Russo, chairman and CEO ofLucent; Jack Stahl, former president andCEO of Revlon; Kathryn Turner, chairmanand CEO Standard Technology; Robert vanOordt, former CEO, Rodamco N.V. ; ArthurWeinbach, chairman and CEO of ADP