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The National Association of Corporate Directors' new guidelines won't tolerate inattentive, passive, uninformed board members

Only a year ago, Donald S. Perkins was being feted as director of the year by the National Association of Corporate Directors at a lavish dinner in Washington, D.C. The former chief executive of the supermarket chain Jewel Cos. and member of nearly a dozen different boards had been honored as the director who had done the most to advance and strengthen the principles of good corporate governance.

Now, the same organization that awarded him a trophy is effectively saying that Perkins fails to meet the new standards of professionalism in the boardroom. A special panel of 30 governance experts convened by the association issued a sheaf of guidelines on Nov. 12 that are likely to dramatically alter the composition of Corporate America's boards. Among other things, the influential group recommends that senior executives serve on no more than one or two boards besides their own and that retired execs such as Perkins hold no more than five or six public-company directorships. The NACD's recommendations, which often form the basis for shareholder resolutions at many major companies, should have a big impact. The group's report last year on director compensation led well over 100 companies to begin paying directors in stock and to eliminate their pensions.

Perkins, 69, who says he has missed just two out of 150 board and committee meetings so far this year, laughs aloud at the obvious irony. ''I shake my head when people say you shouldn't serve on so many boards,'' he says. ''There is no substitute for having experience doing this.''

Experience, however, may no longer be enough. As institutional investors demand more than quiet oversight from boards, a new set of expectations is emerging for directors, along with demands for a new breed of activist in the boardroom. ''It is no longer enough for boards to be passive advisers and questioners,'' says Ira M. Millstein, senior partner at Weil, Gotshal & Manges and a governance maven. ''Boards must also be active participants and decision makers.''

The rising expectations mean that a seat in the boardroom will require much more time and commitment. It's one reason General Electric Co. Chairman John F. Welch refuses all invitations to sit on other company boards and insists that all of his senior executives do the same. He's not alone. The chief executives at Eastman Kodak, Intel, and Walt Disney all sit on only one board: their own.

KNOWLEDGE. Moreover, fellow directors are going to be far less tolerant of inattentive colleagues who come to meetings without solid preparation, without fully understanding the intricacies of the company's business, or even without the simple ability to read a balance sheet. Indeed, perhaps the most shocking element in the new NACD report was that the commission's members, who included a good number of high-profile directors, felt the need to stipulate that directors should be ''financially literate.'' According to the report, ''directors should know how to read a balance sheet, an income statement, and a cash flow statement, and they should understand the use of financial ratios and other indices for evaluating company performance.'' Imagine having directors who can't tell the difference between return on equity and return on assets.

Yet it's been even worse than that. ''Look what happened to IBM,'' says John M. Nash, president of the NACD and a member of the Commission on Director Professionalism. ''Four or five of those directors didn't ever use a personal computer. And at General Motors, the board was in corporate denial for years as the Japanese gained market share. The expectations are changing because the shareholders are demanding more.''

So are some of the better directors. They privately tell stories of inattentive colleagues who talk on cell phones or work on other business during the most critical part of board meetings. ''I've seen directors come late and leave early,'' says one. ''Or they don't show up at all.''

STEP ASIDE. More serious evaluation of directors' performance already is leading to something that had been virtually unheard of before: a director losing his or her job. A recent survey by Korn/Ferry International of more than 1,000 directors and chairmen found that 54% of the responding companies recently asked a director to resign, most often because of poor performance. Directors themselves, the survey showed, believed that no one should serve on more than an average of 2.6 boards.

Being a fully informed and active director requires much more than mere attendance at board and committee meetings. It requires almost daily attention to a company's business, including reading all the important news about the company and its industry, from news articles to analysts' reports. It requires staying in close touch with senior management, even outside the monthly or quarterly board meetings. And it requires that directors fully absorb the company's financial documents and reports--not perform a cursory review of them on an airplane flight--in advance of meetings.

Directors, say some governance experts, should budget a full day's preparation for every board or committee meeting. If they are chairing a committee, they may need to spend two or three days preparing for the session. That kind of commitment of time and energy is necessary, according to governance experts, to provide the directors with a foundation to ask more challenging questions of the chief executive. ''A great director is a fantastic thing to have,'' says John M. Coleman, senior vice-president for law at Campbell Soup Co. ''World-class directors can ask questions in a nonoffensive, nonleading way, and with those questions they can defrock a stupid idea--or, more commonly, sharpen or make better a good idea.''

PROACTIVE STANCE. Above all, governance experts say, strong and well-informed boards should be involved with management in the setting of strategy--before the fact. ''The worst mistake boards make is thinking their role is to monitor management performance,'' believes John A. Pound, a Harvard University professor and governance expert. ''That is passive and backward-looking, and it gives management the room to hang itself.''

How to more fully engage directors? ''Board members have snapshot views of a company for four hours on a monthly basis,'' says Michael R. Bonsignore, CEO of Honeywell Inc. ''So it's really important to maintain a sense of continuity in the interim.'' Bonsignore attempts to bridge the time between meetings with personal contact and correspondence. Home Depot Inc. goes so far as to require its directors to visit eight stores every quarter to get direct feedback from customers and employees. Other companies, including Avon Products Inc. and Chrysler Corp., are having board members meet directly with major institutional investors.

That's a good idea for two reasons. First, directors are, after all, supposed to be the representatives of those shareholders. And second, such meetings would quickly expose the weak links on a board, says John B. Neff, who for years managed the Windsor Fund and is now a director at Chrysler. Neff believes that board members should meet annually with their company's 10 to 20 largest shareholders. ''It would take the curtain down once a year,'' he says. ''Those exchanges would drive away the weaker members of the board.''

As a company's needs change, it should also be prepared to recruit new directors with more desirable skills and to ask for the resignation of directors with expertise it no longer requires. Motorola Inc.'s board, for example, recently recruited Procter & Gamble Co. CEO John E. Pepper as a direct result of the tremendous growth in its cellular-phone business. ''As that business exploded, the company found itself back in the consumer-product business, and the board recognized it needed someone who understands consumer marketing and mass merchandising,'' says B. Kenneth West, a Motorola director.

Not to be overlooked is the matter of setting limits on how many board seats a director can hold--it's a start toward achieving professionalism in the boardroom. The NACD panel also urged that corporate boards consider establishing limits on the length of service by directors so that new members can provide fresh ideas and critical thinking (table). It recommends that every board establish an independent committee of outside directors to oversee governance responsibilities and evaluate the performance of directors. ''If these changes occur,'' says Nash, ''companies will be managed better, shareholders will be happier, and directors will no longer be maligned for not doing their jobs.''

A fair number of board members are professional directors in one sense: Serving on a wide variety of boards has become their sole occupation. But in the eyes of the NACD and of increasingly demanding shareholders, professional directors are one thing--and director professionalism is another thing altogether.

By John A. Byrne in New York

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Updated June 14, 1997 by bwwebmaster
Copyright 1996, Bloomberg L.P.
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