12/08/97 THE RESEARCH BEHIND THE RANKINGS

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THE RESEARCH BEHIND THE RANKINGS
Respondents to BUSINESS WEEK's survey manage more than $2 trillion in equity
Judging a board's effectiveness is no cakewalk. From the outside, it's impossible to tell what kinds of questions directors are asking about a company's strategy, succession, or governance decisions. Nor can investors know how beholden directors might be to the boss sitting at the head of the table.
So how did BUSINESS WEEK rate the best and worst boards? We gathered the views of the nation's largest pension funds, money managers, and experts on corporate governance. Then we measured each board's independence, quality, and accountability to shareholders by studying its composition, directors' stock ownership, attendance records, and other criteria.
-- Board Performance Poll. Louis Harris & Associates, the well-known pollster, mailed a questionnaire to 371 of the largest money-management firms and corporate, public, and union pension funds. In addition, it surveyed 50 of the nation's leading governance experts, including academics, attorneys, and activists. Of 421 surveys sent out, 103 were answered--a response rate of 24.5%. The responding money managers and funds manage more than $2 trillion in equity.
The survey asked respondents to identify public corporations with the most and least effective boards. The company cited most often for having an effective board got 25 points; the company most cited for an ineffective board got -25. Then respondents were asked to grade the boards on a scale of 0 (poor) to 10 (excellent) in four categories: shareholder accountability, quality of directors, independence, and corporate performance.
-- Governance Guideline Analysis. The 224 companies singled out as having either the most or least effective boards then got another round of scrutiny. BUSINESS WEEK measured their boards against a set of guidelines, or ''best practices,'' commonly articulated by governance experts. For boardroom data, we examined companies' latest proxy statements. Points were awarded to boards and directors who met the criteria. Points were subtracted when boards and directors fell below the standards.
To judge independence, a board scored points if it has no more than two inside directors; no insiders on its audit, nominating, and compensation committees; no outside members who directly or indirectly draw consulting, legal, or other fees from the company; and no interlocking directorships (CEOs who sit on each other's boards). If outside directors meet regularly without the CEO, a board got extra points.
To assess accountability to shareholders, a company scored points when all of its directors own a minimum of $100,000 of stock. That helps align their interests with those of investors. More points were awarded if a company does not offer pension benefits to its directors--a benefit many believe makes directors less likely to challenge the CEO--and if the board stands for election every year. Boards that fail to evaluate their performance also lost points.
To measure director quality, a company was awarded points if its fully employed directors sit on no more than three corporate boards and its retired directors on no more than six. More points were awarded if a board has at least one outsider experienced in the company's core business and at least one CEO of a company of similar size or stature. Additional points were scored if all directors attend 75% or more of meetings or if a board has no more than 15 directors.
-- Composite Ranking. To produce an overall ranking, the raw scores from the poll and the board analysis were combined. A maximum of 100 points could be scored, half based on the poll results and half on the analysis of proxy data.
Campbell Soup Co.'s board topped the list for the second year in a row with 87.1 points overall. It garnered 43.1 points from the Harris poll of investors and board experts and tallied more votes for having the best board than any company other than General Electric Co. and Coca-Cola Co. Its scores for accountability, quality, independence, and corporate performance were also among the highest. Then, Campbell picked up 44 points in the analysis portion of the ranking, pushing it to the pinnacle once again.

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