| BUSINESSWEEK ONLINE : JANUARY 24, 2000 ISSUE | ||||||||
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| SPECIAL REPORT -- CORPORATE GOVERNANCE
Good and Bad Boards by the Numbers Why some got extra credit, some got demerits Determining the effectiveness of a board of directors is hardly foolproof. What goes on behind the boardroom doors is known only to the directors at the table. So how does BUSINESS WEEK judge Corporate America's boards? In the absence of a front-row seat, we gather the views of the nation's largest institutional investors as well as governance experts. Then we measure each board's independence, quality, and accountability to shareholders. We added one new change in this third board ranking. As audit committee performance has become a key governance issue, BUSINESS WEEK began to assess whether that important panel was properly composed, or met often enough, to do its job well. BOARD PERFORMANCE POLL. Harris Interactive Inc., the well-known pollster, sent questionnaires to 457 of the largest money-management firms and corporate, public, and union pension funds. Harris also surveyed 65 of the nation's leading governance experts. Of 522 surveys sent, 99 were answered, a response rate of 19%. The money managers and funds manage over $1 trillion in equity. The surveys asked respondents to identify the most effective and least effective boards. The company cited most often for having an effective board got 25 points, while the company gaining the most mentions for having an ineffective one lost 25 points. Up to 25 more points were awarded or subtracted on the basis of grades respondents gave in four categories: shareholder accountability, quality of directors, independence, and corporate performance. GOVERNANCE GUIDELINE ANALYSIS. Next, we measured companies singled out for having either the most or least effective boards against a set of guidelines, or ''best practices,'' identified by governance experts. For boardroom data, we examined companies' proxy statements. Points were given to boards and directors who met the best practices criteria. Points were subtracted when they 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 one another's boards). If outside directors regularly met without the CEO, a board got extra points. To assess accountability to shareholders, a board scored points when directors own a minimum of $100,000 worth of stock. That helps align their interests with those of the shareholders. More points were awarded if a company does not offer pensions to directors and if the board stands for election every year. Points also were given to boards that met at least four times a year and those whose audit committees met at least three times annually. Boards that assess their own performance also won points. To measure board quality, BUSINESS WEEK awarded points if fully employed directors sit on no more than three boards and retired directors on no more than six. More points were given if a board has at least one outsider experienced in the company's core business and at least one outsider on the audit committee with a financial or accounting background. A board lost points if any of its directors failed to attend at least 25% of its meetings. 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. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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