Building an Exceptional Board

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"They are living organisms," adds McGurn. "A great board is made by the care and feeding of the board by the board itself. How do they do succession planning? Do they complete regular and robust evaluations? Are the right people in the committee chairs?" he asks. "You need the right structure and the right people. You can't have a great board without both of those things."

Charles Elson, a professor and director of the Weinberg Center for Corporate Governance at the University of Delaware, says that there are many great boards that fly under the radar. "There are great boards you never hear about because they very quietly and professionally address the problems that crop up and they take care of them before they develop into big problems." A board that Elson thinks fits this mold is Colgate-Palmolive.

Ira Millstein, a senior partner at law firm Weil, Gotshal & Manges who has counseled numerous boards on issues of corporate governance, including General Motors, Disney, and Westinghouse, says it is nearly impossible to tell a good board from the outside looking in. "You have to observe them in action," he says. "A board might look terrible to an outside observer because they don't have enough independent directors, but when you get in the boardroom, you find that they work great together."

Good Governance

While good governance structure doesn't guarantee a great board, it can help improve the chances that a board will function well. Marshall says top-notch boards need two essential elements, independence and a good ownership structure, to have high governance standards. "The degree of independence from management is absolutely first on the list," says Marshall. "You can't have a board that's focused on oversight and effective checks and balances of management power unless it's an independent board."

Elson agrees that corporate governance scores aren't essential, but that measures of independence are important. "They don't predict corporate performance," he says. "But the higher the score, the more likely a board will act as a circuit breaker and hold management accountable."

Millstein says that while it's difficult to identify great boards, there are some hallmarks of excellence:

Does it have independent leadership? A separate independent chairman is almost essential, he says. Second best is a lead director.

Does it have a meet-alone policy? Non-executives should meet alone as a matter of policy, not just in an emergency, he says.

Does the board appraise and evaluate itself? Millstein says a good board isn't afraid to do a self-evaluation where the members comment on each other's abilities and performance.

Does the board deliver value to shareholders? "If you want to determine if the board is performing well you have to look at if they are adding value," he says.

Does it have quality directors that are not overboarded with other jobs? "You want to see people on the board who have the experience, not a golden tiara of a board with diamonds and rubies that don't know the industry," says Millstein. "You don't want show-piece directors. It is more important that they know the business and have time to devote to it."

How does the board deal with compensation? Is the CEO's pay package filled with too many shortterm incentives? He also looks at the compensation consultants to see if they are independent or if they are advising management on other things.

Overcoming Adversity

Many board watchers say that boards that have succeeded in the face of adversity end up better for it. "Adversity makes for better directors," says Marshall. He says The Corporate Library keeps a list of directors who have been through scandals, bankruptcies, and other problems. To be sure, in some cases the board looked the other way and the adversity developed out of the existence of a weak board. But in many other cases, the board rose to the challenge, cleaned house, and put the company on solid footing.

"A great board is one that acts quickly to terminate a poor-performing CEO," says Elson. They might also move against a CEO that runs into a personal problem that creates a distraction for the company. One such situation he cites is the board of Boeing, which Elson says acted courageously to oust former CEO Harry Stonecipher for a violation of the company's code of conduct.

Millstein agrees that good boards are ones that have been tested: "I love boards that have gone through adversity," he says. Governance experts say that the sign of a good board is also one that doesn't overreact to adversity. "You don't want the board making knee-jerk reactions," says Elson. "A great board approaches a difficult situation with calm and clarity and follows due process."

Click here to see examples of great boards.

Provided by Directorship—The Leading Publication for Boardroom Intelligence