Magazine

The Board


When Enron collapsed, many pointed an accusing finger at the board, and rightly so. Rarely has there been a management team so intent on deception or a group of directors so sound asleep. But accountability is a two-way street. It's not enough that the board keep a watchful eye on management. Just as important, the shareholders must keep an eye on the board.

That's difficult to do. Shareholders aren't invited to board meetings, individual board members rarely speak out, and when they do it's usually to trumpet the company line. The fact is investors know practically nothing of what goes on behind the closed doors of the boardroom. They must instead rely on directors to represent their interests vigorously. To make sure that happens, changes are badly needed.

In recent weeks, Congress, the White House, federal regulators, and the stock exchanges have all proposed reforms, including some that would require CEOs to vouch for the accuracy of company disclosures and disgorge personal profits from corporate wrongdoing. But the reforms would not guarantee the thing in greatest demand and shortest supply: accountability of all directors. "They're not going far enough," says Peter C. Clapman, chief counsel for TIAA-CREF, the world's largest pension system. "They're underestimating the total needs of a better corporate governance system."

To ensure accountability, shareholder resolutions that pass by a majority of the shares voted for three consecutive years should be binding. Today when a resolution passes, it is frequently ignored. At Bristol-Myers Squibb Co. (BMY), for example, a proposal to hold annual elections for directors has won a majority of votes cast for five straight years. But the company has never acted on it, claiming that it failed to get a majority of all the shares outstanding. Making resolutions binding would make companies profoundly answerable to shareholders.

In addition, the stock exchanges, which set many of the governance rules companies must follow, should come up with meaningful regulations and enforce them. At a minimum, the exchanges should limit every board to no more than two insiders, require every board to appoint a lead director who can convene the board without the CEO, assign only independent outsiders to the audit, compensation, and nominating committees, and restrict directors from serving on more than three boards. Companies such as Disney (DIS) have begun making such changes.

Other reforms could help to make boards more inclined to act ahead of a crisis. A ban on stock sales by directors for the duration of their terms would encourage them to blow the whistle on management when necessary without fear of the short-term price declines that may follow. Mandatory term limits--requiring directors to resign after 10 years or at age 70, whichever comes first--would prevent board members from becoming entrenched.

Even more important, the exchanges should require every board to conduct an extensive annual self-evaluation, involving both a review of board policies and an anonymous appraisal of individual directors. Some boards--including Kmart (KM), Campbell Soup (CPB), and Occidental Petroleum (OXY)--already do a version of this, but they need to go further. The findings need to be made public, and every three years the board member with the lowest ratings should be required to resign. Tough medicine, but a bruised ego is a small price to pay for better governance.


Reviving Keynes
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