A 'blue-collar approach' to board effectiveness.

Given the elevated level of much of the governance debate, it would do well to take under advisement the counsel of Lao-tze: `Govern as you would cook a small fish: Don't overdo it.'

Shareholders, management, employees, and the public owe a great deal to the governance movement for reforms that have set the stage for the continued strength of the corporation in the 21st Century.

While a broad consensus is evolving on what constitutes effective governance, American business is as pluralistic as American society, and for that reason we should be wary about rigid rules that are designed to fit all companies. We should continue to debate the application of principles. A conclusive link between governance principles and performance has not yet been universally established, but, in the meantime, investors should view effective governance as a form of inoculation: It sure won't hurt, and it might help.

Some companies outside of the consensus will do well; some that are well-governed will face difficulties. What all this is about is improving the odds and, more profoundly, maintaining a social contract that allows businesses to exercise a great deal of power in society. For that social contract to be sustainable in the long term, there has to be a basic belief by shareholders, government, and others who are concerned that corporations are governed in a way that makes them appropriately accountable to shareholders and other stakeholders.

Let me review this consensus on governance, which revolves around three principles that should form the foundation of a well-governed corporation:

* First, shareholders exercise the vote attached to their stock to elect the board of directors which has broad responsibility for directing the affairs of the corporation. For this basic principle to work, directors must be independent of management, otherwise they cannot select and monitor management An independent board is the linchpin of the American system of corporate governance. But independence must be coupled with effectiveness if the governance system is to be dynamic rather than static.

* Second, the CEO and other corporate executives work under the authority of the board. That authority is what legitimizes the actions of executives. It should also be somewhat humbling for CEOs, and most of us would benefit from a good-sized dose of humility. If the board is not fully informed, not given time to deliberate on the long-term best interests of the corporation, and not treated with respect by executives, those executives are undermining the very source of their power.

* Third, the board must actively participate in developing long-term strategy and financial goals for the enterprise and review and monitor management's progress toward these goals. A balance between a focus on tomorrow and an appropriate level of concern about today is the challenge. If for too long directors have been too removed from participation in strategic decisions, the converse is too much involvement at too great a level of detail. Governance expert Ira Millstein has observed, "...the genius of the corporate system in the United States is innovative, risk-taking managers capable of acting quickly and decisively even in ambiguous circumstances...." Micromanagement by boards will undercut the strength of the companies they govern. While monitoring of senior management is one component of the board's work, monitoring is not second-guessing. Management runs the company every day. A management that looks over its collective shoulder for direction at a board that micromanages will not be effective.

The basic model, with substantial room for variations, will work for most companies. The danger is that we end up with a series of rigid rules. We need continuing debate on specifics, such as whether to have a mandatory retirement age for directors, how many insiders should serve on the board, whether the idea of a lead director works for all companies, what the appropriate level of director compensation and stock ownership is, whether term limits make sense and, if so, how long the term should be, and other governance issues. We also need to recognize that what makes sense for one company may not be appropriate for another. Governance is about a broad consensus with substantial variations in application.

Next steps

If indeed broad consensus is developing around the principles of corporate governance, then what's next? As just noted, debate over specific implementations of the model is a healthy next step. Another important next step is to address how to make an independent board more effective. This is the trench warfare of governance. It requires conscious work by each company's board to create its own path toward day-to-day effectiveness. Some small steps can make big differences.

At this juncture in the governance movement, boards need to step back and ponder how they work. just as individuals struggle to become more self-aware in order to grow personally, boards must be conscious of how they function. Each board is different and each will approach its work based on its own traditions and where the board fits in the history and culture of the specific company. What I think is most important is the very act of focusing on governance in a thoughtful and persistent way.

With that in mind, what briefly follows are merely a few observations on board effectiveness rather than a formula, if there could ever be such a thing. Experimentation, communication, and dialogue should all be part of the process of developing the best practices for effective board governance. Given the elevated level of much of the governance discussion, consider this a blue-collar approach.

Agendas and time allocation

I begin with agendas -- a blue-collar topic of corporate governance if there ever was one. I have observed boards where the agenda is so crowded that there is no time to deliberate on broad strategic issues. Or, the big questions are left until the end of the meeting. Boards should take time to step back periodically and ask. How are we doing on agendas and time allocation? Is precious time allocated to the right issues? Are we asking management for the right information? Are we communicating with the chair or other agenda-setter?

One way of getting the board's work done more efficiently and effectively -- and, at the same time, tapping the expertise of individual directors -- is to allocate more of the work to well-structured committees. For example, committees dealing with strategy and executive personnel can spend in-depth time on strategic direction for the company and on executive development, reporting back to the full board and helping the chair direct the allocation of board time.

Greater board effectiveness requires directors to be informed, and independence assumes something other than total dependence on management for information. There are models of this evolving in real time. Over the past 10 or so years, for example, compensation consultants have become a fixture in many companies. First working directly with human resources departments as sources of information that the HR department transmitted to the board, consultants are now moving toward a new direct relationship with the board compensation or personnel committee. While the balance between advising management and advising the board can be tricky, a direct link to an independent and skilled compensation consultant can make a huge difference in the effectiveness of a board compensation committee.

Committee effectiveness

Audit committees could work more directly and perhaps in a less stilted way with a company's auditors. If a nominating committee is really going to be responsible for recruiting new directors who are not chosen by management, it needs in many cases direct access to a recruiting resource.

Any time a board goes outside for advice and perspective there is some degree of threat to management. If the board is too aggressive in this regard, it can undermine management and harm the company. A strategy committee regularly seeking outside advice on issues of strategic direction would be usurping the role and responsibility of the CEO. Yet, there may be times when it is appropriate for a board committee to get an outside perspective on a strategic issue.

Outside experts advising board committees can be a minefield. But effective boards cannot rely solely on management The best approach is a cooperative one where management and the board work together to get the best and most relevant expertise. But board committees have to learn to ask for information -- from inside and outside.

To ensure fresh thinking, diverse perspectives, and new energy and expertise, boards need to be in a constant, but systematic, state of self-renewal. Bringing in new directors and rotating others off the board is an opportunity to create a more diverse board and to ensure its ongoing vitality.

Getting any new director up to speed on a company's business requires a systematic approach to his or her orientation. A well-designed program to introduce a director to the people and issues he or she must deal with can go a long way to making the director more effective quickly.

A director who has not served on a public board before will need additional preparation and support. Some business schools and the National Association of Corporate Directors, among others, are starting to provide courses and workshops to help meet this need, but making a first directorship more productive for the company and the director calls for more than coursework. A practice suggested by one of Ceridian's directors, Paul Walsh, CEO of Pillsbury and a director of its parent company, Grand Metropolitan, is a mentoring relationship that pairs insiders and outsiders on the Grand Met board. Under this buddy system, each pair gets together once a quarter, one on one, to exchange perspectives and information. Such a relationship could work for new directors.

Since there is a strong trend in American companies away from having many insiders on the board, this concept could be broadened to an outside director/senior executive relationship -- perhaps with annual rotation. Directors would get to know senior officers better and the board's understanding of the company would be enhanced. Could this backfire? Could this be seen as another threat to the CEO? Perhaps. It would need some tender care. But, let's be clear: The governance emphasis does represent a modest but palpable shift in the balance of power in a corporation from the CEO to the board.

Firsthand contact

At Ceridian, we also make sure that directors have regular firsthand contact with employees through visits to facilities, dinner meetings with high-potential employees, roundtable discussions with employees with no management present, and participation in a variety of employee events. The senior management team meets with the board for a two-day strategic review once a year and on other occasions as well. The board committees also provide an opportunity for directors to have close contact and access to other senior executives.

A final observation on board effectiveness relates to the important and controversial subject of board self-evaluation. There are a number of different approaches being tried. Particularly interesting and important examples are recent programs at BankAmerica, Campbell Soup, and Beckton Dickinson. Evaluation of the board as a whole and of individual directors seems to me to be critical to keeping the board focused on improving its effectiveness. This process could encompass the regular evaluation of the CEO and utilize contemporary evaluation methodologies such as 360 [degrees] feedback. Using a third party outside of the company to manage the evaluation process could improve it significantly by promoting confidentiality as well as objectivity and allowing a mechanism for meaningful feedback.

Squarely centered

We need to remember that the burden of corporate governance rests with the board of directors. Individual directors -- independent, informed, and effective -- form the keystone of the governance process. All we do to reinforce and promote these characteristics, not just in the proxy season but every day, will contribute to building shareholder value over the long term.

The continuing debate over governance principles and models contributes ultimately to the vitality of American business and the welfare of society. But I offer one caveat: Avoid the fate of the quality movement, which nearly codified itself into irrelevance.

In his book, The Death of Common Sense, Philip Howard catalogued the extremes to which the American obsession for regulation, legislation, and litigation have led. I trust that the corporate governance discussion will evolve differently -- that it will not be trivialized, that it will remain squarely centered in common sense and focused on the creation of shareholder value.

Through a the advice and discussion, we need to be guided by the words of that eminent governance expert, Lao-tze: "Govern as you would cook a small fish: Don't overdo it."

RELATED ARTICLE: The Ceridian Corp. Board

Ceridian is a growing information services company created five years ago as a result of the separation of Control Data Corp. into two companies. One retained the Control Data name and systems legacy while Ceridian began to build a diversified portfolio of services businesses. Today, Ceridian businesses are leaders in four markets: human resources, transportation, gaming, and marketing information.

In 1992, we knew that building Ceridian would be a difficult task -- each business needed to be turned around. Because Ceridian had in its immediate past the difficult shareholder relations history of Control Data, we needed to convince existing and potential shareholders that even though there would be potholes on the road to growth and stability, building value for shareholders was the most important objective of management So, establishing a governance model that ensured an independent, well-informed, and effective board of directors who could advise, monitor, and help management was critical to the future of the company because it would be a way to build confidence -- to reassure shareholders about the long term.

Ruth M. Davis President and CEO Pymatuning Group Inc.

Richard G. Lareau Partner Oppenheimer Wolff & Donnelly

Ronald T. LeMay President and COO Sprint Corp.

George R. Lewis President and CEO Philip Morris Credit Corp.

Charles Marshall Retired Vice Chairman AT&T

Lawrence Perlman Chairman and CEO Ceridian Corp.

Corole J. Uhrich Executive Vice President, and President, Commercial Imaging Polaroid Corp.

Richard W. Vieser Retired Chairman, President and CEO Lear Siegler Inc.

Paul S. Walsh Chief Executive Officer Pillsbury Co.

Lawrence Perlman is chairman and chief executive officer of Ceridian Corp., an information services company based in Minneapolis, Minn., with revenues of $13 billion. He has been chairman since 1992 and CEO since 1990. He is a director of Seagate Technology Inc., Valspar Corp., and Computer Network Technology Corp. The Ceridian board was cited by Business Week magazine in its 1996 inaugural list of "The Best Boards." This article is adapted from a speech Mr. Perlman gave to the Council of Institutional Investors in September 1997.