Boards on Trial.

The best boards evaluate their CEOs -- and themselves -- in hard-nosed fashion. The worst are asleep at the switch, ineffective, and weak. Here are our picks for this year's five best and five worst and what each did, or didn't do, to make the grade.

When we first approached this task, nine years ago, it wasn't hard to find companies with weak and ineffective boards. They often came hand-in-hand with dominant or heedless CEOs whose mistakes were left unchecked and with dormant corporations clinging stubbornly to an outmoded past. It was comparatively easy to cherrypick some progressive boards who stood for better corporate governance. They were innovators in diversity, director independence, board structure, and endorsing shareholder interests.

A great deal has changed since then. But, as the French say, "Plus ca change, plus ca meme chose." The more things change, the more they stay the same.

Dramatic improvements in corporate governance have swept the American economic system in recent years. Board actions considered heretical a decade ago are now routine. Today's boards evaluate their CEOs in hard-nosed fashion and, when one doesn't measure up, he or she is replaced in short order. They evaluate themselves as well, and most directors now seem to take their governance responsibilities seriously.

A lot of credit goes to the S.E.C. and Arthur Levitt. Today's proxy statements are far more specific and revealing than those of the '80s and early '90s. The facts of executive and director compensation are now clearly laid out. Board committee structures are described. Details of executive contracts are disclosed. The audit committee procedures have been expanded and stiffened. A do-nothing or captive board has difficulty hiding from its shareholders, the press, and prospective investors.

Credit also goes to the enlightened CEOs and directors who voluntarily put through so many corporate governance improvements over the last few years without regulatory reforms. Designed to make the operations of boards more effective and efficient, these have been the most productive efforts of all. Yet, they've made our task of picking the best and worst boards more complex.

Our hallmarks of good corporate governance (see box, page 46) have changed little over the years. But while many more companies approach our qualifications without great difficulty, merely going through the motions of instituting a corporate governance procedure does not, in itself, make for a good--much less a best--board. A good board is developed through years of patient recruiting and internal give-and-take as the deliberative processes of corporate governance are refined. As viewers of the passing corporate scene, we can't go into the boardrooms and personally witness how this evolution takes place. But we've been in enough board meetings to understand what's happening. And when we read or hear about a company doing exciting things in corporate governance, we take a closer look.

Over the years, we've also been able to point the finger at a number of companies--such as Cendant, Rite Aid, Conseco, Disney, and Apple--well before they were forced by their shareholders to make major corporate governance changes.

On the whole, the state of American corporate governance health is much improved. Our reading and research, plus the responses collected by Korn/Ferry International in their recent survey of directors, give us confidence that stockholders are better served in American boardrooms than anywhere else in the world. The crusade continues, however, as thousands of new firms, CEOs, and directors are anointed each year. With today's swelling ranks of Internet companies and huge global expansion, the task of installing good corporate governance systems remains extremely challenging. The learning process is a long one, but it's worthwhile.

The Five Worst Boards

WHY ARE some boards asleep at the switch? Why do they fail to notice red flags? To take action when the handwriting looms large on the wall, readily readable to shareholders, analysts, and the media?

Four of those singled out as this year's worst are boards of companies that posted poor performance for at least two years. Two of the four stumbled under new CEOs. The third has a seesawing performance history coupled with a loss of credibility and a reputation for excessive CEO compensation. The fourth has a long record of poor performance under the almost total control of a single family. The fifth company, by contrast, enjoyed enviable profitability and growth, yet shows early rumblings of investor unease with its corporate governance and implied long-term prospects.

We believe our probing of these weak boards--and the factors that cause boards to sleep on the job--can serve as a useful lesson to those directors and CEOs alike who are committed to effective boards and good governance.

Toys 'R' Us--Tremors at the Top

1. After many years of impressive performance, Toys 'R' Us has fallen on hard times. The return to stockholders has declined dramatically both in absolute values and as compared to the S&P 500 and the S&P Retail Composite Index.

Two top management shake-ups occurred in the past three years. A new CEO was named and a new president/COO brought in during early 1985. The new president resigned in March of 1999, while the new CEO held on until August of 1999. The company's chairman then assumed the office of interim CEO, and served in that position until January 2000, when a new CEO was brought in.

Where was the board during this period? The answer is unclear. It's worth noting that shareholders were not equally oblivious. A stockholder resolution presented at the last annual meeting makes evident the displeasure felt by the stockholders over many years and recommends drastic action. The board's management plan and strategy is no longer acceptable, it claims, and it urges sale of the company to the highest bidder.

The board's composition provides one clue to its inaction. It now consists of eight members, since two opted not to stand for re-election and the board chose not to fill their positions. Of the remaining eight, three are insiders. Two are private investors or investment managers, one a university president, and one an independent consultant. Only one independent member of the board has hands-on management experience in retailing, serving as president and vice chairman of Federated Department Stores 12 years ago.

The nominating committee had three members (one of whom is not standing for re-election) and met only once in the past year. The corporate governance committee consisted of three members, but the board has decided not to replace one of its retiring members, so it will soon be a two-person committee. It also met just once in the past year. Obviously there's little concern about the activity--or lack thereof--of the board.

The compensation committee held three meetings and took five actions by unanimous written consent. It has targeted total compensation packages to fall between the 50th and 75th percentile of peer companies. This seems astoundingly optimistic in view of performance to date.

The company also found an alternative to repricing for underwater options, "a voluntary option exchange." Options priced at more than $22--current prices range between $9 and $19--could be exchanged for restricted stock, which has "economically equivalent" value as computed using a "modified Black-Scholes calculation." It also resorted to awards of restricted stock in an effort to retain two valued executives. Simple options are apparently not very effective "golden handcuffs" in the present company climate.

The new CEO, as of January 2000, is the former chairman and CEO of FAO Schwartz, and has announced some sweeping reforms. We wish him the best of luck and some positive upgrading in board quality.

Humana--Declining Performance, Escalating Executive Pay

2. Humana, which also showed poor results after many years of sector leadership, is also going through drastic top management changes and has brought its retired CEO back to take charge of the transitions. Its performance graph shows a steady decline in the past five years, steepest in the past two, both in absolute terms and as compared to the S&P 500 and its peer group.

Chairman David A. Jones is a formidable figure. He has served as chairman since the company's founding more than 30 years ago, and was also its CEO until the end of 1997. He owns 5.4 percent of the outstanding stock and has represented the company in many public and governmental arenas. His son, David A. Jones, Jr., serves as vice chairman of the board. Jones Jr. received a retainer of $30,000 as reimbursement for office expenses and a grant of 40,000 options.

When Jones stepped down as CEO in 1997, a new president and CEO, as well as a new VP and chief medical officer were brought in. Neither lasted long. The CEO resigned in August of 1999, and the chief medical officer left in February 2000. Jones was appointed interim CEO in August of 1999, and he proceeded to organize an Office of the Chairman to assist him. After a six-month search, one of the three members of that office was named president and CEO.

All three members were well rewarded, receiving a cash bonus of between $175,000 and $250,000, plus options for 100,000 shares in addition to the annual grant of 30,000 shares. While Jones did not receive any additional pay for his six-month service as interim CEO, his generous compensation package as chairman encompasses a consulting retainer of $200,000, plus stock options, executive committee member service fees, as well as a retirement plan award of $60,000 per month. Upon his retirement as CEO, in '97, Jones was awarded $2.5 million for his "leadership in guiding the company through a period of strategic management changes."

The board's passive response to declining performance may stem from deference to a much-admired leader. Its eight members consist of three insiders, two "academics" (a distinguished physician and a university president), one private investor, and only two retired senior executives. Each of these three serve on six additional boards.

Board committees include a nominating and corporate governance committee, which consists of two independent directors and the vice chairman, and met just once in the past year.

American International Group (AIG)--Big Insider Control

3. AIG is a company that has maintained a truly remarkable record of growth and profitability for over two decades. Its performance graph for the past five years shows accelerating improvement, with growth outpacing both the S&P 500 and its peer group in the past two years. The firm has been a Wall Street darling for many years, as has its CEO "Hank" Greenberg. Despite this proud record, three stockholder resolutions presented at AIG's last annual meeting denounced its corporate governance practices.

Major criticism focuses on the composition of AIG's board of directors. In simple body-count it's a throwback to an earlier--almost prehistoric--era. Of 18 directors, 10 are insiders, being senior executives of AIG and its subsidiaries. One of the insiders, the president and COO, is the son of the CEO.

Of the eight outside directors, two can be classified as "beholden." One is a lawyer whose firm serves the company; the other is a well-known trade consultant whose firm is retained by AIG. That leaves only six truly independent directors. Two of these are distinguished "academics"; four are retired executives.

The board committee structure is interesting. While there's no nominating committee, the company notes that "although the executive committee formally serves as a nominating committee, in practice the board serves as a committee of the whole in determining nominees for membership." There are currently six members on the executive committee, four of whom are insiders (including both CEO and COO).

Top executives enjoy an impressive list of perks, including cars and drivers, use of a yacht, corporate aircraft, club memberships, recreational opportunities, and clerical and investment management services. A series of complex arrangements with two corporate entities--Starr and SICO--which the SEC treats as "parents" of AIG, make it difficult to evaluate total executive pay. Certain senior executives of AIG serve as directors and officers of SICO, Stan, and Starr Foundation, and receive compensation for services rendered. These duties are "not considered to detract materially from the business time available for AIG matters." No amounts are disclosed.

AIG's latest proxy frustratingly fails to disclose several items, such as that certain outside directors also serve as directors of various subsidiaries, and receive fees for their service in this capacity," without any amounts being specified. Disclosures of payments to beholden director's firms also fail to specify the amounts involved. Even total director fees are not fully disclosed.

At its last annual meeting, five stockholder resolutions were presented. Three dealing with the selection and composition of the board were submitted by two religious orders, a union retirement plan, and some independent shareholders. Management urged a "no vote on all of them, raking the position that the firm had done well with its current board, which represented deep industry and professional knowledge. It's not clear why all this wealth of knowledge and experience could not be available to company management without being put on the board.

Two resolutions on board composition received 26.2 percent and 27 percent, respectively. These are a long way from the 51 percent needed for adoption, but rather impressive counts in a typical proxy voting cycle. Board and CEO need to take notice.

Hillenbrand Industries--It's All in the Family

4. This company is almost a perfect illustration of poor corporate governance--from the composition of its board to its executive compensation practices. In the past five years, corporate performance has come to reflect the governance weaknesses. Hillenbrand's performance graph shows a steady decline in stockholder values compared with the S&P 500 and the peer group. Even a quick glance at the composition of the board focuses attention on its weakness. Of 11 members, seven are insiders--five of them are Hillenbrands, the sixth is a son-in-law of one of the Hillenbrands, the seventh is the company's president. Of the four outsiders, one is a lawyer whose firm does legal work for the company, two others are private investors, and one is a consultant. Both the chairman and the CEO are Hillenbrands, and the rest of the Hillenbrands on the board have typically devoted their careers to managing personal and family investments. The structure of board committees points out other major weaknesses in corporate governan ce. The executive committee consists of six family members. The finance committee consists of the same six members. The audit committee of three members includes the chairman of the board, and is chaired by the lawyer who would be viewed as a "beholden" director by most critics. The most remarkable approach is evident in tackling executive compensation. Instead of the normal single committee, Hillenbrand has a compensation committee and a performance compensation committee with a sub-committee. Both committees consist of the same three outside directors plus the chairman and CEO in the case of the compensation committee, and the chairman only, in the case of the performance compensation committee. The first committee is chaired by the director we described as "beholden"; the second is chaired by the chairman of the board. In their joint reports for the 1999 proxy, the committees explain their award of the CEO's base salary of $855,000, as based on corporate financial performance and his contribution to the cr eation of long-term shareholder value. The CEO'S compensation package totaled $1,939,824 in 1999, a reduction of just 7.5 percent from 1998, while shareholder value dropped 38 percent. The company has shown an equally generous streak in the compensation of its non-executive chairman. Under a consulting agreement he received $264,305 in 1999, plus other benefits amounting to $227,529, for a total of $491,834.

Computer Associates International--Asleep At the Switch

5. This company's cyclical record of performance, has been viewed with suspicion by Wall Street and the investment community in the past two years. Several analysts have described this as a credibility problem, or a lack of basic trust in the company's senior leadership.

Investor unrest reached a peak in 1999 when restricted stock awards to the three top officers were valued at an eye-popping $1 billion. Ironically, the company's performance graph puts 1999 as the low point in total shareholder value, a year when its performance index dropped from 330 to 240, while its peer group--as measured by the S&P Computer Software & Services Index--rose from 363 to 628.

The 1999 award launched a shareholder suit claiming the awards were not in keeping with the terms outlined in the company's federal filings. The suit was subsequently settled, with the three top executives agreeing to give 4.5 million shares, valued at $259 million, back to the company, strengthening the impression that top management's greed exceeded its good judgement.

This year saw a similar combination of lavish compensation for top management accompanied by dramatically disappointing results, leading to steep share price declines. Press criticism has further fanned skepticism and discontent, making share price recovery that much more difficult. Another irritant, though minor in financial terms, is the payment of almost $1 million to a law firm in which the CEO's brother serves as a partner.

In March 2000, the CEO received a salary of $1 million, plus a cash bonus of $4.8 million and $7.2 million in restricted stock. He was also awarded 1 million options. The cash portion of his compensation represented a 26 percent increase over the previous year. In early July, the company announced a revision in earnings expectations. First quarter projections were dramatically lowered from 55 cents to 11-to-16 cents. Stock price dropped 43 percent to $29 (its 52week high was $79.44 in January 2000).

Even assuming that the CEO and COO are incapable of controlling their thirst for high compensation regardless of shareholder values, the question still remains: Where was the board? Why didn't it take action to institute tighter reviews and controls on executive compensation?

A look at its composition may well answer these questions. Of a relatively small board of eight members, three are insiders. The outsiders include two "celebrity" directors (a former U.S. Senator and the head of the New York Stock Exchange). Two are investment managers, one of whom could be considered "beholden," since he is also a director of a company that received $3 million in advertising fees from Computer Associates. The final outside director is an "academic"--by coincidence, the same university president who sits on the board of Toys 'R' Us.

It seems obvious that the outside directors need to become more intimately engaged in evaluating, analyzing, and approving executive compensation packages. This goes beyond simply not attending enough meetings. (The committee met eight times and acted by unanimous written consent twice.) Rather, it's the independence to make certain that executive pay is fair, appropriate, and sends the right message to management and investors alike.

The Five Best Boards

WHAT MAKES a "Best" board this year? All five of our best board choices come very close to fulfilling the hallmarks of a good board that we began posting nine years ago. All five are successful, progressive companies, working in apparent CEO/director harmony and respected in their industries and communities for their policies and position. Each has also made an extra effort to accomplish something important on the corporate governance front and, therefore, stands as a role model for other corporations to follow.

None, however, is "perfect" from a governance standpoint. In real life, we will perhaps never find a corporation that meets corporate governance perfection, at least by our severe standards. Nevertheless, we are pleased to point out the special corporate governance achievements that each company has made or is making.

General Electric--Superior Succession.

Each year, we considered selecting GE as one of our best board candidates, but never picked it. We were concerned that the board was too much the image of its brilliant CEO, Jack Welch, and slow in adopting a modern day corporate governance stance.

Now, with the adoption and implementation of a thoroughgoing management succession plan, the GE board deserves being chosen as one of the year's best. Under Welch, GE has become one of the world's best managed and most successful companies. Since 1980, his first year as CEO, $100 invested in GE stock was worth $7,183 at the end of 1999. Welch retires in April, 2001, and the board agreed to stay intact until the new CEO takes office. The board has taken a major role in the selection process and Welch's eventual successor will be a joint decision.

It's been a good ride for the 16 GE directors, 13 of whom are outsiders. Their compensation is $75,000 a year, plus $2,000 for each board and committee meeting attended. Half of the annual retainer that a director has elected not to defer is paid in GE stock. There is also a retirement and life insurance plan for directors and a contribution program. Since 1997, each director has had an annual option on 6,000 shares of stock.

Like its executives, GE directors make a lot of money, but they work hard, too. Last year, they held eight board meetings and a large number of committee meetings. Their most critical involvement comes via the management development and compensation committee, which met eight times.

It's said that "nothing succeeds like success." If that's true, then the combination of a superb CEO and a competent board has been a key factor in GE's success.

Hewlett-Packard--Finding Fiorina

This company, and its board, operated for years in the shadow of its founding fathers and, until recently, five of its 11 directors were family members or company executives. Then, last year, a decision was made for the CEO, Lewis Platt, to retire and a widely publicized recruiting program was undertaken to find the new CEO, Carly Fiorina.

At the same time, the board made significant internal changes. Two directors went with the spin off of Agilent Technologies. A new chairman was named--Richard Hackborn, a former H-P officer who headed up the management succession task force. A third family member retired from the board, which dropped from 11 to nine members. Also, the board compensation plan was changed, with attendance fees eliminated, the percentage of the retainer fee paid in stock increased, and the annual retainer raised from $85,000 to $100,000.

It will be some time before we know how effective the succession program really was, but it was a laudable effort, with frill board participation and involvement, which is what led us to select H-P as one of the year's best boards.

Enron--A Board that Runs Deep

3. Enron is a fast moving, innovating energy and communications firm. It calls itself a "New Economy" company. As such, its board-a big one, with 18 directors--works hard to keep up with things.

It held five regular and nine special meetings in 1999. In addition, the board "uses working committees with functional responsibilities in the more complex and recurring areas where disinterested oversight is required." Accordingly, the compensation and management development committee met eight times, while the audit and compliance committee, the finance committee, and the nominating committee each met five times. All of the directors attended at least 75 percent of the board and committee meetings except for the ubiquitous Rebecca Mark, head of Enron International.

Board fees are $50,000 and $1,250 for each meeting, with 50 percent of the service fee paid in phantom stock units and stock options. In total, the average annual fee for an outside director in 1999 was $86,830. CEO Kenneth Lay had a base salary of $1.3 million and a bonus for his 1999 performance of $3.9 million, plus an option grant of 769,120 shares and 158,500 shares of restricted stock.

While somewhat concerned with the large board size (18), the number of insiders (six), and the presence of a very active executive committee (10 meetings), we are heartened by the overall corporate governance structure and by its governance guidelines, which call for regular evaluation of director and executive performance.

Sealed Air--A Governance Overhaul

4. When Sealed Air merged with the Cryovac division of W.R. Grace in 1998, it inherited three measures of corporate governance that were not liked by the CEO and the board of Sealed Air. Sealed Air wanted to end staggered directorships, let the shareholders remove directors with written consent, and strike down a clause requiring 80 percent of stock holders' votes for a bylaw to be changed. Sealed Air conducted a two-year campaign to rid themselves of these "poison pills" and finally won out in April of 2000. This is in keeping with long-term Sealed Air policy that no U.S. employees have employment contracts, golden parachutes, or guaranteed severance contracts.

Sealed Air is a conservative company in many ways. Dermot Dunphy, who moved from CEO to chairman this year, received the same salary of $360,000 from 1991 through 1997; he was raised to $480,000 in 1998 and received an equivalent bonus the same year. The new CEO, William Hickey, is even more modestly paid, but both have large stock options and holdings.

The composition of the board has no surprises. Of the 10 directors, two are insiders, two are women, and four are in venture and investment businesses. There is an annual retainer fee of 1,200 shares of stock, plus a cash fee of $2,000 for serving on one of the two committees and $1,000 for each board and committee meeting attended.

The company has been well run and is highly successful, especially through 1997. The Cryovac merger slowed things down, but $100 invested in 1994 was worth $206 at the end of 1999. Not bad for a company that doesn't believe in protective padding for its executives.

Johnson & Johnson--The "Right" Stuff

5. J & J success is a constant. In addition to the regular five-year performance chart in the proxy, which shows that $100 invested in 1994 ended up at $366 in 1999, J&J also shows a 10-year chart that brings the $100 to $735.

The board composition is close to ideal: two insiders, the CEO and the vice chairman, plus 11 prominent executives, including three women. The directors, who met eight times, are awarded $10,000 in stock when they join the board and get an annual fee of $65,000. Of this fee, $20,000 is required to be deferred in stock equivalents. Directors also receive about 1,200 option shares per year. Committee chairs are paid $8,000 and committee members get $1,500 on non-board meeting days, which is the only attendance fee paid.

The nominating and corporate governance committee is particularly interesting. It oversees the evaluation of performance and practices of the CEO and the board, and reviews management succession and all other matters of corporate governance.

The top executives of J & 3 are conservatively compensated. The CEO's salary is $1,365,000, his incentive bonus was $2,847,000, and he was granted 250,000 options. Company policy is that options are not revalued or repriced. What's more, the company's annual report and proxy statement are a pleasure to read.

Formerly the CEO of F.&M. Schaefer (1972.1977), Robert W. Lear is chairman of CE's advisory board and a partner of Lear, Yavitz & Associates. Boris Yavitz is dean emeritus of Columbia Business School. He works as a governance consultant and is a partner of Lear, yavitz & Associates.

PARAMETERS of the Study

Our analysis was limited to public corporations of sufficient size to be listed on one or more of the major stock exchanges. Companies considered had at least $250 million in revenues.

* Criteria were established and board characteristics assessed on the basis of published data, mainly annual reports, proxy statements, and a variety of directories.

* An important aspect of the time dimension needs to be emphasized. Today's boards are typically the end-products of a long history of director selection and structural evolution. Many characteristics viewed unfavorably today were perfectly acceptable a few years ago.

* We intentionally omitted any corporations with which we are personally connected as directors or governance consultants.

The WORST Board of Directors

Toys "R" Us--RoAnn Costin, 47, president of Reservoir Capital Management; John H. Eyler, Jr., 52, president and CEO; Michael Goldstein, 58, former Acting CEO and current Chairman of the Board; Calvin Hill, 53, independent consultant; Shirley Strum Kenny, 65, president of the State University of New York at Stony Brook; Charles Lazarus, 76, chairman emeritus; Norman S. Matthews, 67, former president of Federated Department Stores; Arthur B. Newman, 56, senior managing director of The Blackstone Group L.P.

Humana--David A. Jones, 68, chairman of the board; David A. Jones, Jr., 42, Vice chairman of the board; K. Frank Austen, M.D., 72, professor of medicine at Harvard Medical School; Michael E. Gellert, 68, general partner of Windcrest Partners; John R. Hall, 67, retired chairman of the board and CEO of Ashland; Irwin Lerner, 69, retired chairman of the board and chairman of the executive committee of Hoffmann-La Roche; Michael B. McCallister, 47, president and CEO; W. Ann Reynolds, Ph.D., 62, president of the University of Alabama at Birmingham.

American International Group (AIG)--M. Bernard Aidinoff, 71, senior counsel at Sullivan & Cromwell; Eli Broad, 66, chairman and CEO of SunAmerica; Pei-Yuan Chia, 61, retired vice chairman of Citicorp and Citibank, N.A.; Marshall A. Cohen, 65, former president and CEO of The Molson Cos.; Barber B. Conable, Jr., 77, former president of World Bank; Martin S. Feldstein, 60, professor of economics at Harvard University; Ellen V. Futter, 50, president of the American Museum of Natural History; Leslie L. Gonda, 80, Chairman of the International Lease Finance Corp.; Evan G. Greenberg, 45, president and COO; Maurice R. Greenberg, 74, chairman and CEO; Carla A. Hills, 66, chairman and CEO, Hills & Co.; Frank J. Hoenemeyer, 80, retired vice chairman of Prudential Insurance Company of America; Edward E. Matthews, 68, vice chairman, investments and financial services; Howard I. Smith, executive vice president, CFO, and comptroller; Thomas R. Tizzio, 62, senior vice chairman, general insurance; Edmund S.W. Tse, 62, vice c hairman, life insurance; Jay S. Wintrob, 43, vice chairman and COO of SunAmerica; Frank G. Wisner, 61, vice chairman, external affairs.

Computer Associates International-- Russell M. Artzt, 53, executive vice president, research and development; Alfonse M. D'Amato, 62, partner at Park StrategiesLLP; Willem F.R de Vogel 49, president of Three Cities Research; Richard A. Grasso, 53, chairman and CEO of the NYSE; Sanjay Kumar, 38, president and CEO; Roel Pieper, 44, former executive vice president at Royal Philips Electronics; Shirley Strum Kenny, 65, president of the State University of New York at Stony Brook; Charles B. Wang, chairman.

Hillenbrand Industries--Lawrence R. Burtschy, 63, chairman of L.R. Burtschy & Co.; Daniel A. Hillenbrand, 76, chairman of the board; Ray j. Hillenbrand, 65, private investor; John C. Hancock, 70, consultant; George M. Hillenbrand II, 6o, private investor; John A. Hillenbrand II, 68, private investor; Frederick W. Rockwood, 52, president.

Source: Board member listings reflect most recent proxy statements.

The HALLMARKS of an Effective Board

* Board size: Keep it relatively small--more than a handful of members (four or five) but less than a crowd (15 or more).

* Outsider/insider ratio: Limit yourself to one or two inside directors. Former CEOs, serving for a prescribed period, count as insiders.

* Potential conflicts of interest: Minimize the number of active investment bankers, legal counsel, commercial bankers, consultants, and interlocking directorships.

* Narrow special-interest groups: Minimize investors representing blocks of shares, relational investors, family members.

* Demographic balance: Maintain an appropriate mix of backgrounds, skills, and experience; recognition of capable women and minorities; relevant geographic dispersion.

* Stock ownership by directors: Encourage by means of fees or special stock grants.

* Committee structure: Establish a clear definition of responsibilities and functions of standing committees (Audit, Compensation, and Nominating).

* Form a "corporate governance" or "independent director" committee: Establish processes for CEO, board, and director performance evaluations.

The above characteristics applied in reverse typically represent needless "baggage" and curtail operating effectiveness. Cumulatively, such baggage can add up to a flawed or ineffective board.

The BEST Board of Directors

General Electric--James I. Cash, 52, professor of Business Administration at the Harvard Graduate School of Business; Silas S. Cathcart, 73, retired chairman of the board and CEO of Illinois Tool Works; Dennis D. Dammerman, 54, vice chairman of the board; Paolo Fresco, 66, chairman of the board of Fiat SpA; Ann M. Fudge, 48, president of Kraft's Maxwell House and Post Division; Claudio X. Gonzalez, 65, chairman of the coard and CEO of Kimberly-Clark Corp.; Andrea Jung, 41, president and CEO of Avon Products; Kenneth G. Langone, 64, chairman, president, and CEO of Invemed Associates; Scott G. McNealy, 45, chairman of the board and CEO of Sun Microsystems; Gertrude G. Michelson, 74, former senior vice president, external affairs at R.H. Macy & Co.; Sam Nunn, 61, partner of King & Spalding; Roger S. Penske, 63, chairman of the board of Penske Corp.; Frank H.T. Rhodes, 73, president emeritus of Cornell University; Andrew C. Sigler, 68, retired chairman of the board and CEO of Champion International Corp.; Douglas A. Warner III, 53, chairman of the board, CEO, and president of J.P Morgan & Co.; John F. Welch, 64, chairman of the board and CEO. Hewlett-Packard--Philip M. Condit, 57, Chairman of the Boeing Co.; Patricia C. Dunn, 46, chairman of Barclays Global Investors; Carleton S. Fiorina, 45, president and CEO; Sam Ginn, 62, chairman of Vodafone AirTouch Plc; Richard A. Hackborn, 62, executive vice president, computer products; Walter B. Hewlett, 55, independent software developer; George A. Keyworth, 60, chairman and senior fellow with the The Progress and Freedom Foundation; Susan Packard Orr, 53, president and owner of the Technology Resource Assistance Center; Robert P. Wayman, 54, executive vice president.

Enron Corp.--Robert A. Belfer, 64, chairman and CEO of Belco Oil & Gas Corp.; Norman P. Blake, Jr, 58, CEO and secretary general of the United States Olympic Committee; Ronnie C. Chan, 50, chairman of Hang Lung Development Ltd.; John H. Duncan, 72, private investor; Wendy L. Gramm, director of the Regulatory Studies Program of the Mercatus Center at George Mason University; Ken L. Harrison, 57, chairman of the board and CEO of Portland General Electric Co.; Robert K. Jaedicke, 71, professor emeritus of Accounting at the Stanford University Graduate School of Business; Kenneth L. Lay, 57, chairman of the board and CEO; Charles A. Lemaistre, 76, president emeritus of the University of Texas M.D. Anderson Cancer Center; Rebecca Mark-Jusbasche, 45, former chairman and CEO of Azurix Corp.; John Mendelsohn, 63, president of the University of Texas M.D. Anderson Cancer Center; Jerome J. Meyer, 62, chairman and CEO of Tektronix; Paulo V. Ferraz Pereira, 45, president and COO of Meridional Financial Group; Frank Savag e, 61, chairman of Alliance Capital Management International; Jeffrey K. Skilling, 46, president and COO; John A. Urquhart, 71, senior advisor to the Chairman; John Wakeham, 67, retired former U.K. secretary of state for Energy; Herbert S. Winokur, 56, chairman and CEO of Capricorn Holdings.

Sealed Air Corp.--Hank Brown, 60, president of the University of Northem Colorado; John K. Castle, 59, chairman and CEO of Castle Harlan; Lawrence R. Codey, former president of Public Service Electric and Gas Co.; T.J. Dermot Dunphy, 67, chairman of the board; Charles F. Farrell, Jr., 69, president of Crystal Creek Associates; William V. Hickey, president and CEO; Shirley Ann Jackson, 53, president of Rensselaer Polytechnic Institute; Virginia A. Kamsky, 46, founder, chairman, and CEO of Kamsky Associates; Alan H. Miller, 66, private investor; John E. Phipps, 67, private investor.

Johnson & Johnson--Gerard N. Burrow, M.D., 67, special advisor to the president of Yale University for Health Affairs; Joan Ganz Cooney, 70, chairman, executive committee, Children's Television Workshop; James G. Cullen, 57, president and COO of Bell Atlantic Corp.; M. Judah Folkman, M.D., 67, senior associate in Surgery and Director, Surgical Research Laboratory, Children's Hospital; Ann Dibble Jordan, 65, former director, social services Dept., Chicago Lying-In Hospital; Arnold G. Langbo, 62, chairman of the board of the Kellogg Co.; Ralph S. Larsen, 61, chairman of the board and CEO; John S. Mayo, Ph.D., 70, president emeritus, AT&T Bell Laboratories; Leo F. Mullin, 57, chairman and CEO of Delta Air Lines; Henry B. Schacht, 65, former chairman of the board of Lucent Technologies; Maxine F. Singer, Ph.D., 69, president of the Carnegie Institution of Washington; John W. Snow, 60, chairman, president, and CEO of CSX Corp.; Robert N. Wilson, 59, vice chairman of the board.

Source: Board member listings reflect most recent proxy statements.