Commonsense reform in board governance.

The call for reform has come to the corporate boardroom just as it has become a major initiative for government, education, trade and a host of other economic, social and political agendas. Reform of board governance is an attention-grabbing topic since its proponents expect it to effect a broad range of issues -- from shareholder return to long-term strategy, and including executive compensation, management performance, and social concerns.

If Total Quality hasn't taught us that Continuous Improvement is mandatory in management, then our shareholders certainly will. Thus, demands for ever better board performance and governance are clearly justified. But the methods for improvement are proving to be controversial.

Since so much is at stake, any initiatives to reforming board performance should be thoughtful and fully responsive to the diverse needs of the many stakeholders. Some constituencies, including the media and the general public, usually opt for a less thoughtful and responsive adversarial approach -- it is more exciting and there is a popular theory that decisions hammered out on the anvil of public debate serve us best.

From the view of a chairman and CEO, knowing the corporation's destination, course, and speed should determine its distinct passage as it strives for improvement. Defining what improvements are needed are clearly our first order of business, but these are often corporation-specific. That is why I am not a proponent of the growing number of lists of rules and "dos and don'ts" specific to board policy and practice. No two boards or corporations are identical; the issues they face are deserving of their own priorities and solutions. While guidelines may prove helpful, they should be viewed in the context of the individual character of a specific board. Shareholders must demand no less.

Identifying the issues relevant to a company's board and its role in reaching corporate objectives will make for a considerable divergence in board agendas. Identifying general "best practices" for corporate boards without regard for specific needs and circumstances is absolutely counterproductive. And yet, this one-size-fits-all approach is receiving considerable support.

Perhaps it is because these lists often are generated as byproducts of highly visible and troubled enterprises and their boards. Other advocates of this cookie-cutter approach are investors with a special agenda not representative of the majority of shareholders. And still others are well-meaning constituents who find comfort in simple rules and the sense of order and discipline they seem to imply. While uniform rules and regulations can certainly have considerable value, we have also experienced the unanticipated difficulties they can create for all parties.

Here is how I respond to some generalities that are on the verge of passing for conventional wisdom:

Prescriptions on Size and Composition of die Board: This defies generalization in my view. As the needs of the board and shareholders change, so should the recipe for size and composition. Broad guidelines are welcomed if they are applied with board needs and common sense in mind.

The Number of Board and Committee Meetings: The importance of any set number pales when compared to the meetings' content and achievements.

Restrictions on the Number and Role of Insider Directors: This, too, should pass the test of common sense. Don't dismiss an insider's invaluable knowledge and experience on the premise that he or she may have a special agenda in conflict with shareholders' best interests. Most inside directors have demonstrated a strong recognition of their responsibilities and leave their line jobs outside the boardroom. Those who do not must be dealt with in the same fashion as unsatisfactory outside directors.

Keeping a Former CEO on the Board: This debate should center on the potential for contribution or distraction.

The Chairman/CEO Combination: This is coming under considerable fire as a matter of principle, in spite of the fact that the combined role is the predominant format. The validity of the concept should not be a question of principle but a pragmatic recognition of the demands of both jobs and a decision as to whether the jobs are best fulfilled by one person or two.

Term Limits on Directors and Committee Chairpersons: This usually makes good sense. There is little sense, however, in rigid rules and loss of flexibility denying the occasional appropriate exception.

Lead Director: This role may serve a valuable purpose, or may not if the person acts as a screen to filter communication between the chairman and the board. Committee chairpersons often see themselves as lead directors specific to their area of responsibility. The lead director concept is difficult to judge in theory but much more clear when held up to current needs and realities.

These and other issues make the case against narrow, unilaterally developed, potentially polarizing, hard and fast rules for corporate governance and for broad, mutually derived guidelines applied with care to the specific needs of individual corporations.

Even more disturbing is the potential for a false sense of security derived from compliance with a corporate governance "checklist." Further, a much needed emphasis on the evaluation of individual director and management performance stands to be distracted by a focus on relatively less important issues. Worst of all is the prospect of our regulatory agencies coming up with their own set of rules and regulations and more bureaucrats with a command and control mentality rushing to "help" us.

Compliance with rules and guidelines must be seen as only a means to the ultimate end of serving shareholder interests and exercising sound business judgment.

Board responsibility has changed dramatically and will continue to evolve as long as new governance issues emerge. Some boards see this an imposition on their traditional roles of approving strategies and budgets, evaluating and compensating CEO and management performance, and ensuring a sound succession process. Others look at changes in responsibility as another challenge to be met in the management of corporate change. A few recognize that a well functioning board is a source of competitive advantage and can make an enormous difference in the process of creating shareholder value. That board will understand that while systems, rules, and guidelines can be beneficial, results are imperative.