TIAA-CREF looks for signs of improvement.

Huge pension funds like TIAA-CREF--the retirement system for higher education and research employees, with nearly $300 billion in assets under management--have a lot of clout on corporate governance. Improvement in that area was the focus when the fund recently updated its Policy Statement on Corporate Governance, last amended in 2000, which applies to companies in which it invests.

Fundamentally, the fund wants to see improvement in governance related to three specific areas widely recognized as sources of governance deficiencies: the failure of boards of directors to play their required oversight role; the failure of some professional advisors, including public accountants, law firms, investment bankers and consultants, to discharge their responsibilities properly; and the failure of many investors, particularly institutional investors, to exercise their rights and responsibilities--or even be heard--on important matters of corporate governance affecting them. This last idea has been echoed by regulators and groups of small investors, who have called on major investors to be more active.

Following are descriptions of the new policies intended to strengthen governance of portfolio companies:

1. Annual Election of All Directors. TIAA-CREF says such a policy "establishes a board that is more responsive to shareholders." Boards without annual elections, it says, "can strongly impede a free market for corporate control ... and restrict a board's ability to quickly remove an ineffective director."

2. Designation of a Lead or Presiding Director. When the board chooses not to separate the positions of chairman and CEO, it should designate an individual director who would preside over an executive session of independent directors.

3. Auditor Independence. A company's audit committee should ensure that the outside audit firm's independence is not compromised by the provision of non-audit services or by a long-standing relationship with the company, and should consider requiring periodic rotation of the outside audit firm.

4. Shareholder Access to the Board. Formal procedures should be created to enable shareholders to communicate their views and concerns directly to board members. When a board fails to fulfill its governance responsibilities, shareholders should consider other means to ensure board responsiveness, including challenges to the current board.

5. Equity-Based Compensation Charged to Earnings. TIAA-CREF strongly advocates comprehensive disclosure and realistic accounting of equity-based compensation plans, with the cost charged to the income statement, creating "a realistic accounting of the cost of equity-based compensation plans ... so as to eliminate the excesses that have diminished the usefulness of these plans to shareholders."

6. Holding Requirements. Companies should require that employees who acquire stock through the exercise of options hold that stock for a specified, substantial period of time.

7. Performance-Based Equity Compensation Plans. Equity-based compensation plans should emphasize restricted stock awards, which "more closely align the interests of executives with shareholders (as opposed to option grants). The value to the recipient and cost to the corporation can be determined easily and tracked continuously. Stock options should be awarded judiciously, if at all."