Twenty years of corporate governance.

My first column in Chief Executive Magazine appeared in issue #10 and was titled, "What the Outside Director Expects from the CEO." I thought it was hot stuff, because in those days, CEOs didn't take a lot of lip from their outside directors. I was really writing, I guess, about corporate governance, but the words were not in common usage at the time.

Now, nearly 20 years and some 104 columns, nine book reviews, and five articles later, I realize that I have been a participating witness to the corporate governance evolution/revolution. It all began about the time of Chief Executive's birth in 1977, is in full sway now, and probably will still be going on 20 years hence.

In riffling through my voluminous scrap book, it was fascinating to re-read some of my columns of the '70s and '80s about Succession Planning, Executive Compensation, Director Recruiting, Pay for Performance, and the Changing Job of the CEO. The first time I actually used the words "corporate governance" was in '83, and the first time I wrote about the institutional shareholders was in '87. But, by '93, corporate governance was so widespread that I wrote a column labeling the '90s the "Decade of Corporate Governance."

Let's take a backward look and see what has been going on all these years.

To begin with, the definition of corporate governance has been broadened. It now has come to mean the whole process of running a company and serving the best interests of the shareholders in conformity with the laws and ethics of the land. All of the factors that are involved in balancing the power between the CEO, the board, and the shareholders are now considered to be a part of the corporate governance syndrome.

Corporate governance includes the selection of directors; executive compensation; performance evaluation of the CEO, the board, and individual directors; proxy statement disclosures; golden parachutes and poison pills; conduct of annual meetings; and much more.

During the '70s, corporations were broadly criticized for a number of perceived evils - excessive executive compensation, CEO domination, too few independent directors and too many inside and beholden directors, failure to act promptly and positively in times of crisis, and communicating inadequately with shareholders.

By the '80s, many well-managed companies began responding to these criticisms by changing the composition of their boards, placing more power in the hands of independent directors, and disclosing information. In a number of high-profile cases, there were proxy fights, confrontations with institutional shareholders, and CEO dismissals. What was really happening was that corporate governance was beginning to work. It was messy, slow, and incomplete. But corporate governance was now out of the closet.

By the '90s, some order began to appear out of the chaos. Enough good corporate governance programs had been put in place by good companies so that we had role models. Enough advocacy groups had put together suggested patterns of corporate governance behavior to gain the support of most critics. Enough headlined articles had been written so that everyone - including the general public and small shareholders - could have a better idea of what good corporate governance consists of.

Why, then, are there still many companies and CEOs who have not yet come around to embracing corporate governance?

I believe it is just a defect of a free society. The boardroom is one of the last bastions of unfettered enterprise. There are no laws that say who should or should not be the CEO or a director, what or how they should be paid, how their boards should be organized, or what they have to do in board meetings.

Not that there are no regulations; we have them aplenty. The 8K, 10K, and other such reports. The million-dollar taxable limit on executive salaries not tied to performance. The three-year limits on golden parachutes. The FASB rules. The IRS, the SEC, the FTC, and so on. The government is not loathe to "help" companies manage.

And the corporate critics, particularly my academic friends, are far from appeased. There are those who advocate training a corps of professional directors (mostly from the academic sector, to be sure) and using them as representatives of the institutional shareholders on targeted boards. There are those who propose requiring all directors to be licensed and to pass a course (taught, I suppose, by these same academics). There are those who would insist that the chairman of the board be a non-executive, as the English practice. The critics have lots of ideas.

What we need to do, as CEOs and independent directors, is to put our own houses in order. In the case of recalcitrant CEOs and directors, better corporate governance may not be attainable until retirements have taken place; the Dwayne Andreases, Peter Graces, and William Agees finally retire, die, or get fired.

In the meantime, my concluding observation is that corporate governance is alive and reasonably healthy in the United States. We have a better corporate governance system than any other country in the world; but it requires constant vigilance and policing to keep it properly balanced and effective.

Shareholders are becoming more knowledgeable, better organized, and more vocal on corporate governance matters. Independent directors, with their newfound powers and responsibilities, are becoming more participative and amenable to corporate governance change. And CEOs, especially the confident and competent ones, are recognizing that they are better off joining - and leading - the corporate governance movement than fighting off the shareholders who clamor for it.

I can hardly wait to see what the next 20 years are going to bring!

From the Archives

Highlights from "Speaking Out" - 1979-1997

Winter 1980: Why Succession Planning Goes Wrong

Management succession is one responsibility from which weak or CEO-dominated boards too offer: recoil - until the last moment... Too many boards suddenly wake up one day to learn that the company's products are dated, its plants are old, its market share is slipping - and its management is inadequate to revive the firm's competitiveness. Only then do some boards focus on the company's long-term needs and discover that turnaround time is long, slow, and expensive... In far too many once-great corporations, the outside directors are benignly and neglectfully forfeiting their management succession responsibilities to the retiring chief executive and to a few top managers who have vested interests. As Georges Clemenceau said: "War is much too important to be left to the generals." The same is true of management succession.

Summer 1982: Competence and Continuity

As a long-term observer of the "Who's News" column in The Wall Street Journal, I foresee increasing use of a three-person hierarchy in large corporations. Businesses are getting so complicated that one autocratic genius simply cannot run internal operations, external affairs, and groom competent successors simultaneously. Our businesses are also too dynamic and too fragile to allow for a long learning period,

Autumn 1982: And Now, A Report from the Nominating Committee 

Given a general charter or left to its own devices, it is easy to see how a committee on directors can wield inordinate power ... it not only can railroad its director candidates and committee slates, but it can dictate company policy in areas that should be appraised by the full board. It can be just as debilitating an influence on effective board discussion and participation as was the omnipotent executive committee of earlier years... However, there are many useful and constructive things it can do, and they outweigh potential drawbacks.

Jan/Feb 1989: Evolving the Effective Board

Everybody knows that good, strong outside directors are a difficult lot. They are often opinionated and can be either subjective or objective to a fault. Although they invariably put a strain on the process of change, they are nevertheless a vital ingredient in the process... Developing an effective and participative board ... means a regular review and update of goals and timetables. It means, in time, a confrontation with a director who is uncooperative or incompetent. Sadly it sometimes has to wait until key recalcitrant directors have retired.

March 1990: More Stock for Outside Directors?

If you take a good look at the proxy statements coming out this spring, you will notice something different about outside director's stock holdings, They not only own a larger number of shares than they used to, but they have also voted themselves a variety of programs that will sharply increase their holdings... This is not such a bad idea. It certainly intensifies the director's identification with the shareholder and it should whet the director's interest in what management is or is not doing to "maximize shareholder value," as our friends the raiders say.

October 1991: The Unretiring CEO

The former CEO, when he sits in the old boardroom, is still the CEO to most of the directors. It is a rare individual who can step down from the CEO role and become an objective, dispassionate, independent advisor to his successor. He still exerts power, and the board abets him. Situations such as the "Geneen Syndrome" at ITT, and the "Dutt Disaster" at Beatrice have developed and have manifested themselves far too many times at far too many companies to be ignored.

June 1992: Who's the Chairman?

All things being equal, which they never are, I think the CEO should usually be the chairman as well... Yet there are some times when it makes sense for the CEO not to be chairman... I can't see anything wrong with having the board elect its own chairman each year, simultaneously deciding whether he should be an outside director, the CEO, or whomever... Are there instances in which an independent chairman would improve corporate governance? Yes, Where and when? It depends. Let the companies and their boards decide for themselves.

January/February 1993: Finding a New Director

Search for [a new director] the same way you would look for a new, valued executive... A board I was on decided it needed to replace the audit committee's chairman, who was retiring in two years. We targeted someone about 55 years old, who probably was a CF0 with considerable control experience, came from a multidivision industrial company somewhat larger than ours, and was in the same region of the country. A quick desk search turned up three candidates, one of whom was known to two of the directors, He met the CEO, was asked to join the board, accepted, and later became a fine chairman of the audit committee,

November/December 1993: How to Fire a Director

The climate is right to improve the overall quality of board members... It just doesn't make sense to put up with Old Joe or Old Susie who doesn't do the homework; doesn't ask the hard questions; accepts the easy answers; and hasn't kept up with the changing world of technology, globalization, and corporate governance... And it is no exaggeration to say that, as chairman and CEO, if you don't weed out the underachievers on your board, you may be the unwanted director who gets fired.

September 1995: The Spoilers

I feel uneasy about what is going on in executive pay ... the uncomfortable fact of the matter is that [a number of] CEOs and the boards that approved the deals are spoiling the compensation programs of all CEOs ... their present and future compensation simply exceeds the bounds of generosity and edges over into greed... I think compensation committees should adopt a convention that puts a ceiling on pay packages, somewhat like what has been done with golden parachutes... Unless corporations voluntarily begin to do something, the 15 or 20 "spoilers" who crop up each year with huge numbers are going to bring down the whole compensation house of cards for everyone,

December 1995: The Hair Shirt Director

Some of the most effective directors I have known seem to wear a figurative hair shirt, They ask difficult and sometimes embarrassing questions, They challenge the validity of long-held assure options, question the continuance of sacred cows, and reject the popular answer, "because we've always done it this way."... [They] are well-informed, responsible observers and critics of corporate policies and procedures, plans and strategies, and corporate governance. They are difficult to find, because they are on other boards or are busy with other activities, They are to be coveted and cherished... I believe CE0s should actively seek such directors.

November 1996: The CEO's Role in Corporate Governance

There are still many chairmen/CEOs who have reservations about the corporate-governance moves under way... It seems to be particularly true of a few an arrogant CEOs who are overwhelmed with their importance and power; of CEOs who founded their companies; of CEOs who own a great deal of stock and of CEOs who are insecure in their jobs and fear director criticism ... the mere establishment of Corporate Governance Committee and having once-over-lightly performance evaluation of the CE and the board is not, in itself, going to make good corporate governance happen, It won't and car work until the CEO wants it to.

December 1996: The Inaccessible CEO

Industrious, hardworking CEOs sometimes can fool casual, uninvolved board that tends to correlate busyness with effectiveness, If the board doesn't a actively see the CEO muddying administrative water and if the CEO keeps stroking outside directors with elegant trips and high board fees, he or she often can get by for months - or even years... The fact re mains that it is the board's responsibility to sniff out underachieving CEOs and reform or replace them That is what a well-ordered CEO performance evaluation is supposed to do, Thank heavens more an more companies are in the process of implementing such programs...

Six Steps to Good Governance 

You don't have to be a rocket scientist to initiate a program leading to a workable corporate governance format for your company. I suggest taking six steps:

1. Assemble a good board of talented, experienced outside directors with no conflicts of interest and supply them with good, timely information.

2. Create and produce a statement of principles of corporate governance.

3. Establish board procedures whereby all directors can effectively participate in all critical decisions.

4. Conduct formal performance evaluations of the CEO at least every year.

5. Conduct a formal performance evaluation of the board at least every year.

6. Review and reaffirm (or revise) the Statement of Corporate Governance Principles at least every year.

These steps are not hard to follow. The hard part is learning how to do it all effectively - and that is a continuing, never-ending process.

- R. W.L.

Seven Forces Driving Better Governance

1. The National Association of Corporate Directors. Under the leadership of John Nash, the NACD has unceasingly furnished the format of better corporate governance at seminars, training sessions, and its publications. Two stand out: the Blue Ribbon Commission Reports on "Performance Evaluation of CEOs, Boards and Directors" in 1995 and "Professional-ism in the Boardroom" in 1996.

2. California Public Employees Retirement System. Led by Dale Hanson, this huge pension fund got wide publicity for grading the top corporations of the u.S. on their corporate-governance actions and in targeting those companies each year that symbolized poor corporate governance. This was a catalyst for much of the later activity by institutional shareholders on a broad front.

3. General Motors/Ira Millstein. After the highly publicized board ruckus in 1992, the redoubtable consultant Ira Millstein led GM to issue a new statement of corporate governance principles which quickly became a model for many other corporation.

4. Lear/Yavitz Best/Worst Boards. Four detailed articles in Chief Executive magazine since 1992 established hallmarks for good corporate governance, naming companies and directors and preceding similar studies by Business Week and others.

5. Proxy Statements. The revised proxy statement rules issued by the SEC in 1991 fostered great improvement in the amount and quality of data on boards, directors, and board structures.

6. Specialized Director Magazines. These publications for years have clamored for better corporate governance: Directors Monthly, Directors and Boards, Directorship, The Corporate Director, Fund Directors.

7. Business Press. Corporate governance became significant news in the '90s. The Wall Street Journal, in particular, now includes detailed board information in most of its company stories. The executive compensation reports of Business Week and Forbes are complete and revealing. Frequent corporate governance articles now appear regularly in Business Week, Fortune, Harvard Business Review and, of course, Chief Executive.

Robert Lear covers corporate governance for CE and is chairman of CE's advisory board.