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No one role model for all companies.

Should there today be hard-and-fast rules of corporate governance? Should every board have a certain number of directors? Every chairperson and CEO be separate? Every board committee wholly independent of management?

Hardly a week goes by these days without these questions being asked of corporate management in one form or another. So long as these issues are posed as questions for discussion, I have no quarrel with the debates. But when the debates turn into proposals for a single set of rules that represent "good" corporate governance, I must take issue with the proponents.

I believe that the interest in a single governance model ignores two fundamental factors.

First, every company is different. Different histories. Different futures. Different capital structures. Different industries. Different markets. At different places in their evolution.

Second, within those very different companies, governance ultimately boils down to motivating and challenging individuals to perform, and maximizing shareholder interests. This leads me to believe that there is no ideal model. There are principles likely to promote or permit good governance, and many different approaches for implementing those principles.

At Dayton Hudson, we take the subject of governance very seriously. Naturally, we are pleased that our governance is sometimes promoted as a model to be followed. But while our experience may be instructive, it should be examined for the principles inherent in our system rather than used as a model to be mirrored in another corporation.

"Good governance" usually begins with the premise that a board of directors represents and serves the long-term best interests of the shareholders. Even that most basic premise is, however, open to interpretation. Each board and management must agree on what exactly are the long-term best interests of their shareholders.

For us, the precise definition of that statement evolves from our history as a family-owned company. The Dayton family was not interested in running the company for the short term. They instilled a sense of stewardship in the company's management and board -- a sense that the institutional integrity was to be maintained and enforced for succeeding generations of family and shareholders. That obligation has been handed down through the generations. It most definitely colors the contemporary thinking about the role and mission of the board, and management's responsibility within that mission, to build and deliver long-term value.

We also include in our definition of long-term value our relationships to the communities in which we do business. When the board evaluates my performance, the directors examine how well we have maintained those relationships. We believe that for a retail company, which depends so directly on its relationship with consumers, this is particularly important.

Our definition of long-term value is also colored by a singular event in our history: In 1987 we were the target of a hostile takeover attempt. The board believed that Dayton Hudson did indeed have significant long-term value yet to be realized, and rejected the unsolicited proposals. The board stood by management, accepting our conviction that we had the right plan in place to realize that value. The board also authorized us to tell the Dayton Hudson trust managers that they need not feel it was their fiduciary duty to tender into a hostile offer. Indeed, we said they should not tender until the target's management has made a recommendation. This was only a small step, but it was one way to help ensure, during those challenging days (in the '80s), that all of a company's stock didn't travel immediately into the hands of arbitragers. Occasionally, such expressed confidence in management may give a board and management the opportunity to develop an alternative that would permit them to develop and realize a long-term plan.

This principle is still crucial today. Champions of good governance want to improve corporate performance. But, they may not always measure corporate performance as long-term value growth, the way management and directors often do. Statistics show that the average institutional shareholder owns a stock for 1.6 years. In our cyclical world of retailing, for example, this is hardly long-term. It is, therefore, important that despite the intensity of the pressure they are subject to today, management and directors must define the interests they represent very carefully in their own minds and among themselves. The chief executive officer must make sure that management is consistent in enabling the board to fulfill its obligations.

While boards and managements have an obligation and responsibility to their investors, those same investors should be encouraged to share the same goals of long-term value growth.

A shared definition of long-term value and how to achieve it can only come through open communications and a very candid and thorough exchange of information between board and management and between a company and its shareholders. And, it is the chair of the board who establishes the environment for open communication. We could not have hoped for the support of our directors during the takeover threat if we had not given them a full and frank assessment of where we stood, where we needed to go, what would drive our growth, the problems we were likely to encounter, and how we would overcome them. Before, and since, that kind of open communication between board and management has been a cornerstone of our relationship. Similarly, we strive to be frank and open with our shareholders, expecting them and their analysts to assess our strategy for long-term value growth.

Intensity and Energy

Another necessary factor in this equation is a high level of commitment by the company's directors. How do you ensure that? The intensity and sheer level of interest and energy that we expect from our directors come, in large measure, from the careful work of a nominating committee chaired by an outside director. The committee is constantly seeking and assessing potential board members whose interest, integrity, and shared vision will mesh with the company's expectations. This ensures that Dayton Hudson's management cannot collect a nest of cronies and rubber-stampers. To this end, we require that directors rotate off the board after 15 years, or at the mandatory retirement age of 68. We also require directors who change jobs to resign, pending re-nomination at the pleasure of the other outside directors.

The executive committee, composed of all independent directors and the chairman, is responsible for overall board management. In addition, a private executive session of all independent directors is on the agenda of every board

meeting. It is chaired by the vice chair of the executive committee. They do far more than CEO appraisal, although that is certainly one of their vital functions.

Three Principles

Dayton Hudson's governance structure is based on three principles that seem to permeate many of the proposed governance models. These principles include:

A Measure of Independence. Whether it is our nomination system or a requirement that key committees be chaired by outsiders, our company recognizes that board independence is critical for a healthy exchange of ideas and perspective between board and management. There can be no denying that the perspective of management is central to board deliberations; but the fresh air of board independence keeps management alert to trends and ideas that sometimes get lost amidst the familiar and close. Even a fully independent board, by the way, after several years of working closely together can become too confined by past experience. At Dayton Hudson, our nominating procedures and standards, combined with term limits, guard against complacency.

Sharing of Meaningful Information. A board must be knowledgeable and informed in order to be helpful to management and fulfill its responsibility to shareholders. Again, there are myriad ways to do this effectively. We identify precisely what kind of information does provide "meaningful" perspective on the business, and we allocate board meetings to discussion of key issues like strategic planning, capital allocation, long-range goals, performance appraisal, and human resources planning. The board knows these are the subjects in advance and, therefore, can ask for additional information if necessary. A certain number of board meetings or a particular board size might facilitate the exchange of information, but opportunities to learn are meaningless without the commitment from individual board members. Management can only provide what it believes will give an in-depth perspective on the company, and the responsibility to assimilate and ask for more remains with each director.

Management Review. For us managers who are accustomed to "running the show," review by independent directors is always challenging and sometimes downright uncomfortable. Nevertheless, I much prefer to receive an annual performance review from a board that I value and respect than to be left guessing as to how they think I am doing. I like the fact that management and the board work closely together to establish performance goals and strategies for the company. In that process, overly aggressive strategies are checked and overly comfortable positions are stretched. Both are taken into account at review time.

Despite the fact that some observers point to our system as ideal, we recognize that our process may not be for everyone. Ultimately, accountability is the issue, and my personal belief is that it is to management's advantage to have a process in place for directors who have knowledge, insight, and perspective to evaluate performance.

No Right Answer

Let me now return to the questions posed at the beginning.

A growing number of voices have recently proposed that the offices of chairman and CEO be separated. We have done it both ways at Dayton Hudson. In the past, long before it was actively proposed, these offices were separated. Today, I hold both offices, but with a strong independent vice chairman who directs my review and chairs private sessions of the independent directors. Which is best? I believe that there is no right answer for all companies or even for a single company at different times in its evolution.

Some currently recommend that all boards be limited to no more than 8 to 12 directors. But then how will major national companies ensure a diversity of opinions from different disciplines, areas of the country, races, sexes? Again, I would argue that no single rule will fit all corporations.

More recently, a movement seems to be developing in which large institutional shareholders want to meet directly with outside directors. Perhaps this approach may be appropriate where management has been totally unresponsive to shareholders -- but not as a rule applicable to all companies. In fact, on this issue I would argue that directors should be challenged to state their viewpoint vigorously in board meetings and challenged to be sure that management is communicating clearly with shareholders rather than doing that communication themselves.

In sum, Congress can legislate, the SEC can issue regulations, and activists can demand change, but governance will only be effective if it recognizes the uniqueness of every business, and only if the individuals involved are committed to certain essential principles which are the underpinnings of any system of governance.

Board of Directors Dayton Hudson Corp.

Rand V. Araskog Chairman and CEO ITT Corp.

Robert A. Burnett Former Chairman and CEO Meredith Corp.

Livio D. DeSimone Chairman and CEO 3M Corp.

Roger A. Enrico Chairman and CEO PepsiCo Worldwide Foods

William W. George President and CEO Medtronic Inc.

Roger L. Hale President and CEO Tennant Co.

Donald J. Hall Chairman Hallmark Cards Inc.

Betty Ruth Hollander Chairman and CEO The Omega Group Inc.

Michele J. Hooper President, International Business Group Caremark International Inc.

Kenneth A. Macke Chairman and CEO Dayton Hudson Corp.

Mary Patterson McPherson President Bryn Mawr College

John R. Walter Chairman and CEO R.R. Donnelley & Sons Co.

Stephen E. Watson President Dayton Hudson Corp.

Kenneth A. Macke is Chairman and Chief Executive Officer of Dayton Hudson Corp., one of the nation's largest general merchandise retailers. He began his career with Dayton's department stores in 1961 as a merchandise trainee. He has been Chairman and CEO since 1984. He serves as a Director of First Bank System Inc., Unisys Corp., and General Mills Inc.
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Title Annotation:Leadership in Environmental Initiatives
Author:Macke, Kenneth A.
Publication:Directors & Boards
Date:Sep 22, 1993
Previous Article:Welcome to the board: diversification personified.
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