Evolving Corporate Boards

CORPORATE boards of directors are rapidly evolving into a major strategic force in American business. The new activism on the part of corporate directors includes replacing the chief executive officers of such industrial giants as American Express, Eastman Kodak, General Motors, and IBM.

This burst of action is matched by widespread ignorance of how boards functions and how they have been changing in recent years. The most frequent criticism of boards of directors is that they rubber-stamp the views of management. A related criticism is that a board's deliberations are dominated by the CEO, who in 80 percent of the larger corporations serves as chairman. When the same person controls the agenda and conduct of boardroom proceedings as well as the day-to-day performance of the company, the power of the individual director may indeed be attenuated. These criticisms have led to various proposals to reform corporate governance.

Some reformers contend that the ideal board of directors would include only one company officer, the chief executive. All other board members would be chosen from outside the company. Others would go further, barring all members of management from the board. In a variation of this approach, the boards of larger corporations would be limited to three ``inside'' directors - the chief executive, chief operating officer, and chief financial officer.

Despite the criticism of corporate governance, important changes in the boardroom are being made voluntarily. Outside directors have become a majority of most boards of large companies. The average board has nine outside and three inside directors. Of 100 large corporations analyzed in 1992, 11 boards were comprised entirely of outside directors except for the chairman/CEO. Simultaneously, the prevalence of ``dependent'' outside directors (those who also provide services to the company) has diminished.

Corporate boards are also more diverse. Increased numbers of directors have public service, academic, and scientific experience. Boards also include rising percentages of women, minorities, and executives from other countries.

Auditing committees, typically made up of independent directors, have become nearly universal. In many companies, nominating committees propose candidates both for the board and for senior officers. Other committees evaluate and determine compensation for top executives. Each type of committee is composed largely or entirely of outside directors.

Another important, voluntary change occurred earlier this year when the board of directors of General Motors issued 28 ``guidelines on significant corporate governance issues.'' The guidelines designate a ``lead'' outside director to chair three meetings of independent directors a year and give the board, rather than the CEO, authority to select new members.

It is noteworthy that these changes in management did not require a formal takeover.

Further innovations are desirable. To avoid actual or potential conflicts of interest, outside directors should not represent banks, law firms, customers, or the the community in which the corporation has its headquarters. Retired officers of a company do not belong on its board. Outsiders have less stake in defending the status quo than do the retirees who may have created it.

The board chairman should usually be an outside director to ensure the board's independence. But there is no need to modify the traditional arrangement when a well-functioning company's CEO maintains an open, healthy relationship with the board.