A Tough World Needs Tough Boards

The most remarkable thing about the much-hyped corporate-governance "revolution" in the U.S. is how long it's taking. More than a decade after institutional shareholders staged a noisy revolt against poorly performing managements in the mid-1980s, cronyism still prevails on scores of boards. The movement to transform the boardroom from a cozy club of the CEO's buddies into an independent, active body representing owners is taking way too long.

To help pick up the pace, BUSINESS WEEK is creating the first-ever corporate-governance ranking system. We picked the 25 Best Boards and the 25 Worst Boards by surveying pension and money managers as well as analyzing the quality of the boards. Entrenched management is hard to change, but public acclaim and opprobrium just may nudge recalcitrant chief executives to reshape their boards.

What makes for a good board? It helps if directors can read a balance sheet, actively participate in long-term strategy, own significant equity in the company, and actually choose the CEO (rather than the other way around). Directors who sit on too many boards can't guide a complex corporation. A modern board should have no more than two or three insiders on it, and none should sit on the audit, nominating, or compensation committees. Outside directors should dominate.

It's no accident that General Electric, Compaq Computer, IBM, Chrysler, and Eastman Kodak scored among the highest in our Best Boards for 1996. Nor is it surprising that the boards of three of these five companies dumped their chief execs for poor performance and replaced them with new CEOs who turned their companies around. The lowest-scoring board is at Archer Daniels Midland Co. Institutional investors say its directors are compromised by family ties to entrenched 78-year-old Chairman Dwayne O. Andreas and business links to ADM, which recently had to pay a $100 million fine to the government.

Not all poorly governed companies perform badly. Walt Disney Co. stock is up about 20% so far in 1996, keeping pace with the hot stock market, even though five of its 11 directors are insiders, including two who draw fees from the company. But even the smartest CEO needs skeptics on the board of directors to prevent healthy ego from becoming destructive hubris.

Before it's here, it's on the Bloomberg Terminal.