Back in 1996, before Enron was a dirty word, BusinessWeek issued its first report card on corporate governance. We worked from the premise that boards of directors are supposed to represent shareholder interests, not management. Which boards were doing their job? And which were not?
Little did we know what the next six years would bring. At that point, the governance movement was finally beginning to gain traction. Institutional shareholders and governance experts were just starting to call for boards to assume more active oversight, subject strategic plans to rigorous scrutiny, hold the boss to high performance standards, and assume responsibility for management succession.
For our first Best & Worst Boards rankings, we polled the largest pension funds, money management firms, and governance experts. We focused on each board's effectiveness, accountability to shareholders, independence, and corporate performance. We measured each board against a series of best practices by studying its composition, directors' attendance records, compensation plans, and other criteria. And we caused a stir.
No, we didn't cite Enron, WorldCom, or Tyco as companies with bad boards. But we did nail Kmart, Warnaco, Archer Daniels Midland, Westinghouse, Walt Disney, and Time Warner--all of which soon had serious problems that escaped scrutiny by weak boards.
This year, we've expanded our original best and worst list to include three new categories: most improved boards, boards that need work, and the Hall of Shame. We're happy to report that some companies on our early "worst" lists--among them Waste Management, Disney, Computer Associates, and Cendant--are now "most improved." In general, the trend is up for nearly all the companies we examined. A big cleanup is under way.
In raging bull markets, good governance may not matter much to investors. But when companies get in trouble, investors are quick to ask: "Where was the board?" Once CEOs are called upon to testify, or when the stock collapses amid allegations of accounting fraud, or when upper management pay packages draw ridicule, it is too late.
Now, as in 1996, our rankings are a guide to which boards are likely to navigate the future with fewer mishaps.
By Stephen B. Shepard, Editor-in-Chief