How The Best Boards Stay Clued In

When John A. Krol became lead director at scandal-ridden Tyco International Ltd. (TYC ) in 2002, he aimed to create a "plugged-in" board. If Tyco was to regain its footing, he felt, directors needed unfettered access to managers well below the CEO. Directors needed to know what was happening in the field, and employees -- particularly new mid- and upper-level managers -- needed to feel free to discuss challenges they faced. The result, says Krol, is a culture of openness that has helped turn Tyco around. "It all starts out with trust," he says.

Forget the idea that directors should hear mostly from the CEO. At Tyco the board meets about six times a year, joined for dinner by a half-dozen managers of different business units. The dinner talk is informal, followed by detailed strategy reviews the next day. In addition, directors regularly visit business units, sometimes meeting with scores of employees, typically without chief executive Edward D. Breen or other senior staff hovering nearby. The board takes these visits so seriously that open access is now written into board guidelines.

That's a big contrast from Morgan Stanley (MWD ), where the board's reliance on departing CEO Philip J. Purcell for much of its information, combined with his long ties to many directors, left Morgan's directors ill-equipped to respond to the bank's growing crisis. But if Morgan shows the risks of boards knowing too little, too late, other companies are on the vanguard of boardroom best practices. They're moving to ensure that directors are kept in the loop of what's really going on at their companies rather than relying on sanitized reports from the chairman and CEO. Home Depot (HD ), Pfizer (PFE ), and Motorola (MOT ) have gone out of their way to give directors open access.

Yet boards must also walk a fine line between good governance and usurping the CEO. Defining where oversight ends and management begins isn't easy, directors say. Betsy S. Atkins, a director at Polycom, Chico's FAS, and Reynolds American, says she listens to employees and passes on input to CEOs. "You don't want to overstep and set up back channels for someone to undermine the CEO," she says. The mantra, says Charles M. Elson, head of the Weinberg Center for Corporate Governance at the University or Delaware, is "nose in, fingers out -- you want to nose around, but don't touch."

At many companies, life in the post-scandal, Sarbanes-Oxley era means CEOs can't easily corral directors. More directors are, in fact, nosing around. They are making face-to-face contacts with staff a regular part of their jobs. Some companies give directors the office and home phone numbers of dozens of mid- and upper-level managers in case they want to follow up on tidbits discussed in presentations. "Part of your job is getting to know people from as many levels as you can," says Elson, who serves on several boards. "That's being a good monitor."

The contacts board members work to develop up and down the line can lead to real change. Home Depot Inc. directors are urged to visit at least 12 stores a year. Richard H. Brown says his visit to a Maine Home Depot store helped to set up customized displays of rakes used to sweep snow off of roofs. Brown leaves his business card with store managers so staff can contact him.

To make sure directors hear from varied sources, some companies have designated executives to open doors for them. Motorola and Pfizer, for instance, have vice-presidents for governance whom directors can quiz about company issues. That helps directors do their homework. At board meetings the directors "can speak in facts, not generalities," says Motorola Senior Vice-President Patrick J. Canavan.

Some directors concede that such practices may threaten CEOs. But with boards being held to ever higher standards of accountability, asking good questions is "what CEOs should be encouraging their boards to do," argues Arthur D. Collins Jr., CEO of Medtronic Inc. Adds Pitney Bowes Inc. Chief Michael J. Critelli: "The fact that I give them unfettered access makes them feel I'm more secure in the job. If I were trying to stage manage everything they receive, they'd wonder what I was trying to hide." And these days the last thing a CEO wants to do is raise unnecessary doubts.

By Joseph Weber, with Roger O. Crockett and Michael Arndt, in Chicago, Brian Grow in Atlanta, and Nanette Byrnes in New York

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