Board of Directors of American businesses have come under attack.  Chief Executive has provided two sets of hallmarks to separate the better boards from the rotten ones.

Due to the misdeeds of a few corporate executives, business leaders of companies large and small have been tarnished by association, placed under media and legislative microscopes, and viewed as lacking in scruples, especially in the financial arena.  One important question asked in each case is "How come the Board didn't know what was going on?"

To shed light on what makes boards better or rotten, Chief Executive has listed five characteristics of each in its October, 2002, issue.  While the business press has seen a recent proliferation of articles on boards, Chief Executive throughout its 25 years of existence has focussed on the executive suite, corporate governance, and the crucial fiduciary role boards play.  For the past nine years Chief Executive selected the best and worst boards.  Their observations bear listening to.

Five Hallmarks of a Better Board

Five Hallmarks of a Rotten Board

1. Control freak CEOs.  It's easy for CEOs to control the agenda and limit information.  "CEOs must select board members with the courage to challenge and demand information when they think they're being boxed out."
2. Insiders masquerading as outsiders.  These are board members who are personally beholden to the CEO.  They are more common than one might think.
3. Rubber-stamp directors.  Anyone who has served on a board knows how difficult it is to challenge complex issues, especially when their confidence in their own understanding of the underlying information may be lacking.
4. They look good, but they’re asleep.  "Credentials don't make the director."  Homework, attention, and performance do.
5. Boards who listen to CEOs who stretch the truth.  "If senior management is bent on concealing information, there is no board that can't be hoodwinked."     As a confidential advisor to CEOs worldwide on strategy, I frequently interact with boards.  My general impression is they are composed of men and women of good will, experience, and wise counsel.  By and large, they offer sound advice when they understand the issues (good) and remain quiet if they do not (not good).  Equally clear to me is that most companies tap into only a fraction of their board members' good will, experience, and wise counsel!

I well remember the board meeting of a client of mine several years ago.  One agenda item was to approve the issuance of $100 million in debt instruments.  This in a company that traditionally eschewed debt and whose annual revenues were about $500 million.  After the discussion, the board voted to approve the measure.  When the board reconvened after a brief break, one of the respected newer members stood up to say he voted for it basically because he had confidence in the senior management, but he now recognized he had to independently evaluate the soundness of such a proposal (the "biggest" in his life).  That was a better board member.

I was also present at the final board meeting of another client, when the key agenda item was to disband the company and transfer its operations to sister companies.  The board unanimously voted to do so.  Afterward, I was with two board members who said they were looking forward to the next board meeting, which was originally to be at a location known for fine fishing.  When I told them they had just voted the company out of existence and there were no future meetings, they were dumbfounded they had done so!  Those were rotten board members, even though they were good and decent people.  They simply weren't paying attention to the only reason they were in the room!

Given a magic wand, I would mandate all new board members be educated about their fiduciary roles, so they can appropriately exercise their responsibilities on behalf of their company's shareholders.

Make no mistake about it: board issues like these exist not only in business, but in every organization - nonprofit, educational, military, and governmental.  While the cultures may be different, the underlying need for sound, transparent governance principles and practices is the same.

Do boards make a difference?  Yes, they do.