GOOD GOVERNANCE

CORPORATE
GOOD
GOVERNANCE

Principles of Good
Governance
Heres what we look for in evaluating
boards

INDEPENDENCE
No more than 2 directors
should be current or former
company executives and none
should do business with the
company or accept consulting
or legal fees from it.

Principles of Good
Governance
Heres what we look for in evaluating boards
INDEPENDENCE

The audit, compensation

and nominating
committees should be
made up solely of
independent directors.

Principles of Good
Governance
Business Roundtable insists
that all major public
corporations should now
have a substantial
majority of independent
directors, not merely a
simple majority, as at AIG

Principles of Good
Governance
Governance critics note that
separate compensation
scheme controlled by majority
stockholders and handful of
insiders can have a perverse
effect, Since the top officers
control it, the compensation
program could stifle any
dissent that could legitimately
come before the board.

Principles of Good
Governance

STOCK OWNERSHIP

Each director should

own an equity stake
in the company
worth at least
$150,000, excluding
stock options.

Principles of Good
Governance
STOCK OWNERSHIP

The only
exception new
board members
who havent had
time to building
a large stake.

Principles of Good
Governance

DIRECTOR QUALITY

Board should include at

least one independent
director in the
companys core
business and one who is
the CEO of same-size
company.

Principles of Good
Governance

DIRECTOR QUALITY

Fully employed directors

should sit on no more
than 4 boards, retirees no
more than 7.
Each director should
attend at least 75% of all
meetings.

Great Numbers, Weak

Governance? EXAMPLE
By any measure, the board of

By any measure, the board of

insurance giant American
International Insurance (AIG)
is a throwback.

With 20 members, it to large to

encourage meaningful
discussion. With 9 AIG execs
holding seats, it includes far
too many insiders.

Great Numbers, Weak

Governance?
It lacks single currently active
executive among its
independent directors. Until
only recently, the board also
failed to have a separate
nominating committee to
ensure that its outside
directors are truly
independent.

Great Numbers, Weak

Governance?
7 of the inside directors, including
Chairman and CEO Maurice R.
Hank Greenberg, control
aqnd run 2 private companies
that have substantial business
dealings with AIC, leaving the
execs open to charge of selfdealing and conflicts of
interests.

Great Numbers, Weak

Governance?
One of these firms is a bank vault,
paying out tens of millions in
cash and stock to AIC
executives outside the view of
the boards compensation
committee. No wonder many
governance experts consider
the board among the weakest in
Corporate America.

Great Numbers, Weak

Governance?
Critics argue that
shareholders rarely know
the value of a wellfunctioning board until a
crisis hits, and they say that
the governance practices at
AIG dont inspire
confidence.

Principles of Good
Governance
BOARD ACTIVISM

Board should meet

regularly without
management present
and should evaluate
their own performance
every year.

Principles of Good
Governance
BOARD ACTIVISM

Audit committees should

meet at least 4 times a year.
Board should be frugal on
executive pay, decisive when
planning a CEO succession,
diligent in oversight
responsibilities and quick to
act when trouble strikes.

Principles of Good
Governance

HOW WE SHOULD RATE THEM

The Business week

ratings were based
on survey of 51
governance experts
conducted for
Business Week by
Harris Interactive.

Principles of Good
Governance

HOW WE SHOULD RATE THEM

A proxy analysis by Business

Week of Companies.
identified by survey
respondents as having the
most effective and least
effective boards and an
analysis of overall board
performance by Business Week
editors.

Principles of Good
Governance

HOW WE SHOULD RATE THEM

The proxy analysis grades

each company on the extent to
which it meets 16 governance
standards in the areas of
1 - independence
2 - accountability and
3 - quality

How Corporate Scandals are

Sparking a Revolution in
Governance

During 1990s Walt

Disney Co. occupied
a prominent place in
Business Weeks
rankings of
Americas worst
corporate boards.

How Corporate Scandals are

Sparking a Revolution in
Governance

Directors were long

on ties to then CEO
Michael D. Eisner
and short on
management
expertise.

How Corporate Scandals are

Sparking a Revolution in
Governance

Although
performance
was strong,
oversight was
minimal.

How Corporate Scandals are

Sparking a Revolution in
Governance

With its stock climbing

and shareholders
happy, it more or less
ignored the issue,
saying only that
Disneys strong
performance spoke for
itself

How Corporate Scandals are

Sparking a Revolution in
Governance
These days ended with a bang
when the debacle at Enron
Corp, expose how vulnerable
even the largest companies
were to fraud & manipulation.
Across the world a
governance revolution is
under way.

How Corporate Scandals are

Sparking a Revolution in
Governance

As the list engulf grows

from Enron to Tyco to
WorldCom the revolution is
gaining momentum.
Top executives who once
ignored criticism of their
clubby boards are
scrambling to institute
reforms.

How Corporate Scandals are

Sparking a Revolution in
Governance

Directors whose main

contribution to
boardroom debate had
been golf scores and
gossip are returning to
classroom to learn how
to read a balance sheet.

How Corporate Scandals are

Sparking a Revolution in
Governance

Compensation
committees that
routinely awarded
massive pay packages
to poorly performing
CEOs are having
second thoughts.

How Corporate Scandals are

Sparking a Revolution in
Governance
Many official reforms have
already been passed following
Enrons meltdown
Boards are going even further,
instituting sweeping changes in
their composition, structure and
practices on a scale not seen
since skyrocketing executive pay
gave birth to modern government
movement in the 1980s.

GOOD GOVERNANCE

GROUP REPORTS
ASSIGNMENTS

GOOD GOVERNANCE
Group 1 Best Boards
3M, Colgate Palmolive,
General Electric, Home Depot,
Intel, Johnson & Johnson,
Pfizer, Texas Instruments.
Group 2 Worst Boards
Apple, GAP, Kmart, Xerox,
Tyson Foods, Qwest, Dillards

GOOD GOVERNANCE
Group 3 Boards That Need
Work
Advance Micro Devices, AT&T,
Circuit City, Citigroup, Ford,
Hewlett Packard, Microsoft,
Pepsico, Wal-Mart

Group 4 Hall of Shame

Enron, Tyco, Warnaco,
Worldcom, Global Crossing,
Adelphia Communications