The case for the inside director: in the quest for a properly balanced board, don't heedlessly dismiss insiders--they offer attributes essential for governing complex global companies.

• Author: Weidemeyer, Tom
• Position: Board Composition

WHEN YOU HAVE a headache, you may take aspirin. But do you take the whole bottle? You don't unless you want to make an unpleasant situation much worse. So why rush to take the whole bottle when it comes to a headache plaguing corporate America -- accounting fraud?

Granted, it's been a headache of migraine proportions for many shareowners. And unfortunately, the reputation of many innocent publicly traded firms has been affected by the greed of a few. Adjustments certainly need to be made. Yet when it comes to governing public companies, couldn't overreacting do as much harm as good?

Today, overwhelming momentum is building to require the boards of public companies to be composed predominantly of directors from outside the enterprise. At first blush, there seems to be logic in that. After all, outsiders have no ties to the company, while inside directors may report to the CEO or, in some cases, be retired senior executives. Therefore, one would assume, outsiders must be more objective about decision making.

But does detachment, in and of itself, guarantee the best representation for shareowners? That question was addressed by Dr. Jeffrey Sonnenfeld, founder of Yale University's Chief Executive Leadership Institute. He reported some interesting findings in a recent Harvard Business Review article:

* There's no correlation between boards with large numbers of independent directors and how those companies rank on the Fortune "Most Admired" list.

* In many cases, the least-admired companies had only one or two inside directors on their boards.

* On the other hand, well-respected companies like Home Depot, Intel, Southwest Airlines, and Microsoft had a substantial representation of inside board directors.

As these facts suggest, the spotlight seems to be shining on the wrong place. It should be pointed at the process rather than the structure of boards. That process involves creating the right atmosphere and rules of discussion to challenge assumptions, to permit healthy debate, to foster teamwork, and to bring forward the truth.

So what are the critical attributes that effective board members demonstrate? And why can inside directors offer a unique advantage to governance? I believe four attributes stand out:

-- Integrity;

-- Business expertise;

-- Understanding of corporate culture; and

-- Accountability.

The unassailable attribute

First and foremost is integrity. Without that, the other attributes don't matter. Integrity has been defined and described in many ways. To me, its essence is crystal clear. Integrity is the intrinsic value of honesty of purpose as well as deeds. It requires doing the right thing, whether or not anyone is looking. And it's the attribute above all others that must be unassailable, whether it applies to an inside or...