Benchmarking fundamental and 'ideal' board practices.

• Position: Board of directors

In June 1997, the staff of the California Public Employees' Retirement System proposed that the fund formally adopt a set of governance principles whose purpose would be "to provide a benchmark of what is `good' corporate governance." The principles were categorized as Fundamentals, criteria that CalPERS deems essential right now to ensure effective accountability; and, The Ideal, criteria that, in CalPERS' view, "may be further from today's tradition, or that may not be wholly applicable to all companies ... but which are necessary for the future competitiveness of U.S. companies." The principles have been under review since then by the CalPERS board of trustees and some action on adoption is anticipated this year. Here is a selection of those principles.

Board Independence and Leadership

1. A majority of the board consists of independent directors. Ideal: The CEO is the only company employee who is a director. In addition, non-independent directors (beyond the CEO) comprise no more than 20% of the board.

2. Independent directors meet alone, at least annually, without the CEO and other non-independent directors.

3. When the chair of the board also serves as the company's CEO, the board designates an independent director to act in a lead capacity.

   Ideal: The chair of the board is an independent director.

4. Certain key committees consist entirely of independent directors. These include the committees which perform the following functions: audit; director nomination; board evaluation and governance; CEO evaluation and management compensation; and compliance and ethics.

   Ideal: The chairs of these independent-only committees have access to advisers who are independent of management

5. Director compensation is a combination of cash and stock, with the stock component being a significant portion of the total compensation. Directors receive no other form of compensation (e.g., retirement benefits). Director compensation is reviewed at least once every three years, against appropriate industry comparisons.

   Ideal: At least 50% of the director's total compensation is in the form of company stock, and no director may also serve as a consultant or service provider to the company.

   Board Processes & Evaluation

1. The board has adopted written governance principles, and reevaluates them at least every two to three years.

2. A board committee, consisting entirely of...