What a board needs from its general counsel: in order to make a positive contribution toward excellence in governance, corporate counsel must be a teacher, a mentor, and more.

• Author: Deju, Raul A.
• Position: BOARDS AND THE GENERAL COUNSEL - Root causes of board problems

DEAN ROGER MARTIN of the J.L. Rotman School of Management at the University of Toronto once observed that "If you took 99 percent of the boards and dissolved them, there wouldn't be a perceptible change in corporate governance or shareholder influence over companies." His comment reflects the low value that many investors and management experts place on this venerable institution.

From the launch of the Securities Exchange Act of 1934, corporate boards were created to deal with a basic structural issue of public companies--namely, the needed separation of ownership from day to-day control. As long ago as 1973, Peter Drucker was worried that boards were becoming superfluous. Drucker described corporate boards as "either simply management committees" or as "ineffectual." In fact, Drucker then described three root causes of board problems that are as real today as they were in the 1970s:

- dispersion of share ownership,

- separation of ownership and control, and

- the fact that in many instances strong top managers do not want effective boards.

Drucker's definition of an effective board is also just as valid today as it was then: "An effective board asks inconvenient questions. An effective board demands top-management performance and removes top executives who do not perform adequately--this is its duty. An effective board insists on being informed before the event--this is its legal responsibility. An effective board will not unquestioningly accept the recommendations of top management but will want to know why.... An effective board, in other words, insists on being effective. And this to most top managements appears to be a restraint, a limitation, an interference with 'management prerogatives' and altogether a threat."

Agents of change

In the past few years, since the meltdown of Enron and a few other major stalwarts of Wall Street, boards have begun to exercise a greater degree of reflection on their roles. Corporate counsels and their boards have also been affected by the passage of the Sarbanes-Oxley Act as well as by a myriad of federal regulations and state laws aiming to address in various ways the fallout from prior scandals. Corporate counsels have now been finally called to play a significant role as agents of change in governance.

To define the role of counsel to a progressive board, one must begin by clearly defining the responsibilities of the board itself in this age of transparency. The responsibilities of counsel are derived from the requirements to fully exercise the board responsibilities. I believe boards serve a key function in our capital-driven society and that strong and open boards can significantly enhance the success of a modern capital enterprise while positively impacting the underlying social structure.

In 2000, McKinsey & Co. conducted an exhaustive opinion survey of investors in more than 200 public companies. From this survey the resulting definition for a successfully managed company was as follows: "A well-governed company is defined as having a majority of outside directors on the board with no management ties; holding formal evaluations of directors; and being responsible to investor requests for information on governance issues. In addition, directors hold significant stockholdings in the company and a large proportion of directors' pay is in the form of stock options."

Exhibit 1 is an attempt to compile a broad statement of principles for corporate boards that can serve as a benchmark for excellence in governance. It draws on a comprehensive base of information and research, including an analysis of governance principles, data, and trends for more than 40 public company boards, covering a broad range of small, midcap, and large public...