It's time to improve corporate governance.

• Author: GEORGE, WILLIAM W.

'I frankly am disappointed that we have not made more progress in the past 10 years.' Recommendations for building a great board, using it effectively, and establishing a balanced relationship between the CEO and the board.

DURING THE PAST 20 YEARS much has been written about vitally needed improvements in corporate governance, but the signs are everywhere that it is not working. Weak boards let their CEOs dominate them, to the detriment of their shareholders. CEO compensation has run away from reality and often bears no relationship to performance, short-term or long-term. CEO evaluation and selection processes are badly flawed.

On the one hand, boards often let their CEOs stay in office well beyond their peak performance; on the other, the boards of great companies like Procter & Gamble, Coca-Cola, General Motors, Gillette, and Xerox have such flawed CEO selection processes that they are forced to oust their new CEOs in less than two years. Many boards wind up as nothing more than the cronies of long-tenured CEOs. Other boards sit idly by while the company implodes under an aggressive CEO and eventually disappears altogether.

There are exceptions, of course, like GE and Target, but the tragedy is that they are the exception, not the rule. Perhaps the General Electric board has set the standard once again of how the selection process should be done.

I frankly am disappointed that we have not made more progress in the past 10 years. Having studied corporate governance since my early twenties, I always believed that my generation would be different when we reached the top of our corporations and controlled the boards. Sadly, this is not the case.

Let me propose to you that the core of the problem is that most boards do not operate from a well-thought-out set of governance principles and stick to them during times of challenge and crisis. Sound governance is the key to building successful corporations and shareholder value for the long term.

So how can one build a great corporation through a superior board and outstanding corporate governance? I would like to address that question in three primary areas:

1. Building a great board;

2. Principles of corporate governance; and

3. Board-CEO relationships.

1. Building a Great Board

   Building a great board is a most difficult task. It takes a great deal of time on the part of the board members and the CEO. But it is the key to a strong system of corporate governance. Let's examine the five areas of building a board: 1) board member selection; 2) use of the board; 3) board performance and evaluation; 4) board tenure; and 5) board chemistry.

   1. Selecting Board Members: The key to building a great board, in my opinion, is selecting board members with a diverse set of opinions, experiences, and expertise. Diversity comes in many forms: professional career experiences, educational background, gender, race, national origin, and geographic location. All of these are important in building diversity of opinion.

      Board members should be selected more for the contribution they can make, not the position they hold. This principle seems obvious, but far too often I have witnessed the selection be based on the title of the person, especially if he is a CEO, than his or her capabilities. Being a great board member takes more than ability, prestige and title; it takes time, dedication and commitment. Over time it is essential that board members get to know the company well and understand and care about its history and culture as well as its vision for the future.

      It is a big mistake to select well-known CEOs just for the prestige they bring to your board, unless you first assess their level of interest in your business and the time they will have to devote to it. In my judgment it is very important to have sitting CEOs on your board, but you do not want to have a board composed entirely of CEOs. Medtronic's experience in building its board over the last 40 years may be instructive here (see accompanying sidebar).

   2. Use of the Board: It is not enough to have a great group of directors: The key is how you use them. My philosophy has been to use the board not just as a review and approval body, but as a sounding board. We bring the Medtronic board our thoughts and ideas about new strategic directions, new business ventures, possible acquisitions, and sticky legal issues long before we go to them for approval. I have found their counsel and advice to be invaluable. Many times it has saved me from bad decisions; other times it has empowered me to take on a risky course of action.

      Sometimes the CEO has to give encouragement to the sole director whose opinion runs contrary to all the other directors and management. Two examples in this regard may be useful. In one case a board member with pharmaceutical experience held out against the acquisition of the leading drug delivery company because he felt it would take us in a direction we knew little about. Although the rest of the board approved the acquisition by an 11-1 vote, I decided he was right and cut off the negotiations shortly thereafter. I also reached out to him immediately after the meeting to reinforce his courage in going against the rest of the board.

      In another case we were considering getting out of an important business. We had tried unsuccessfully for 10 years to establish a position but had never gotten above a 10% share. We had contemplated several acquisitions, none of which worked out. And we were losing $60 million a year in the business. One of the physicians on the board held out against the management and the remaining directors about getting out. Eventually, I decided she was right and convinced the board...