Two modest proposals: there are ways for shareholders to obtain primary source information about directors.

• Author: Kaback, Hoffer
• Position: Column

There are ways for shareholders to obtain primary source information about directors.

Presumably, few would doubt the validity of these principles: 1) Primary source information is, generally, preferable to secondary source data, since the latter are filtered through third parties; and 2) Measuring rods are useful only if they appropriately measure the quantities (or qualities) sought to be assessed.

These principles apply in corporate governance. Supporters of the checklist approach to governance claim that, since we lack the data for direct evaluation of directors' performance, it is OK to use, instead, their lists of "objective" factors.

The flaw in this claim is that the checklist items simply don't go to the issues of directors' character, judgment, and business acumen. Hence, those items are invalid devices for measuring current (or predicting future) performance. Checklisting to evaluate directors creates a misleading aura of measurability.

The Business Roundtable agrees. Its September 1997 Statement on Corporate Governance notes that focusing on governance's "formal, structural aspects... permits evaluations that appear to be objective and verifiable' "But the BRT emphasizes that, on the contrary, it is the "`soft,' subjective factors ... such as the quality of directors ... [that] are critical in the real world of corporate behavior."

Just so. And therefore we should permanently discard the governance checklists. We should instead apply the two basic principles and attempt to learn--if possible through primary source data--more about those "soft" factors. We should want to know: A) How directors actually perform, and B) What their characters and abilities are.

There are roadblocks, however. In a fantasy world where corporate governance per se was the chief Platonic good, shareholders could obtain stenographic transcripts (or recordings) of board meetings. They could then see, hear, or read for themselves how their representatives act. But the real world of business confidentiality precludes obtaining hard, reliable group A data in this manner. Relying on secondary sources for how directors conduct themselves is not an acceptable substitute because of the lack of verifiability Nor are board minutes of much help. They generally are not obtainable except in litigation. Moreover, they almost invariably reveal only that "The Chairman raised issue X. A discussion ensued." With minor exceptions (like when they reveal a voting split)...