From the outside looking in: checklist-ism won't tell you what you might really need to know about a board.

AuthorKaback, Hoffer
PositionQUIDDITIES

AT A FEBRUARY 8 New York Society of Security Analysts corporate governance conference, Holly Gregory of law firm Weil, Gotshal & Manges voiced the important question, "How do we judge a board's effectiveness?"

Let us first of all recognize numerous sub-questions inherently involved:

* What does "effectiveness" mean?

* Over what time frame is it to be measured and evaluated?

* What criteria should be used?

* Who sets them?

* Who does the evaluating and judging?

* Is that judging to be wholly internal, wholly external, or something else? That is, should evaluation be made by 1) directors of their colleagues, 2) ratings services types, 3) the editor of Business Week, 4) the editor of DIRECTORS & BOARDS, 5) majority vote of hedge fund managers (like the popular vote of baseball fans in past All-Star selections), or 6) others?

Consider just a small portion of the difficulties: Can "effectiveness" be equated, more or less, to a board's thoughtfully and carefully hiring the right CEO for the job? (Many do believe that selecting an appropriate CEO is the board's most important responsibility.) But, because experience shows that CEOs who appear "right" on paper often fail, how do we know until after the fact whether the board's decision was correct? Should we perhaps say that an effective board is one that timely fires the wrong CEO?

Or, is an effective board one that gets the stock price up, and an ineffective board one where the stock price languishes? After all, isn't the lodestar for good governance supposed to be "value creation for shareholders," and what is a high stock price but value creation? Those inclined to think so should ponder examples like Sunbeam, Enron, and WorldCom. Was the Sunbeam board "effective" when it hired Chainsaw Al Dunlap (stock at roughly $12)? Was it effective as the stock zoomed to $50? Did somehow the identical directors, possessing the identical capabilities and responsibilities for overseeing the identical business, become ineffective when the stock started to tumble (toward, literally, zero)? Or was this the same board, qualitatively, throughout, irrespective of stock price movement (dramatically up followed by dramatically down)? Was the Enron board good ("effective") at one point and bad ("ineffective") at another, or was it always the same quality?

Does it really make sense to look to stock price movement as a key indicator of board quality or effectiveness?

Numerous firms "rate" the quality of governance...

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