Principles-based behavior for boards.

• Author: Cole, Thomas A.
• Position: Duties of Directors

It would a real shame for directors to focus exclusively on the new rules and miss the broader principles that will form a more lasting foundation for good corporate governance.

LEROY "SATCHEL" PAIGE has been quoted for three rules to live by:

* Work like you don't need the money;

* Love like you've never been hurt;

* Dance like no one is watching.

Beyond humor and sagacity, these rules are a great example of adopting an appropriate mindset for the achievement of a particular goal. Interesting that this wisdom comes from the most focused of professional athletes--a legendary pitcher. In the current business and political environment, corporate directors need the concentration of a professional athlete, but three simple rules won't suffice. Nevertheless, seven broad principles can go a long way.

1. Trust, but verify

   This old adage from arms control diplomacy captures several different notions. In its original usage, "trust" was clearly intended to be ironic. In the current boardroom context, it is useful to start with this word as a sincere reminder of the importance of a trusting relationship between a CEO and his or her board. Trust leads to collaboration which, in turn, is the best way out of the current mess. If a board has questions about the character or integrity of the CEO, it is probably time for a successor. If a board, through compensation arrangements, has created incentives that would test the most moral of individuals, then the board should remove that temptation.

   Even when trust is clearly present, a board that also "verifies" will do itself and senior management a favor. Boards are typically protected against liability by relying in good faith on reports of experts and officers. An absence of good faith can eliminate this protection as well as the protections of exculpatory charter provisions. In the current environment, there are those who believe that good faith requires more than simple reliance on corporate records or even audit opinions, especially if there has been evidence of prior unreliability.

   Establishing good faith to an unquestionable degree may require a careful evaluation of the adequacy of information systems, an assessment of the biases of the "reporter" and a thorough probing of the assertions, conclusions, and recommendations of management and advisers. The mere prospect of a rigorous vetting by the board will typically cause a management to do a better job in its analysis in the first place. And, on...