Principles to govern by.

• Author: Kaback, Hoffer
• Position: Corporate governance

Corporate governance is currently a hot issue. Consider what has been written this year concerning the Kmart, Borden, W.R. Grace, and Morrison Knudsen boards. Undoubtedly, more such examples will surface and occasion additional discussion of the role and behavior of corporate directors.

The basic legal principles concerning the nature and scope of directors' fiduciary duties (including a vast body of case law defining the contours of those duties) are well-established. They should be quite familiar to any reasonably sophisticated corporate director. So long as you are honest, loyal, act with prudence and integrity for the good of the corporation, and reach independent judgments on an informed basis rather than rubber-stamping management proposals, you can sleep well at night.

Less clear, however -- especially to newer directors -- may be:

(a) what behavioral principles should guide ordinary course performance of the director's job?, and

(b) what is the most effective way to apply or modify such principles?

Conscientious directors think about these things and sometimes struggle with them in particular instances. Less conscientious directors perhaps neither agonize over, nor even ponder, them, but simply attend meetings, pocket their meeting fees, and go about their business (as distinct from the corporation's).

The following is an incomplete (and subjective) list of some possible operating principles. Some are irreconcilable with others; most, if taken literally, are more or less unworkable for one reason or another.

The goal is to select appropriate variations of the right principles in particular circumstances so as to act effectively as a director, while simultaneously honoring punctiliously your fiduciary obligations.

1. The Davy Crockett Principle: "Be sure you're right and then go ahead." Versions of this principle play out as:

   - always verbalize what you think is right and do strenuous battle for your positions;

   - always vote the way you think is right, even if boardroom discussion makes it clear that you are in the clear minority;

   - always vote "no" when you disagree and always insist on having your "no" votes recorded in the minutes;

   - always be prepared to resign if an important matter is decided contrary to your strongly held beliefs.

   While morally satisfying, this principle is too absolutist to be workable in the real world. On some issues, of course, your business conscience will demand the application of the Crockett principle. But is it not more effective to apply it, and to use the full powers of your moral and logical suasion, chiefly on those key issues where you truly believe the corporation may be at risk because an unsound decision is about to be taken? In other words, the ancillary principles of "pick your spots" and "save your bullets" should be utilized as tempering modifiers of the Crockett principle. Otherwise, you may become a holier-than-thou type who, counterproductively, loses boardroom effectiveness.

   Example 1: The CEO and an overwhelming majority of the...