The Chevron way to a strong board.

• Author: Derr, Ken

Developing a basic governance structure is merely the start. Building a relationship of trust between directors and the management team is what is instrumental in generating superior value from your board.

Given the amount of money that's been going into the stock market, the subject of corporate governance is neither an academic nor a theoretical issue. With people investing a higher percentage of their personal finances in public corporations, and with pension funds heavily into stocks, governance affects real lives and real futures. It's a simple fact that good corporate governance makes a significant difference in the performance of a company and in its worth to those investors.

We at Chevron believe we've established a good track record on governance. While our system may not be perfect, we must be doing something right. CalPERS has given us an "A," and over the last nine years Chevron has had the highest stockholder returns among the major oil companies.

I would not contend that we've developed a magic formula for good governance. I'm not even sure there is a definitive "right way." In fact, different systems can work for different companies, and quite well. But if the successful systems have one thing in common, it's that the company's governance framework reflects the culture of the company itself, and to some extent the culture and the makeup of its board of directors.

Developing a basic governance structure is not that difficult. One has to be willing to take the time and make certain decisions on how you're going to do it. But the most important way to ensure you have a well functioning board is to first have that structure in place.

The recruiting challenge

At Chevron we're convinced that one of the most important prerequisites for good governance is recruiting a strong board. Anyone who has tried to recruit good board members in recent years knows it is no easy task. Executives today realize they are taking on a serious and significant commitment with a board membership. That was not always the case 25 years ago when boards were a bit "clubby" and participation was more casual. While attracting talented individuals is clearly tougher in these intense times, there's nothing more important to a company's fortunes than a strong board.

What do I mean by a strong board? First of all, it's characterized by a relationship of trust between the board and management, and especially with the CEO. Second, a strong board is one in which management can call upon and use the individual talents and business experiences of the directors to help deal with complex and difficult issues. To that end, diversity in board membership is very important. By that I mean diversity not only in experience, but also in ethnic and cultural background.

Six of Chevron's 10 outside directors are current or retired CEOs of large companies, such as Hewlett-Packard, Boeing, and Bank of America. Three directors served in government, and with great distinction. For example, Carla Hills was the U.S. Trade Representative during the Bush administration. Bennett Johnston, one of our newer directors, was a former Democratic senator from Louisiana and the longtime chairman of the Senate Energy Committee. And Condoleezza Rice served President Bush as Senior Director for Soviet Affairs at the National Security Council. She joined Chevron's board at the suggestion of former Secretary of State George Shultz who has since retired from our board - when we were in negotiations on an oil venture with Russia. And from academia we have former University of California Chancellor Chang-Lin Tien, who has expertise in the energy field and is an authority on Asian affairs.

Renewal process

Along with seeking a diverse membership, it's also important to maintain a constant renewal process, if only to freshen the board's makeup. Four of our current directors were on the board when I became chairman almost 10 years ago, a senior quartet whose familiarity with Chevron is invaluable. Three members joined about six years ago. And within the past two years we've added three more, who bring new perspectives to our table.

Some companies may not make any changes in their board makeup for long periods of time. It's a practice I don't recommend, because such a board could grow perfunctory in its decisions and behavior. A strong board is a dynamic board.

Insiders and outsiders

Today, most boards are controlled by a majority of outside directors. Our board has 10 outside members and three from the company - Vice Chairman Jim Sullivan, Chevron Overseas Petroleum President Dick Matzke, and myself. This ratio, however, has not always been the case at Chevron. When I joined the board in 1981, there were more insiders than outsiders.

Some critics would argue that three insiders are too many, and that the CEO should be the only insider on the board. I see nothing wrong with having several insiders as directors. In fact, I think it's a plus. Having other...