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How Effective Is Your Board?

How to evaluate a board of directors' effectiveness? Business Week's November 25, 1996 issue' report card on corporate governance provides some answers to that question. Their criteria are built on some basic assumptions about board function:

  • Directors act on behalf of shareholders.
  • Directors oversee management who are hired to execute owners' desires for the application of their assets.
  • Directors' primary responsibilities are active oversight, rigorous scrutiny of strategic plans, holding top management to high performance standards, and assuring management succession.
  • Directors also serve as a crucial resource to the CEO who should eagerly share questions and problems with the board.

Specifically, best board criteria used by Business Week that are particularly relevant to family businesses include:

  • Evaluating annually CEO performance in independent directors meetings
  • Linking CEO pay to specific performance goals
  • Reviewing and approving both long-term strategy and one-year operating plans
  • Assessing boards' and individual director's performances annually by a governance committee
  • Keeping inside directors to a minimum
  • Requiring directors to retire at 70
  • Having audit, compensation and nominating committees composed of outsiders
  • Banning directors who get consulting, legal or other fees from the company

As we often point out, the impact of family ownership on a business can be very positive or very negative. Business Week's analysis of boards bears out that conclusion. Both their best and worst boards were characterized by heavy influence from powerful families. The best: Campbell Soup where the Dorrance Family provides four of 15 directors including vice chairman John Dorrance. The worst: Archer Daniels Midland dominated by family and friends of 78-year-old chairman Dwayne O. Andreas.

 

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