1. overnance headlines in
2004 were sadly similar to
those of recent years, with
more than a few stories of
boards forced to remove
their CEOs under clouds of disgrace. From
Marsh & McLennan, Fannie Mae and
Computer Associates in the U.S. to Royal
Dutch/Shell and Parmalat abroad, boards
claimed to have been ambushed by the
massive fraud of those close to the top.
The investigations that follow major white-
collar improprieties invariably show that peo-
ple at the top could have learned about them
but insulated themselves, or denied the bad
news when corrective action could have
been taken. Why? We might think of the
state of awareness as a continuum ranging
from individuals “in the know” to those “in
the dark”—the victims, for instance. In
between are individuals who have partial
knowledge or a vague understanding. Why
don’t they act? There are several factors.
First, and most obviously, is the image
of the company. For six years, Fortune
ranked Enron as the most innovative com-
pany in the nation. Leading consulting
firms and academics held Enron up as the
prototype of the “New Economy.” Arthur
Andersen was their accounting firm. CEO
Ken Lay was a personal friend to President
Bush. With such a reputation, suspicious
activity was easier to dismiss.
The second factor is somewhat para-
doxical. There is virtually no significant
transaction today that does not involve
dozens of specialists and dozens of organ-
izations. Many of the major deals that have
come unglued involved bankers, invest-
ment bankers, auditors, equity investors,
lessees, vendors, lawyers for the lessee,
lawyers for the lessor, the banks and so on.
We use these specialists to reduce the risk
of doing business. But, in practice, having
so many players creates a structure in
which it’s easy to conceal fraud.
Third, there is a phenomenon of “anes-
thetization” that occurs when fiduciaries
guarding against wrongdoing develop a set
of routines over time that they follow in a
mindless way, ignoring the signs of trouble
that the routine was designed to detect.
There are six steps we recommend for
CEOs and their boards to pursue in 2005:
G
CEO Magazine December 2004 41
BOBDOB
Reforming Governance
Companies must go beyond rules to focus on issues
of character. BY ROBERT P. GANDOSSY AND JEFFREY SONNENFELD
Agenda 20052 11/16/04 9:01 AM Page 41

2. AGENDA 2005
1. Create a climate of trust and candor.
Often, boards are “managed” by executives
who see them as obstacles rather than as trust-
ed business partners. Critical information
should be shared with directors in time for
them to read and digest the facts. Polarizing
factions and in-groups should be discouraged.
2. Foster a culture of open dissent. Dis-
sent is not the same thing as disloyalty. One
prominent director warned that “no one
wants to be seen as the skunk in the lawn
party.” Safeguarded channels for whistle-
blowers in management should supple-
ment new Sarbanes-Oxley protections and
audit committee solicitation of concerns.
3. Mix up the roles. Managers and cor-
porate directors must avoid getting trapped
into rigid typecast positions. To stimulate
debate and avoid the stereotypes of being
the “fire-the-bastards” person, or the “har-
monizer” or the “governance whiner,” peo-
ple should take turns as enthusiasts and
devil’s advocates. This can challenge blind
obedience to authority and break the
group’s tendency to avoid reality testing.
4. Ensure individual accountability. To
escape the quicksand of bystander apathy,
managers and directors can be required to
report on strategic and operational issues.
These tasks should involve the collection of
external data, interviews with customers,
anonymous “mystery shopper” visits and the
cultivation of links to outside parties critical
to the company’s future.
5. Let the board assess leadership talent.
At top companies, the board is actively
involved in assessing talent. At Procter &
Gamble, The Home Depot and General
Electric, the board regularly visits facilities
and meets with managers and customers to
learn and to observe operations and talent
firsthand. Directors at P&G often come in
early to board meetings to meet with and
coach emerging leaders.
6. Evaluate the board’s performance. It is
impossible to learn without feedback. Yet
many in top management and half of all
boards do not provide performance
appraisals. Everyone else in the enterprise
can be assessed, but somehow the more
senior players find excuses to not collect
this often discomforting information.
The Securities and Exchange Commis-
sion is encouraging more direct nomina-
tions of directors from shareholders,
bypassing board nominating committees.
While shareholder activists and CEOs bat-
tle over the legal definitions of the trigger-
ing events that should lead to such direct
nominations, the criteria for identifying
more diligent directors has been left on the
sidelines. To improve the quality of direc-
tors, we suggest the following:
Q Seek knowledge rather than names. An
overenthusiasm for “branded” names has
led to a pathological fixation on fame. Cor-
rupt CEOs love to hide under the reflect-
ed glory of star-studded boards, knowing
that investors will be impressed and the
directors themselves likely will be too busy
to ask tough questions.
Q Focus on character more than inde-
pendence. Many shareholder activists are
pushing for supermajorities of independ-
ent outside directors with the ultimate goal
of having the CEO be the only insider.
That’s not necessarily wise. One of the most
courageous voices on the Enron board was
a renowned scientist, Charles LeMaistre.
But today, LeMaistre would be suspect
because his institute, MD Anderson Can-
cer Center, received Enron funding.
Similarly, having some inside directors
who know the business can help inform the
outside directors by reducing the filtering
of knowledge through the CEO.
Q Ruthlessly purge those with hidden
agendas. Boards and management com-
mittees should not resemble city council
meetings. Sometimes unrevealed conflicts
are not even financial but rather political
and personal. Forest products, pharma-
ceutical and media firms are especially
exposed to public issue advocacy groups.
Board candidates who are primarily
anchored in single-issue causes are not like-
ly to be legitimate representatives of a
broader group of shareholders.
Q Find people with passionate interest in
the business. Sadly, many people seek board
posts for the vanity and power but have lit-
tle interest in the industry or culture of the
enterprise they have joined. Sometimes
directors will even admit they do not fully
understand the acronyms on the charts in
PowerPoint presentations.
Q Avoid joiners who collect boards like tro-
phies. Until the forceful reform efforts of
shareholder activists a decade ago, it was
common to find directors serving on more
than a dozen boards and frequently attend-
ing fewer than 75 percent of the meetings.
With a single board post now easily requir-
ing 200 hours a year of preparation and
meetings, four boards is becoming a com-
mon limit for otherwise employed directors.
Q Don’t accept arbitrary retirement ages.
Enterprises such as Corning, Delta and
Boeing have wisely sought energetic elder
statespersons, like Jamie Houghton, Jerry
Grinstein and Harry Stonecipher, to lead
them through troubled times.
For reformers, the situation today is akin
to that of the dog who finally caught the car
it has chased for years. Now that we have
a climate that will embrace reform, what do
we do with it? It’s time to shift the debate
from rules and procedure, to focus now on
what we really know about people and their
character. L
Robert P. Gandossy leads Hewitt Associates’
talent practice. Jeffrey Sonnenfeld is Associ-
ate Dean at the Yale School of Management.
They are co-editors of the book, Leadership
and Governance From the Inside Out.
200 The number of hours a board post
requires in preparation and meetings per year
42 www.chiefexecutive.net December 2004
Agenda 20052 11/16/04 9:01 AM Page 42