School of Business > UPDATE > Fall 2002 > Article

A 10-Step Program to Restore Corporate Governance

William W. George

"In recent years many boards have abandoned their legal and fiduciary responsibilities. They have become more responsive to the CEO and the management than to the shareholders. In doing so, they abandoned their governance role and jumped on the bandwagon to get the company's stock price up. They stopped asking the hard questions about how the company was achieving its numbers." William W. George Former Chairman and CEO, Medtronic, Inc.

One of the most trenchant speeches at the Directors' Summit was given by William W. George, former chairman and CEO of Medtronic, Inc., who has become a nationally recognized authority on corporate governance issues. Two years ago, he gave the keynote address to the National Association of Corporate Directors, warning that time was running out for boards of directors to step up to their responsibilities and transform themselves from within. "Sadly," as George recalled, "we did not act and now we are living with the consequences of our own inaction."

George then went on to outline 10 steps that he believes could restore governance to corporations:

1. Create principles of corporate governance. Independent directors should establish corporate governance principles to describe the board's function and conduct. These should be published for shareholders, and the board should report to shareholders annually on how well the board lived up to those principles.
2. Have a majority of the board be independent directors. George believes boards should be composed of a minimum of 50 percent independent directors. He'd prefer 70 percent or more. And to be truly independent, no director should receive any additional compensation other than standard board fees from the corporation (no consulting fees or speaking fees, etc.).
3. Change how board members are selected. "We need to choose board members more for their values than their titles," according to George. Boards should look for diversity and experience and should consider hiring former CEOs.
4. Create a governance and nominating committee. George believes all boards should have a governance and nominating committee composed solely of outside directors.
5. Select a lead director. Especially if the CEO and chairman of the board are the same person, George sees it as imperative for the board to elect a lead director to ensure independence.
6. Establish audit and finance committees. Qualifications for members of these committees must be set so members can ensure the veracity of financial statements.
7. Hire its own independent compensation consultant. George would urge that the consultant should work only for boards of directors and not for companies themselves.
8. Hold regular executive sessions. To ensure the independence of the board, independent directors should regularly meet with the lead director in executive session, then convey the general discussion to the CEO.
9. Keep in mind board chemistry. Board members need to be respectful, but not hesitant to challenge each other, the CEO or other members of management. Extended meetings, preferably off-site, can help boards develop closer relationships, which can be vital in times of crisis.
10. Reestablish the "bright line" between governance and management. Directors must step up to their governance responsibilities, taking control back from management

The above points are adapted from the speech, "Restoring Governance to Our Corporations," given by William W. George on September 5, 2002, as part of the Directors' Summit. Patricia Lipton of the Wisconsin Investment Board spoke to Art Smith of Keystone Travel Services during a break in the conference.