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CHAPTER 6 • STRATEGY ANALYSIS AND CHOICE 199

example, boards could require CEOs to groom possible replacements from inside the firm
because exorbitant compensation is most often paid to new CEOs coming from outside the
firm.
Shareholders are also upset at boards for allowing CEOs to receive huge end-of-year
bonuses when the firm’s stock price drops drastically during the year. 12 For example,
Chesapeake Energy Corp. and its board of directors are under fire from shareholders for
paying Chairman and CEO Aubrey McClendon $112 million in 2008 as the firm’s stock
price plummeted. Investor Jeffrey Bronchick wrote in a letter to the Chesapeake board that
the CEO’s compensation was a “near perfect illustration of the complete collapse of appro-
priate corporate governance.”
Until recently, boards of directors did most of their work sitting around polished
wooden tables. However, Hewlett-Packard’s directors, among many others, now log on to
their own special board Web site twice a week and conduct business based on extensive
confidential briefing information posted there by the firm’s top management team. Then
the board members meet face to face and fully informed every two months to discuss the
biggest issues facing the firm. Even the decision of whether to locate operations in coun-
tries with low corporate tax rates would be reviewed by a board of directors.
Today, boards of directors are composed mostly of outsiders who are becoming
more involved in organizations’ strategic management. The trend in the United States is
toward much greater board member accountability with smaller boards, now averaging
12 members rather than 18 as they did a few years ago. BusinessWeek recently evaluated
the boards of most large U.S. companies and provided the following “principles of good
governance”:

1. No more than two directors are current or former company executives.
2. No directors do business with the company or accept consulting or legal fees from
the firm.
3. The audit, compensation, and nominating committees are made up solely of outside
directors.
4. Each director owns a large equity stake in the company, excluding stock options.
5. At least one outside director has extensive experience in the company’s core busi-
ness and at least one has been CEO of an equivalent-size company.
6. Fully employed directors sit on no more than four boards and retirees sit on no
more than seven.
7. Each director attends at least 75 percent of all meetings.
8. The board meets regularly without management present and evaluates its own
performance annually.
9. The audit committee meets at least four times a year.
10. The board is frugal on executive pay, diligent in CEO succession oversight
responsibilities, and prompt to act when trouble arises.
11. The CEO is not also the chairperson of the board.
12. Shareholders have considerable power and information to choose and replace
directors.
13. Stock options are considered a corporate expense.
14. There are no interlocking directorships (where a director or CEO sits on another
director’s board). 13

Being a member of a board of directors today requires much more time, is much more
difficult, and requires much more technical knowledge and financial commitment than in
the past. Jeff Sonnerfeld, associate dean of the Yale School of Management, says, “Boards
of directors are now rolling up their sleeves and becoming much more closely involved
with management decision making.” Since the Enron and Worldcom scandals, company
CEOs and boards are required to personally certify financial statements; company loans to
company executives and directors are illegal; and there is faster reporting of insider stock
transactions.
Just as directors are beginning to place more emphasis on staying informed about an
organization’s health and operations, they are also taking a more active role in ensuring