At GM, A Magna Carta for Directors
A Commentary

For the past six months, a crack team has toiled away in secret at General Motors Corp., devising a spiffy new model now being unveiled to a select audience around the U.S. There's no fanfare in the auto showrooms, though. The new product is a six-page, 28-point document. Written by the carmaker's outside directors, it's a corporate Magna Carta. Although not perfect, it goes a long way toward spelling out the way things ought to be if directors are going to do their job--make management accountable to shareholders.

Designed to ensure the board's independence, GM's guidelines aren't revolutionary. Many are pure common sense. Trouble is, they're not very common. Most boards follow largely unwritten traditions left over from the days when chief executives were autocrats who wanted little interference and no one cared that boards were cozy clubs. GM was no exception--until two years ago. After years of market-share losses, the board in November, 1992, dumped go-slow CEO Robert C. Stempel in favor of harder-driving John F. Smith Jr.

The story might have ended there. Other boards--at American Express Co., for example--changed CEOs, then fell back into their sleepy old habits. GM's board didn't. When it promoted Smith, it also appointed John G. Smale, retired CEO of Procter & Gamble Co., nonexecutive chairman. And Smale--tough, unassuming, laconic, and chastened by GM's brush with disaster--was hell-bent on lasting reform. In consultation with GM's other outside directors, he set about writing a boardroom code. Among its key elements:

-- The board, not the CEO, selects new members "in fact as well as procedure." The invitation to join comes from the board, so there's no question of where loyalties lie.

-- Outside directors will choose a "lead director" whenever the role of chairman and CEO is not split. The lead director chairs at least three "executive sessions" of the outside directors a year. A discussion with the CEO will follow each meeting. Once a year, outside directors will formally evaluate the CEO.

-- The board has a "Director Affairs Committee" whose duties include assigning members to working committees, assessing whatever skills the board may lack, and evaluating the board's performance in an annual report to the full board.

-- Board members have "complete access to GM's management."

-- Before each board meeting, management will distribute to directors not only standard business information but also the planned presentations on specific subjects. This way, "discussion time [is] focused on questions the board has about the material." The chief executive, meanwhile, must report to the board annually on succession plans and on the management-development program.

-- GM's outside directors will make all decisions about corporate governance.

Smale has been moving toward these practices ever since he took GM's chair, shifting GM's board meetings from stiff, scripted affairs to open discussions. "The difference is night and day," says Harry J. Pearce, who as GM general counsel has been a boardroom regular since 1987. "Everyone can speak candidly, there's no sense of not wanting to hear something, and it doesn't matter if it's controversial." And directors are delving deeper into GM's business. "They're getting more complete, more detailed, more relevant information, and they're asking tough questions that enable us to do business better," says Pearce.

One startling example: Until they asked, directors never saw the net income that each GM model produced. Neither did executives. "Management had not been looking at this before, not down to net income on the Monte Carlo," says Pearce. "We didn't know if we were losing money or making money. We had to put in place new processes to get that information." Directors also are reviewing quality and customer-satisfaction numbers for each GM product line at every meeting. "This board is showing how energized boards are going to operate," says John A. Pound, a governance expert at Harvard University.

FRESH AIR. The GM guidelines have a few faults. They duck the issue of whether the retiring CEO should remain on the board, leaving what clearly is a bad idea to be decided case by case. They dismiss term limits for directors, which many experts favor. And they gag directors from speaking to investors and the press unless management knows or requests it--a dictate that would have delayed many recent boardroom coups.

Still, GM's new rules quite simply are a breath of fresh air. "If every board in the country operated this way, the U.S. would be much more competitive," says Ira M. Millstein, an attorney at Weil, Gotshal & Manges who advises GM's board but didn't help develop this manifesto. Sadly, GM sent it to only 150 investors and governance experts. The paper deserves broader circulation. Every board in Corporate America should sit down, review GM's practices, and see if their conventions measure up.