CORPORATE GOVERNANCE: THE OTHERSIDE OF THE COIN By Kenneth N. Dayton The Dayton Hudson Corporation is known for its protable growth as a diversied retailing company, for its merchandising strategy, for its objective to be premier in every facet of its business, and for its detailed attention to issues of management and governance. ts former chairman describes here the role of a strong board in making rst!rate management even stronger. ts ve concepts of governance, and their conse"uences will interest all directors, encourage some to challenge the practices of their own boards, and alarm others with the prospect of that challenge.
Corporate corporate management are two sides of the coin. #ou can$t for long have one governance without theand other. %y corporate governance, mean the same processes, structures, and relationships through which the board of directors oversees what its e&ecutives do. %y corporate management, mean what the e&ecutives do to dene and achieve the objectives of the company. f good management is the face of the coin, good governance is its other side. would like to e&amine with readers of H%' that neglected side and e&plore the importance of developing a strong board. begin with a conviction and two dreams. (y conviction is that the board of directors is the )chilles heel of the )merican corporation. *very time you nd a business in trouble, you nd a board of directors either unwilling or unable to fulll its responsibilities. The corollary of this conviction is that if we want to improve the performance of corporate )merica, then we must rst improve the e+ectiveness of corporate boards of directors. )nd now my dreams. (y rst dream is that one day some investment analyst will conclude his or her report on Dayton Hudson with something like this. n addition to its e&cellent strategic thrust and management strength, Dayton Hudson Corporation has a premier concept of governance and a premier board of directors, which together o+er the best hope for ensuring the corporation$s future. -o, if you want to buy a share of stock for your new grandchild, this would be a company to select. /hen some analyst says that about us0or about any other corporation for that matter0it will, at last, be an indication that the market is beginning to look beyond this year$s 1or even ne&t "uarter$s2 estimate of earnings. f that day ever does come, it will bring recognition that corporate governance is every bit as important as corporate management to ensuring the future of corporate )merica. (y second dream is that someday the capital gains ta& will be revised along these lines3 if you hold a stock less than a year, the gain 1if any2 will be ta&ed at ordinary income ta& rates4 if you hold it for one year, the rate will go to 567 of ordinary income rates, if for two years to 867, if for three years to 967, until, after ten years, there would be no capital gains ta&. don$t know if ten years is the right span of time, but the principle is the same whether you pick twenty years or ve.
f such a law were passed, it would have a dramatic e+ect on )merican shareholders. /e would once again become owners rather than the speculators we all are today. f you think Dayton Hudson Corporation is underpriced today, you buy into it. f it seems overpriced, you sell out of it. #ou are betting against someone else that the stock will go up or down. That betting makes you a speculator rather than an owner. #ou are not there for the long haul but only for the fast ride. Think, instead, of buying a stock with the idea that you will get a premium for holding it for :6 to ;6 years. Think how di+erently you would analy
/e have long believed that a strong board makes a rst!class management even stronger, that a professional board makes management even more professional, that an optimum relationship between board and management creates dynamic, and in that the ideal board setup isthat the corporation$s best protection of an its almost future. unbelievable n my opinion, every C*= )merica should welcome kind of relationship. t is for this reason that we have given a tremendous amount of time and thought to matters of corporate governance0to its philosophy and structure. >or this reason, we state clearly in the board$s position description that it is the board$s function as representatives of the shareholders, to be the primary force pressing the corporation to the reali
doubt that many corporations would make such a statement. ?sually management is the primary force 1the only force2, and the board is either a rubber stamp, or a monitor, or just there in case of a crisis. /ell then, how do we go about making the board the primary force@ Aote rst that said primary force pressing the corporation, not primary force managing the corporation. There can be no doubt that the C*= is the primary force managing the corporation. )lso note well that no board can be the primary force unless the C*= enables it to be that force. t is the act of enabling that really causes management to be superior. t is therefore essential to optimi
Bet$s look at the concepts. The rst is that the board has the vital role of protecting the corporation$s future. *ven though we have nowyear, 1and the always have had2 management that looks long range rather than only to ne&t "uarter or ne&t board must seea to it that future managements always have that approach. t must ensure a future!oriented culture within the corporation.
-econd, if it is to fulll its role, the board must be independent of management. )ll our policies on board makeup and tenure0the carefully worked!out position descriptions of the board and its committees, the annual calendar of matters to be brought to the board, the board$s annual review of itself and its relation to management0are designed to make our board independent, responsible, and vital. )ll are designed to help management 1particularly the C*=2 enable the board to fulll its vital role. ) third concept follows logically3 the ideal board cannot be what we want it to be0independent and future oriented0if it has on it management members other than the C*=. The board becomes less independent, less challenging, less willing to speak out or critici
These concepts have led Dayton Hudson to a structure that is unusual in )merican business. /e have a board whose composition is based on a model we consider ideal for us. /e review, revise, and update that model at least annually. Currently our model calls for a board of :0with :; outsiders and members of management.
/e want the :; outsiders to include 8 or 5 corporate e&ecutives, of whom or E are involved in consumer goods. /e want or F to be specialists in certain areas of value to us0in communications, services, and high technology. /e would like at least to be C*=s and to be owner!managers. n addition, we want or F professionals with backgrounds and perspectives on education, government, international a+airs, economics and nance, consumer research, corporate governance, or public a+airs. /e would like at least to be from our head"uarters area. /e want no investment bankers, lawyers, retirees, or professional directors. /e seek an age spread, staggered retirements, and an average age of or less. /e seek diversity. 1/e don$t want everyone to belong to the same club.2 n addition, we have listed :: criteria that apply to all directors3 ntegrity. /isdom. ndependence. Galid business or professional knowledge and e&perience that can bear on our problems and deliberations. roven record of accomplishment with e&cellent organiurthermore, we have an annual two!day board retreat at which the board reviews and, if it wishes, revises its own responsibilities. t also assures itself that it has, indeed, fullled all of them. t is an e&cellent e&ercise and is only one part of the board$s annual review of itself, its performance, and its relationship to management. The Dayton H&d#on E'e!&t($e Co))(ttee
erhaps the most unusual element of our corporate structure is our e&ecutive committee. There are, you should know, three kinds of e&ecutive committee0the emergency committee, the select committee, and our kind of committee. -ome corporations have e&ecutive committees made up of in!house or local directors to take action in case of an emergency between board meetings. %ut today it$s easier to get the entire board onto a conference call than to get the in!town or even the in!house directors together for a meeting. -o really that kind of committee is useless and archaic. Then there$s the e&ecutive committee made up of a select group of directors 1usually the C*=$s cronies2 that never rotates and is really the power center of the board. This creates a two!class board. /hy anyone would ever go on a board with such a committee can$t understand. certainly wouldn$t do it0 unless, of course, was on that committeeJ )ctually, it doesn$t make any di+erence whether you call such a group the e&ecutive, the personnel, the compensation, or the nominating committee. t$s all the same if it is select. Aow, let me tell you about our e&ecutive committee. t$s made up of all the nonmanagement members and the C*=. t is, therefore, a committee of the whole. /e have no second!class nonmanagement directors. =ur e&ecutive committee functions as a combination personnel and nominating committee. t deals solely with matters of compensation and of organi
