The Shift Is from Inside to Outside

OF ALL management groups, none has a greater responsibility than the company board of directors, which watches over the investments of millions of U.S. stockholders in publicly owned corporations. One of the hottest running debates in U.S. industry today is whether stockholders are better served by boards composed mainly of "inside" directors who are also officers of the corporation, or by "outside" boards consisting principally of men from other companies. Last week the argument was bubbling at a fast boil. In a lengthy study, the American Institute of Management took aim at the board of Bethlehem Steel Corp., all inside directors, reported that the 15 members voted themselves nearly $5,500,000 in bonuses last year despite a $19 million dip in Bethlehem's profits. Said A.I.M., arguing that such bonuses might be better spent elsewhere: in too many cases of inside boards, "small stockowners who constitute the majority of investors have little recourse except to follow the rough old rule: 'If you don't like what we are doing, sell your stock.' "

Much can be said for the inside board, to which many big and forward-looking firms still cling steadfastly. They argue that only the president and his executives--men intimately familiar with the corporation's daily operations--can make swift, sure policy decisions. International Shoe Co., the largest U.S. shoe manufacturer, has a 100% inside board to run its highly technical business; the U.S. petroleum industry also leans to inside boards, whose members know all the tricks and pitfalls of their risky business. Says Harmon Whittington, president of Anderson, Clayton & Co., world's largest private cotton broker and a firm with a tightly knit inside board: "I don't think outsiders pay too much attention to the company's business; some go to directors' meetings only once or twice a year. The only ones who have the know-how are the people in the company."

Despite such arguments, there is a strong movement from inside to outside boards. Last year 52% of the publicly owned U.S. corporations polled by the National Industrial Conference Board had boards dominated by outside directors, and the percentage is growing. Partly, the shift is due to widening public ownership of U.S. business. As companies grow bigger and more competitive, the day of the tightly held family corporation is fast disappearing. Says Cleveland Management Consultant Robert Heller: "As companies expand, they have to go into the market for money and then must bring in outside directors to represent the public." -

The increasing complexity of business also makes it profitable for corporations to pepper their boards with outside specialists in banking, engineering, the law, science and merchandising. Many a firm now recognizes that an outside board is better for public relations and stockholder relations--to say nothing of its position in a proxy fight. Last week California's S & W Fine Foods, Inc., long dominated by an inside board, lost five of the nine seats to Louis A. Petri, president of United Vintners, largely because of stockholder dissatisfaction with the old board's policies.

Another telling argument against too many insiders is that directors actually work better one step removed from the day-to-day operations of a company. In its role as a trustee for stockholders, the proper function of a board is to establish long-range goals and policies, appoint competent executives, fix officers' salaries and stock options, act as a check on management without stepping into management's bailiwick. The great trouble with many inside boards is that they tend to perpetuate themselves, become shortsighted, convene merely to ratify their own previous decisions as operating officers of the company. Says Thomas F. Patton, president of outside-board Republic Steel: "We don't like inside boards. We feel we must have the benefit of experience of men in other fields and from other parts of the country who can bring us knowledge from their own businesses."

The solution many companies are turning to is a nicely balanced compromise in which their boards do not lean strongly to either inside or outside members. The company president and his top executives have a firm hand in overall policy, but there are enough seats reserved for outsiders to provide greater stockholder protection and broad-scale experience. Philco. Jones & Laughlin Steel, Standard Oil of California, Atlantic Refining Co. which once had almost completely inside boards, have all gradually whittled away the number of insiders, replaced them with outsiders. And as Philco President James M. Skinner Jr. says, "Any further changes in board membership will be toward outsiders. We don't want the kind of board where the officers are auditing their own work, sitting around admiring what they've done as officers."

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