Inside, Outside -- We Just Want an Active Board

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We make too much of the structure of corporate governance and not enough of the people who govern. We focus too much on the rules and not enough on the spirit. We do so because, frankly, it is easier and allows us to be more objective.

But it makes no sense at all because, as Jeffrey Sonnenfeld of the Yale School of Management has demonstrated empirically (check out "What Makes Great Boards Great" in last month's Harvard Business Review), it doesn't matter. Companies that have few outside directors and companies that have almost all outside directors have made mistakes and ripped off shareholders and failed to govern effectively.

Fundamentally, good corporate governance is about having informed, smart directors who are not overly burdened, have enough time and really care about the companies they are working for. We want so much to have some sort of magic formula, but there is none.

Arguably, the greatest wealth-building corporation -- Warren Buffett's Berkshire Hathaway(BRK.A Quote - Cramer on BRK.A - Stock Picks) -- has a board stocked with insiders. The board of the Walt Disney(DIS Quote - Cramer on DIS - Stock Picks) corporation, as poor a performer as you can find, has lots of outsiders who should have been able to do much more than they have to check the terrible administration of Michael Eisner.

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Inside, Outside -- We Just Want an Active Board

So why bother to discuss governance at all? Because companies need to have some checks and balances if only to ensure that the chicanery of the past several years never comes back again.

One way to do that is to insist that board members do their homework and know what is going on at the company. They should be given lots of information about what is going on and have regular contact with the CEO. If they don't read their packets and keep up with the company, they should be made to step off boards as part of some sort of regular review.

Similarly, there should be someone at the company who specifically judges and rates the directors to see if they are doing their jobs. It should be institutionalized, so that the process of review is done regularly. Director peer review should also be part of the process. That way, ineffective board members could be dismissed and new blood brought in.

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