(FORTUNE Magazine) – Richard Koppes dropped by the other day. Koppes is the former general counsel of the California Public Employees' Retirement System (Calpers). He and his boss, Dale Hanson--by virtue of their smarts and aggressiveness and Calpers' incomparably fat wallet--were the most important shareholder activists in corporate governance battles during the first half of this decade, when CEO heads seemed to behave like bowling balls at an 8-year-old's birthday party: a slip, a weak attempt at spin, and a quick roll into the gutter. In the summer of 1996, Koppes left the public sector and signed on as a partner at Jones Day Reavis & Pogue, the giant Cleveland-based law firm--gone over to "the dark side," some of his former comrades-in-arms say. Four days a week he advises Jones Day clients on corporate governance; on the fifth he teaches the subject at Stanford.

Blond, pleasant, and lively, Koppes never did look the part of the Bogeyman of the Business Roundtable, the Freddy Krueger of the FORTUNE 500. But you don't need the glowering mien of a super-villain when you're the mouthpiece for upwards of $100 billion in pension money. Once, Koppes recalls, he was lunching with the chief counsel of an East Coast media giant. His job that day: to let the counsel know that his company was a candidate for Calpers' list of "targets," an unhappy elite whose governance the pension fund chose to deplore publicly.

"I hate to say this," Koppes began nervously, "but you've got a shitty board."

"Oh, I agree," his lunch date replied.

Koppes exhaled and relaxed. He recalls: "It's always nice to find someone you can work with."

Corporate governance is a menage a trois among the CEO, the board, and the shareholders, each of whom wonders what the other two get up to when he's not around. No one knows that scene better than Koppes, and he's worried. After the corner-office defenestrations of 1992-93--when the CEOs of, to name a few, American Express, Compaq, Digital Equipment Corp., General Motors, IBM, Kodak, Sears, Tenneco, Time Warner, and Westinghouse jumped, were pushed, or had their wings clipped--a period of constructive engagement began. CEOs like David Johnson of Campbell Soup set examples of good governance (and stellar performance). One after another, major companies took it on themselves (or had it thrust upon them) to see to it that their boards were not overlarge, that most board members were outside (nonemployee) directors, and that key committees like audit and compensation were not subject to the CEO's undue influence. New proxy rules required companies to be more candid about executive pay and to have a rationale, if not necessarily a rational one, for what the chief executive took home. As progress replaced posturing, hostilities between activists, boards, and CEOs eased, though they never disappeared.

Recently, Koppes warns, "the state of the conversation has deteriorated. There's not a lot of dialogue. Groups are talking at each other, not with each other." Koppes may just be feeling the heat of the blowtorch he's used to wielding, but there's evidence that he's right.

In Europe, for example, battle lines are clearly being drawn. Five years ago Europeans eyed the transatlantic fisticuffs, half appalled by how uncivilized Americans are, half relieved that they were safely out of it. In the winter of 1993, I overheard the CEO of a troubled European electronics company, who did not know he was speaking into a live microphone, say to an American counterpart, "I'm glad I'm in Europe."

These days the company is still troubled, and he should be glad he has retired, because U.S.-style shareholder activism is on the march in the Old World. The International Corporate Governance Network, an affiliation of institutions and gadflies, drew 35 people to its inaugural meeting in London in 1996 and 125 to its second meeting in Paris this summer. Last January Koppes himself was invited by the French Business Council to address a packed palais of French top managers. That governance issues have crossed the Atlantic is hardly a shocker, given the capital flowing in the same direction; U.S. institutions already own 25% to 40% of the shares of many French companies. Says Koppes: "As I met with executives there, I found many expect within the next few years to be majority owned by U.S. institutions."

That's a stunning thought, with possibly provocative implications. How might, say, the German public and government react if U.S. institutions, speaking as the majority owners of, say, Deutsche Telekom, were to tell management that it really had to bring costs in line--even if that meant laying off tens of thousands of employees?

Institutions had been cautious abroad, slow to invest in the first place--many are union or civil-service employee funds whose rules limit investments in non-U.S. companies--and reluctant to move into the activist role they assumed at home. But that reticence has more recently been overcome by the sheer size of their portfolios: Calpers invests more than $25 billion overseas. That sort of commitment obviously requires serious fiduciary duty.

Depending on how hard the institutions push and European companies resist, Koppes predicts, "We could see something like 1992-93 over there." Most British companies have relatively little to fear. The French, says Koppes, "just need to clean up--kick their friends off the board, etc. Do you know that a lot of French companies own vineyards on the side?"

Germanic principles of governance, like Germanic accounting, are far more foreign to Anglo-American eyes: Heavy insider and union representation on boards and substantial stock ownership and management influence by banks strike many American investors as a sure way to water down the legitimate rights of owners. Trouble is, what activists see as a system that thwarts shareholders is the same system many Germans credit as having made possible the postwar German economic miracle. It won't be surrendered just because a bunch of Yankee yahoos don't like it.

If what's shaping up abroad seems a bit like battle, the problem at home is more like a stalled peace process. As Koppes sees it, "We seem to be in a kind of reactive mode, on both sides." Most of the obvious affronts to good governance are gone. Says Koppes: "Cronyism on the board, for instance, is not much of an issue at the biggest companies, although"-- the corporate lawyer's nostrils flare, as if he were an old warhorse smelling cordite--"there is Heinz and ADM."

The main issue: Are rules rules, or are rules meant to be broken? If a company has a good, tough, independent board, does it matter that directors' terms are staggered so that not every member comes up for reelection each year? The Business Roundtable has criticized Calpers for issuing one-size-fits-all guidelines for possibly heterogeneous corporate circumstances. On the other hand, governance is a matter of principle--of establishing accountability for results whether they are good or bad; should a company be let off the hook just because, for now, its numbers are good?

Staggered boards, poison pills, and the failure to separate the jobs of CEO and chairman (or name a "lead director" to balance the influence of a chairman/CEO) will get you the black spot from some shareholder groups no matter how vigorous and rigorous your board is. But at one company--Koppes won't identify it but says, "You'd recognize the name"--a director, who got on the board more or less at the insistence of disgruntled institutional investors, says he owes his influence to staggered terms. The director--so outside he might as well be Stella Dallas--told Koppes: "The CEO thinks I'm a pain in the butt. If there had been annual elections, I would not have been asked to stand for reelection. As it is, I've had three years to forge alliances on the board."

The institutions themselves operate from glass houses, many having staggered boards or directors appointed to represent stakeholding constituencies. That wee hypocrisy deserves to be explored: Do institutional investors legitimately serve ends in addition to shareholder value? If so, do corporations? Or should the institutions clean up their own governance so we can all get down to business and make more money?

Boards, too, can become such sticklers for governance rules that they lose sight of the purpose the rules are meant to serve. In his new life, Koppes has seen one board that had to be reined in because it had become punctilious to the point of parody, wanting to hire independent counsel when it had a small problem that a friendly phone call to the CEO fixed. "We don't want to see boards micromanaging," Koppes says, "and I think there's a danger of it."

There are other big governance issues. There's the ever popular obscenity of CEO pay, which Koppes senses is provoking "growing outrage in institutions and among individuals." There's the question of how to reward people in startups and human-capital-intensive businesses without overrelying on stock options, whose funny-money accounting is a scam (my opinion, not necessarily Koppes'). There are growing signs of shareholder rebellion against stock options. But could innovation (e.g., Silicon Valley) flourish without them? And what's the right governance model for a company whose most important assets truly are those that ride its elevators?

Weighty questions, and they are not likely to be resolved by companies or investors striking rhetorical poses. Before he left, I asked my visitor from the dark side a final question: "Has the corporate governance movement gone too far?" He opened his mouth, paused, then said: "Not yet."