(FORTUNE Magazine) – A subordinate has just stepped into your office to talk about his performance last year. It wasn't good, admittedly, just like the year before, and the year before that. Competitors beat his operation badly--yet he gave his highest-ranking manager a big raise and promised him millions more, no matter how he performed--didn't want to lose him, it seems. Besides, your man did show he could be tough, when he pushed out that top-level executive. Granted, it was necessary to negotiate a special pension--several million dollars a year for life. And that manager who was convicted on federal price-fixing charges? Well, no, he hasn't been fired; he remains an employee of your company. Still, your subordinate says he has your best interests at heart, and he'd like you to promise him his job for another year--or two or three.

What do you say?

This is not a hypothetical question. If you own shares in any of the six companies below, you're being asked right now, or soon will be, to pass judgment on the people responsible for those actions and many others. The people are corporate directors, and it's proxy season, when stockholders vote for or against those who are legally bound to protect their interests.

Vote carefully. Directors are no longer "the parsley on the fish," as a U.S. Steel CEO memorably described them more than 50 years ago. By hiring, paying, or firing the CEO and approving strategy, they create or destroy tons of wealth, which is why major institutional investors like pension funds and mutual funds increasingly vote against directors who aren't performing--an almost unheard-of act just a few years ago.

For our second annual roster of America's worst boards, we canvassed institutional investors, corporate-governance experts, investor advisory firms, and shareholder-rights activists for nominations. We made the final selections. Two companies, Advanced Micro Devices and Occidental Petroleum, repeat from last year; the four other companies from last year's list saw significant changes in the past 12 months (see box). That's to be expected. In situations as troubled as these, you've got to hope that something will give.

ADVANCED MICRO DEVICES

AMD has spent years on lists of governance horror shows, and recent events illustrate why. This chipmaker competes with Intel and sticks to a strategy of underpricing Intel's latest and greatest chip with one of its own; right now it's AMD's K6 vs. Intel's Pentium line. But making leading-edge chips in volume is hard, and AMD inevitably hits trouble. The familiar announcement came most recently in March: Because of production problems, the company wouldn't ship as many chips as planned in the first quarter; instead of a profit, it would post a loss. At the same time, true to form, Intel cut Pentium prices drastically, and AMD was once more in a price war with a company ten times its size. Noting that AMD had "burned investors again," FORTUNE columnist Adam Lashinsky asked in the San Jose Mercury News, "Why does anyone bother investing in the stock?"

It's been this way forever--AMD was on our inaugural list last year--and the problem is a low-megahertz board that apparently does nothing to fix the strategy but everything to make sure the man behind it, CEO Jerry Sanders, is well taken care of, even when shareholders suffer. Directors had a bad habit of repricing Sanders' stock options when AMD's volatile stock was near a low point, so he could and did make millions just for getting the stock back up to where it had been months earlier. Perhaps stung by wide criticism, the board in 1996 gave Sanders a new contract that included a megagrant of 2.5 million options, half of which were "performance- and time-based." Sounds good, except that the specified "performance" only makes the options vest faster; even if AMD misses every performance target, Sanders eventually gets all the options anyway. Meanwhile, he can borrow up to $3.5 million from anyone for any reason--let your imagination roam here--and AMD must guarantee repayment for as long as he holds his job and for six months after. If he dies in office, he gets at least two years' base pay ($1 million per), plus his incentive bonus for the year of death and the following year.

AMP

With the decline of the hostile takeover, we're rarely treated anymore to the spectacle of ineffectual directors laboring furiously to fend off a prospective buyer trying to give shareholders more value than they've seen in years. But that's what played out last summer and fall after AlliedSignal's Larry Bossidy made a surprise bid for AMP, a maker of electrical connectors.

AMP's somnambular board had watched for years as the company's stock underperformed its industry and the broader market. When Bossidy called and wrote to the CEO proposing a friendly deal, the company didn't even respond. Only by making his offer public--and thus "hostile"--did Bossidy get the board to wake up. Suddenly the directors decided that the CEO of the past several years was no longer good enough, and they replaced him with former CFO Robert Ripp. He loudly and publicly vowed to repulse the invaders, even though owners of an overwhelming majority of the shares, 72%, said they'd be delighted to take Bossidy's all-cash offer of $44.50 per share, which was 55% above the stock's pre-offer price. AMP's board already had a poison pill in its bylaws and responded further by launching a court fight--Pennsylvania has America's toughest antitakeover laws--and hiring 42 lobbyists to try to get the state legislature to freeze AlliedSignal's bid for a year. AMP also released frequent statements suggesting that for an outsider to offer the owners a huge premium for their company verged on the immoral.

The battle went badly for AMP. The bill failed in the legislature, the court fight began to look untenable, and the Hixon family, owners of the largest block of shares, issued an open letter to the board flaying members for fighting the bid. Realizing that takeover looked inevitable, the company sought a white knight and found one in Tyco International, the hyperacquisitive conglomerate, which offered stock worth something north of $50 a share. Bossidy said AMP wasn't worth that much to him and dropped out.

So here's what happened: Before Bossidy's offer, when the board routinely said performance was important, they didn't achieve it. After the offer, when they said independence was important, they didn't achieve it. The company sowed fear among employees by saying that Bossidy was a ruthless cost cutter, but Tyco CEO Dennis Kozlowski is by all accounts at least as ruthless. Robert Ripp keeps his job, which seemed unlikely in the AlliedSignal scenario, since Bossidy had called AMP's management "inept." And yes, the shareholders got a higher price. The directors agreed to it when they had no other choice.

ARCHER DANIELS MIDLAND

ADM's directors inhabit a parallel universe in which forces that move most companies seem to work in reverse. Start with their attitude toward criminality. You'll recall that ADM, a global power in agricultural commodities, pleaded guilty to federal price-fixing charges in 1996 and paid a $100 million fine, the largest ever in a price-fixing case. So when the feds brought criminal price-fixing charges against two former ADM executives and a current one, Michael Andreas (son of longtime CEO Dwayne Andreas), those being the guys on the FBI videotapes that led to the guilty plea--you might figure, just looking at it as a layman, that there was something to it. But of course that isn't how the law works. All three pleaded not guilty and went to trial, and the company placed Michael Andreas on a paid leave of absence. So if you get indicted at ADM, you still get paid; you just don't have to work anymore. When Andreas (and the other two) were convicted in September, the company got tough: He went on an unpaid leave (at his own request, the company insists). So if you're a felon, you don't have to work and you don't get paid, but you're still an employee.

Also on those videotapes was a memorable statement by James R. Randall, who was ADM's president at the time: "We have a saying in our company: 'Our competitors are our friends. Our customers are the enemy.'" That certainly didn't help in the price-fixing defense, and in today's customer-centric world, such a statement would get you drummed out of most companies. But at ADM they name a building after you: The most recent annual meeting was held at the newly christened James R. Randall Research Center.

Then there's CEO pay. The SEC requires every board's compensation committee to state its pay philosophy, and of course everybody favors paying for performance and tying the CEO's interests to the shareholders'. But not in the looking-glass world of ADM. "Compensation is not related to the market performance of the Company's stock or to the annual profit performance of the Company," the comp committee says forthrightly. Why not? Because the stock price can be affected by so many uncontrollable variables, including "trading of corporate equities as commodities by large financial institutions and funds." That's right--the stock might go up if investors buy it or down if investors sell it, and you can't hold the CEO responsible for that.

Don't try to grasp this logic; you'll get a headache. Just note that ADM stock has performed exactly as you would expect at a company in which the CEO's pay is explicitly unrelated to the share price or profits. Over the past year, and three years, and five years, it has underperformed its industry and the market. It's down about 30% in the past year.

BANK OF AMERICA

BA's board lands on this list as the result of a single act: voting a truly incomprehensible severance package for ex-CEO David Coulter. When Hugh McColl's NationsBank said it was buying BankAmerica last summer (and taking the BA name), the two companies faced an inevitable problem in the fast-consolidating banking business: two CEOs, but a need for only one. The announced plan was for McColl to take the job first, being older, and Coulter to get it when McColl retired. But the merger deal included exit terms so rich that you had to wonder how long Coulter would stick around.

Answer: a month. The deal closed Sept. 30, and within days the company announced a third-quarter write-off of $372 million on a bad loan the old BA under Coulter had made to investment company D.E. Shaw. That wiped out most of the quarter's profits and torpedoed the stock. A few days later Coulter announced his resignation, effective Oct. 31. He took with him 300,000 shares, recently worth about $19 million, plus what may be the greatest pension of all time: $5 million a year for life. He's 51.

The mind reels. No board would offer this deal as an employment contract to a great CEO, yet BA is giving it as an unemployment contract to a nongreat CEO. As the combined banks consolidate operations and lay off workers, exhorting the survivors to work harder to boost the still-suffering stock, will any of them fail to wonder why the man who tanked their shares is getting almost $100,000 a week to do nothing? Twenty years from now, will a single worker fail to think about this? BA's directors didn't solve a problem; they created one, and it isn't going away.

OCCIDENTAL PETROLEUM

A company where all directors are elected for one-year terms, where at least two-thirds of the directors must meet a stringent test of independence, where no director may be elected after age 72, where outside directors meet alone at least once a year, where there's an independent lead director--this outfit sounds like a model of good governance. What's it doing on a list of companies with the worst boards? As usual at Occidental, there's more here than meets the eye. Turns out those governance measures were adopted just weeks ago, virtually at gunpoint. Whether they're for real remains to be seen.

Oxy is a legend among corporate-governance experts, many of whom consider it the all-time champ at shareholder abuse going back to the days of founder Armand Hammer. Best recent example: In 1997 the board bought out the remaining seven years of CEO Ray Irani's contract for $95 million; then, having in effect paid him for the next seven years at the stunning rate of more than $13 million a year, they gave him a new contract that guarantees him $1.2 million a year. Some shareholders, including the Teachers' Retirement System of Louisiana, finally decided not to take it anymore and sued, charging corporate waste, breach of fiduciary duty, and unjust enrichment, among other things. Under the settlement, approved in February, Oxy agreed to a massive overhaul of its governance arrangements.

Anyone who follows Oxy will remain suspicious of these reforms until they're reflected in results, which remain dismal. Even in the context of a tough business, petroleum production, the company has been a terrible performer, though of course it paints a different picture. SEC regulations require the board's compensation committee--still headed by an 83-year-old rancher until April elections--to compare the company's performance with that of a peer group, which the company selects. Oxy's peer group has done badly, but not as badly as Oxy; the committee this year assembled a new peer group that has done even worse.

The faint ray of hope is that the governance reforms really will make directors more accountable to shareholders, leading to improved performance or perhaps even the sale of the company at a reasonable price. In theory, that's what ought to happen. It will be fascinating to see whether it does--or whether there's yet more here than meets the eye.

SYBASE

Like Oxy, Sybase's board--and its CEO John Chen--are being dragged toward good governance. This software maker's performance has been abysmal: The stock, at $32 three years ago, was recently around $8. A huge institutional investor, the California Public Employees' Retirement System (Calpers), included Sybase in its list of "Corporate America's poorest performers" last year for the second consecutive year (this year's list hasn't been released yet). Calpers, owner of more than 400,000 Sybase shares, introduced a shareholder resolution demanding that Sybase not stagger its board; on a staggered board, typically a third of the directors are elected every three years, making it tough for an outsider to take control. Sybase management hated the idea of destaggering--underperforming managements generally do--and included in the proxy materials a special letter to the shareholders urging a vote against it. Management-opposed resolutions win only rarely, but the Sybase shareholders were so fed up that they passed this one.

The staggered board wasn't Sybase's only governance problem. The company also has a poison pill (another favorite management-entrenchment device) and what Calpers considers a "relative lack of independent board members." For whatever cause, the board has for years failed to keep Sybase competitive in a brutal and fast-changing industry, and despite Calpers' prodding, there's no evidence that it has changed its ways.

Top executives are supposed to keep companies successful. When they fail, it's up to the directors. And when they fail, it's up to the shareholders. As the mailbox fills with proxy statements this spring, get in the right frame of mind. You're the last line of defense. With each proxy that arrives, the directors have stepped into your office to explain their performance. If it's no good...you have to fire 'em.

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