The trend line in the practice of corporate governance is no different than other professions, one part history and one part innovation. In many respects, the modern era began in 1932 when Adolf Berle and co-author Gardiner Means published their seminal and influential book, The Modern Corporation and Private Property. They predicted —with some concern—that as corporations took on thousands of shareholders, the shift would lead to a separation of ownership from control. With great prescience they reasoned that, in the future, professional managers would control a company’s destiny rather than its owners.
Barbara Hackman Franklin
Some 45 years later in 1977, this same concern led to the founding of NACD by John Nash, a New York investment banker and an early proponent of formalizing duties and responsibilities of independent directors. Even in its very earliest years, its mission was to help directors be more effective stewards of shareholder wealth. And 10 years later, the association’s first annual corporate governance conference was held aboard The Queen Mary, in Long Beach, Calif. Corporate governance, like the cruise ship, was off to a slow start as the audience seemed more interested in going to Disneyland than in coming to the sessions.
We—directors and NACD— have come a long way since then.
In the decades that followed, more change was in store. By the 1960s, CEOs became the dominant players in the boardroom. It was common for a CEO to populate the board with friends, and boards tended to exercise little true independence. By the 1970s—around the time NACD came into being—the idea of “independent directors” as a check on management began to be heard. Then, in the 1980s the shareholder community woke from its slumber. Large institutional shareholders such as pension funds and mutual funds began to recognize their true power. ISS was formed. So was the Council of Institutional Investors. And the so-called “raiders,” engaging in hostile takeovers, forced boards to make faster decisions under pressure. This era was memorialized in the book by Bryan Burrough and John Helyar, Barbarians at the Gate.
The 1990s saw an increase in board assertiveness that eventually led to the ouster of CEOs of some of our largest companies. Activists then pressed for a number of fundamental changes, but none more emphatically than the need for management to own stock in their companies in order to align their interests. Stock options were thought to have little or no cost as they were not taxable as income. So they quickly became the flavor du jour as a reward for performance and boards dutifully awarded tons of them. Then stock markets boomed, options were exercised and payouts seemed huge. This is where the pay gap between the CEO and lower-level employees began to widen, triggering public concern about excessive CEO compensation that is still with us today. Not long afterward we were hearing about the “rock star” CEO.
Things changed once again in the new millennium. Enron and other scandals led to the passage of the Sarbanes-Oxley Act. This episode was followed by the recent financial crisis, which once again caused directors to take another step up in responsibility, accountability and the power to change how companies are governed.
Today boards now regularly exercise their discretion over corporate strategy, succession planning, the management of risk and, most importantly, the company’s tone at the top. We have been maturing in the way we perform our jobs as directors.
NACD has been maturing, too.
During these decades, NACD matured along this same trajectory— offering more and better education opportunities, information and thought leadership to help directors as well as other critical constituents in the regulatory and political arenas, to be more effective. Today, we are widely thought of as the “voice of the director” community, bringing both education and research to boards that better their corporate governance practices, and boardlevel insights and opinions to investors, regulators and politicians to ensure a healthy two-way communication. The most impactful role NACD plays today may be our ability to convene all stakeholders around the table and facilitate a frank and robust communication among boards of directors, investors, management and regulators.
The most impactful role NACD plays today may be our ability to convene all stakeholders around the table.
And now we directors are on the cusp of more change, this time greater empowerment for shareowners. The Berle and Means treatise of many decades ago has come full circle as we have before us the implementation of the many provisions of the Dodd-Frank bill and the new regulations forthcoming from the Securities and Exchange Commission. The proxy access rule has already been finalized and issued. Because of a lawsuit opposing the rule, the Commission has stayed it until the D.C. Circuit of Appeals reviews the case in the spring. So, the rule will not be in effect for the 2011 proxy season. Dodd-Frank made say on pay mandatory; it will be in effect for this upcoming season.
The changing environment—what does it mean for directors?
So what does this changed environment mean for us as directors? In the words of my favorite philosopher Yogi Berra, “When you come to a fork in the road, take it.”
Taking the best fork means to me that we must recognize that the role we directors play is more important, more relevant, more challenging and has greater impact than ever before. We are positioned to do our jobs even better with greater seriousness of purpose and a deeper understanding of who we are and why what we do is so vital. We contribute through the boards on which we serve to the very foundation of our great economy. We can take pride in playing this critical role. We can be proud to be directors.
Let me suggest some places where the best fork should be taking us.
Understand the business of the company we serve, how the company makes money, the strategy, and how risks are being managed. Be current about the everchanging external environment, economically, politically and competitively, in the United States and around the world. Enhance and protect the “tone at the top.” My way of expressing this is, “Turn up the hearing aid,” even though you don’t wear one. That means turn up our vigilance. Above all, CEO succession should be on our radar screens almost continuously.
Build and maintain a board culture that emphasizes integrity, candor and respect, a culture that values constructive working relationships among board members and between the board and the CEO. The annual board evaluation process is one tool that can enable the board to reflect on its culture and make improvements where necessary; NACD has unique resources to help boards do that.
There are now additional required disclosures about director qualifications and attributes, so it is prudent to refresh our processes for determining board composition, to ensure diversity of thought as well as alignment with corporate strategy.
Another vital element is the leadership of the board. We need leaders who keep the focus on the most important issues, ensure smooth-working processes and know how to forge consensus.
Finally, consider NACD your strategic partner in helping you be the best you can be in the boardroom.
NACD has matured along with directors. We are the only membership organization of public company directors— more than 10,000 strong—and we operate as a nonprofit 501-c-3. Ken Daly is a terrific and energetic leader. The staff is a small hardy band here in Washington— they are terrific, too, hardworking and dedicated to serving you. Our chapters are growing and thriving. The NACD board of directors is one of the most active and engaged boards, especially for a nonprofit, I have ever been privileged to serve on.
NACD has come of age. We offer a profound variety of educational resources, a dedication to thought leadership in corporate governance, and the ability to reach and influence decision makers in the regulatory arena from a director’s perspective. In short, NACD can offer you and your board a great deal more than we ever could before.
Conclusion
Let me conclude with more words from that great philosopher Yogi Berra. He said, “The future ain’t what it used to be.” True enough.
So let us advance into that future with confidence and pride in the important role we play as directors and members of NACD. At all times, we can and should strive to be the best we can be.
The Honorable Barbara Hackman Franklin is chairman of the board of NACD.