The first female CEO of a Fortune 20 company, Carly Fiorina’s rise and fall at Hewlett-Packard was nothing short of spectacular. The first outsider chosen to lead the decades-old technology company, Fiorina, hired in 1999 as a change agent, arrived at the height of the dot-com boom. As part of her efforts to reinvigorate HP’s business, she championed what turned into a difficult merger with Compaq. That ill-timed deal, announced a week before September 11, 2001, was just one factor that contributed to Fiorina’s eventual ouster from HP in 2005.

What follows are excerpts from Fiorina’s remarks to at the Council for Institutional Investors conference this fall. Her views on what directors need to do to liberate themselves and how to take the measure of a company’s innovation and progress stem from her boardroom experiences at Kraft Foods, Cisco Systems, and APR, a large Taiwan-based semiconductor manufacturer.

Basic Principles

The American public company is one of the greatest producers of wealth and rising living standards that the world has ever seen. It is also true that political power is based on economic power. And so it is in our nation’s interest, it is in our interest as American citizens, that we have strong public companies that can compete globally. That means that the goal of board members and management should be to build great companies.

Balancing Acts

While great companies focus on creating value for shareholders, they really have four constituencies they need to be concerned about: shareholders, of course, but also customers, employees, and communities. A CEO’s most important and most difficult job is to balance the demands and requirements of these constituencies, recognizing that those demands can sometimes be conflicting. Cutting jobs and pension plans may be appealing to some investors, but it may impact negatively on employee retention. Investments in a community project may not pay off in the short term, but they may, in fact, enhance a company’s value in the long term. A board, therefore, also has to make judgments about whether trade-offs are being made carefully, appropriately, and adequately.

Competition is Riskier Than Ever

A company’s stock price over the short term is only one measure of a company’s assets. We also have to acknowledge, as we think about the changing role of the board, that the competitive landscape has changed in a dramatic way. Competing and winning over the long haul is a riskier and more difficult proposition for American companies today. We now live in a truly global economy. We face countries and companies around the world who have different standards for accountability and for transparency. China is an obvious example, but it is also true that China is a country that is truly focused on the long term and that believes that economic power is the source of political power.

Death to the Status Quo

Think about how rapidly the landscape around Kodak changed. When I arrived at Hewlett-Packard in 1999, Kodak was king of the hill and the conventional wisdom was that HP could never take Kodak on in a newly emerging industry called digital photography. In less than five years that entire industry landscape changed; in fact, the industry around which Kodak built a leading franchise for 100 years basically disappeared. There are many other examples in the music, entertainment, and media industries, just to name a few. Decisions have to be made with the full knowledge that the industry landscape can be changed by technology virtually overnight. This is one of the principal reasons I believe that political decision-making processes are not a good model for how we should run the decision-making processes for business. I understand this is a controversial position for many, but it has been said that all politics are local. The context of business is now global. The truth is, our founding fathers created a system of political decision-making that by its nature seeks to preserve the status quo. The goal of the American political process is gradual evolution, not decisiveness. And yet, decisiveness is what’s required for a business to compete and win.

Board Priorities

Obviously, a board has to spend a great deal of time on its fiduciary duties, but a board should first spend its time developing a holistic view of the company, and second, know the leading indicators of the company’s future success. In practical terms, a company’s system is made up of four things that represent both its hardware and software: strategy, vision, structure, and culture. Strategy and structure are the hardware, and vision and culture are the software. If you want to change the direction of business, you have to worry about the hardware as well as the software. I think strategy discussions should happen at every meeting: Who are our competitors? What are they doing? What are our assets? How do we deploy them?

Align Rewards with Performance

When I arrived at HP in the middle of the dot-com boom, the company had missed nine quarters in a row. Profit was deteriorating across every line of business, yet employees were receiving record bonuses quarter after quarter. In other words, the rewards system was not aligned to competitive performance. A board needs to understand what drives leadership development. Who gets promoted and why? Strategy, structure, process, rewards and metrics, culture and behavior—this is the company as seen from a holistic point of view.

Laggards and Leaders

What are lagging indicators? Income statements, balance sheets, and cash-flow statements. They’re lagging indicators because they represent decisions already made; decisions already made by customers and employees. And yes, a trajectory of those lagging indicators can tell you something.

But the leading indicators of where a company is going are, in my opinion, customer satisfaction, rate of elevation, diversity, and ethics. Customer satisfaction metrics tell you whether customers are seeking alternatives. If customer satisfaction is deteriorating, revenue or margin decline is eventually inevitable. It’s interesting to me that so many people miss this leading indictor.

The Measures of Innovation

Companies measure innovation in a lot of ways: new products produced, percentage of revenue generated by new products, numbers of patents secured. Innovation tells you whether a management team is willing to take risks, invest in the future, and try new solutions to old problems. If people keep doing the same old things in the same old ways, inevitably, somebody is going to catch up. Cost cutting may generate profits, but it cannot generate revenue. Only customers and good ideas can generate revenue.

A company’s ability to look at new ideas and new solutions is directly linked to the diversity of the management team. If you see a management team that’s becoming less diverse—where everybody looks the same, thinks the same, and has come from the same place—it means that this management team favors consensus and conformity, rather than encouraging the creative tension that comes from differences in perspective, experience, and yes, differences in race and gender as well. This is a business justification for diversity but it also leads to better decision making.

Behavior on the Edge

Let’s be honest: behavior that’s on the edge is frequently tolerated because it produces positive results in the short term. That’s how you get situations like Enron. If people learn that behavior on the edge is tolerated, eventually someone will walk over the line. They will take ethical chances, because they believe the ends justify the means. That becomes corrosive in a company. A leader’s most important job, whether it’s a board director or the CEO, is to maintain the highest standards of integrity, day in and day out.

Rita Foley, Chairman of Pro Mujer, a leading microfinance and women’s development network in Latin America, was named the Not-for-Profit Director of the Year by the NACD.

Although generally known throughout his storied professional life for his work with chief executives, Peter Drucker advised hundreds of boards of diverse organizations around the world, constantly reminding them of the need to stay true to their role as a constructive “adversary of top management.”

David Stockman, a former Congressman, Reagan aide, and auto industry CEO, is getting an education in the white-collar criminal justice system.