South Carolina Gov. Nikki Haley (left) and Attorney General Alan Wilson are sworn in before testifying at a hearing on an NLRB complaint against Boeing. (photo by Associated Press)

The agency last spring filed a complaint—since dropped—on behalf of the 31,000-member International Association of Machinists and Aerospace Workers, siding with the union. Boeing contested the charges on the grounds that opening up an assembly line in South Carolina, where it already had a facility, was in fact a business decision and not antilabor.

Lafe Solomon, NLRB acting general counsel, testified that he issued the complaint to encourage the company and union to reach a settlement. Yes, we know what kind of settlement he had in mind.

Where a company does business is a decision that managements make all the time—in the best interests of their shareholders. But, apparently, not unionized company management under the Obama administration NLRB.

Jeff Cunningham is managing director and senior advisor to NACD. He is nationally known for his views on boards and corporate governance. Prior to starting Directorship magazine, he was publisher of Forbes and managing partner of the U.K. private equity firm Schroders. He has served as an independent board chair or director of 10 public companies.

Jeffrey M. Cunningham

Placing energy and fuel sanctions on Japan was the key factor leading Emperor Hirohito to approve Admiral Yamamoto’s plan to attack Pearl Harbor on Dec. 7, 1941. Sanctions may seem a lesser evil to war, but the other side may not find the idea quite as appealing an alternative.

Jeff Cunningham is managing director and senior advisor to NACD. He is nationally known for his views on boards and corporate governance. Prior to starting Directorship magazine, he was publisher of Forbes and managing partner of the U.K. private equity firm Schroders. He has served as an independent board chair or director of 10 public companies.

Jeffrey M. Cunningham

The no-shows are the United States, China, Russia, Brazil, Japan, and most of industrial Europe including Austria and France. Consequentially, capital costs will rise for these countries. Call us sluggish, not sluggers. (On the business side, ExxonMobil, Johnson & Johnson, Microsoft and ADP are the only U.S. companies to enjoy AAA ratings.)

Jeff Cunningham is managing director and senior advisor to NACD. He is nationally known for his views on boards and corporate governance. Prior to starting Directorship magazine, he was publisher of Forbes and managing partner of the U.K. private equity firm Schroders. He has served as an independent board chair or director of 10 public companies.

Illustration by Gregory Copeland

Yet few things are further from the mind of this globe-trotting, retired four-star general who is so prepossessing in appearance it seems he was sent up from central casting. Although he counts as close friends Saudi princes and sovereigns, there is not even a hint of a star-struck hero. Like an earlier great American general, William Tecumseh Sherman, if asked to self-promote, Shelton would simply refuse.

Shelton was born Jan. 2, 1942, in Tarboro, N.C., and raised in nearby Speed. Like these modest-sounding place-names, he has never quite left his roots. Following a family tradition, he attended North Carolina State University, majoring in the regional specialty, textile engineering, and enrolled somewhat prophetically in the ROTC program. In 1963, as he was about to leave on his first tour in Vietnam, he married his wife, Carolyn; together they have three sons, all of whom have served in the military.

To learn more about NACD’s newly launched “From the Battlefield to the Boardroom” educational program, visit NACDonline.org/Military.

Right after his retirement from the Joint Chiefs of Staff in 2002, Shelton was trimming trees in his yard when, to avoid a wayward limb, he dropped from a six-foot ladder, snagged his boot on a fence post and landed headfirst, seriously injuring his spine. The irony of a paratrooper who made more than 450 successful jumps from as high as 24,000 feet was not lost on him as he spent three months in the hospital, proving to the medical establishment that a man did not have to be paralyzed for life if he truly believed in his own recovery. Shelton gives all the credit to Dr. Jim Ecklund, chief of neurosurgery at Walter Reed Army Medical Center, who would come by daily to grab Shelton’s right big toe and tell him, “Move it for me,” and, of course, to his wife, Carolyn. Today, he is almost completely recovered—the only long-term consequence is that Carolyn has decreed that all future yard work be conducted as a ground-level operation.

ROTC, 1960

Shelton was America’s 14th chairman of the Joint Chiefs of Staff, serving from 1997 to 2001. The role was conceived in principle under President Franklin D. Roosevelt to better coordinate World War II activities, although the first official officeholder was General of the Army Omar N. Bradley, appointed in 1947. Shelton served as chairman under Presidents Bill Clinton and George W. Bush, leading the planning for such events as the Kosovo war and the early stages of the Iraq war. He was in some ways the “accidental” Joint Chiefs chair. Asked if he had ambitions to the role, he demurs: “When I was at ROTC at NC State, I wasn’t even sure I’d make it through summer camp.”

In his military career he served two tours in Vietnam and commanded the much-heralded 82nd Airborne Division, Operation Uphold Democracy in Haiti and the U.S. Special Operations Command (SOCOM), which conducts covert and clandestine missions and oversees the operations of such vaunted units as Delta Force, Seal Team 6, Army Rangers and Special Forces (aka Green Berets).

What drove him? A sense of obligation to do his duty and always to do the right thing, he says—feelings that would accompany him from Vietnam through his role as Joint Chiefs chair. “Throughout my career, the one focus I had was to be prepared to do the best job I could,” he says. “I would glance up at whoever my boss was from time to time and say to myself, ‘If I were ever put in that position, what would I need to be prepared to take his place?’ But never beyond that.” In Shelton’s way of looking at things, field promotion took the place of self-promotion. Doing the right thing became his calling, and he measured his success only by how his troops performed and the level of their morale.

Shelton is also gifted—or plagued—by a strong sense of fair play. Early in his career, he and his wife moved to their new home near Fort Benning, Ga., and he decided to go early on a Saturday morning to get ahead on some paperwork so that he could hit the ground running on Monday. Instead, the sergeant in charge told him that under no uncertain terms would he be returning home. He said that if Shelton wanted to quit the military he was welcome to go back. In the days before cellphone service, that meant leaving his wife in the dark for two days at a new home in a new location. In looking back at this episode, Shelton says he learned an important lesson: “If you don’t take care of your people and you leave them hanging like he did, you’re history, because we don’t need people in leadership positions that don’t care. As I became more senior in rank, I tried to set the tone within the command that any leader exhibiting that behavior would be fired.”

Inconvenient Truths

Shelton in meetings with the National Security Council during the Clinton (top photo) and Bush administrations.

Shelton’s last bosses were President Bush and Secretary of Defense Donald Rumsfeld. Judging from his comments in the interview with NACD Directorship that follows and from his autobiography, Without Hesitation: The Odyssey of an American Warrior (St. Martin’s Press, 2010), Shelton feels the 43rd president was misled both by advisors and faulty intelligence, and driven by a mania for retribution sparked by the brutality of 9/11. With Rumsfeld, Shelton pulls no punches. He is unremittingly critical of the oldest secretary of defense in U.S. history, commenting on Rumsfeld’s Teflon reputation and ability to sidestep criticism while at the same time riding roughshod over his generals and countermanding or ignoring their advice.

Yet Shelton waited 10 years from his retirement from the Joint Chiefs in October 2001 before he would allow his memoir to be published. The reasoning is vintage Sheltonesque: “I wasn’t kind to Rumsfeld, but I didn’t want to be a distraction. He had enough on his mind already. But if I was going to be frank and candid, I didn’t feel like I could write it differently than I did, so I held off until they were all out of office intentionally for that reason.”

For exemplary service to his country, Shelton was awarded the Congressional Gold Medal in 2002.

In the board world, Shelton was a director of Anheuser-Busch up until its acquisition by InBev. He currently serves as chairman of Red Hat and is a director of L-3 Communications.

His Word Is His Bond

Directors are always interested in driving superior performance in an organization. What factor plays the most important role in motivating combat troops?
In a word, leadership. A single individual can establish an organizational climate that will cause people to want to pull together to be the best. The same applies to both civilian and military organizations. For example, I found at Red Hat we have a tremendous number of brilliant young people competing against Microsoft and Oracle, but it is their belief in the company and what it stands for in the open-systems world that unites them and makes them so determined that Red Hat is going to be the leader.

In Ha Thanh, Vietnam

Can an organization develop a leadership culture that is sustainable?
Yes, and the 82nd Airborne is a good example. They call it the All-American division because it has representatives from every state in the nation, and when you get all of them bonded together, you’ve got diversity spread throughout and leadership that says, “Let’s get everybody pulling together and we’ll be the best in the world.” In the business world, the same rules apply. I think the only time you see it go awry is when self-interest or greed starts to drive individuals in leadership positions.

In your book Without Hesitation, you refer to military duty as “selfless service.” Does this come from a sense of purpose or the Army culture itself?
Both, actually. From my first days on active duty, it was the old adage that in the Army your word is your bond. Integrity is the foundation upon which everything else is built. Everything you did had to be in done in an ethical manner and with the view that what is best for your troop is the right thing to do. If an officer had an integrity issue, colored the truth or made decisions in a self-centered way, he was history.

Meaning he’d be finished, right? From below or above?
He would be fired from above, but the recognition would be among his or her peers who would have nothing to do with him.

In the military you are fighting for freedom and our way of life. Is it realistic to expect business executives to be as motivated?
In war, it’s true you’re motivated by the severity of the consequences, and while in the business world, although you’ve got a different set of objectives such as shareholder value and a profit that you need to make, you can still develop that team to be the best. And I think the same rules apply; they converge downstream. You have to have a conviction and unshakable belief in the rightness of your mission. Different goals maybe, but the same techniques.

Wouldn’t most people question whether executives can be as inspired by making a profit as soldiers by saving lives?
To me there are very important similarities. I look at Enron and, while lives were not lost, the number [of lives] that were destroyed when it went under, the amount of personal savings that disappeared and caused retired employees to have to work for the rest of their lives—I easily see a situation that was equal to what we face in the military in terms of leader responsibility. And I feel that responsibility very strongly as a board director.

Business schools try to teach ethics, but the reality suggests it can’t be taught, only inspired. Do you agree?
I think you can teach it to a degree. I think by teaching, I mean including it in every course that you have, and by leaders emphasizing its importance on a day-to-day basis, the leader in the unit – making sure that everyone understands that we’re going to be a company that’s known for its integrity. Emphasizing compliance with the Foreign Corrupt Practices Act is a great example. The secret really is the tone from the top. It has to flow down through each leader and say in the strongest way possible, “This is part of who we are and what we are, and therefore this is the way we operate.”

Speaking of ethics, what about the unfortunate Abu Ghraib prison case? What is the most effective way to deal with cases where our ethical standards are at risk?
I believe it was a major ethical lapse, and the only way to deal with it is to hold the right people accountable at the levels where they should be held accountable, and not simply spread blame indiscriminately. For example, let’s start with the brigadier general who was in charge of this prison. If she didn’t know what was going on in the interrogation of prisoners, then she needs to be held accountable. And my second immediate question would be, did her boss ever walk through that prison to get a sense of how things were going? I think an investigation should show where the whole thing started breaking down, and assign accountability and appropriate penalties from there. But I don’t agree that the secretary of defense or the chairman ought to be fired because we had a breakdown, which violates common sense as well as the correct chain of command.

In the case of morality versus mortality, is it realistic to expect troops to focus on ethical issues at the same time they are facing dangerous combatants and insurgents?
Actually, it’s even more important. When we went into Haiti we immediately set up a prisoner-of-war camp, to house the thugs we knew were in the street and would shoot us if they had a chance. After we captured a number of them and put them in this compound, I immediately sought out the International Red Cross representative, and said, “I’d like you to go over and inspect our compound. Make sure that everything we’re doing is being done in a humane manner, in accordance with international regulations and rules.” And they went over, and the only suggestion they had was that you ought to put a five-gallon water can out there, just to make sure they can never claim they didn’t have water. So we did that. It’s just not that complicated to act ethically and fulfill a combat objective.

Can you expand on the point you make about [H. R.] McMaster’s book Dereliction of Duty, which concerned the lessons we learned from the Vietnam War? Our country has an uncanny ability to investigate and inquire into our history regardless of the embarrassment it may cause, unlike many less democratically governed nations. This allows us to understand what really took place, and in the case of the Vietnam War, as McMaster pointed out in Dereliction of Duty, it showed that the military did not advise the political establishment forcefully enough and that the political establishment did not do its job either. Our task in the military was similar to those financial executives in the ’07–’08 crisis, whose responsibility was to advise their company CEOs on the risk in their portfolios, regardless of how unwelcome that news would be. History shows they failed to do that, and our military leaders at the time also failed to carry out their obligation to our civilian masters to make sure that we give them our best military advice. Having learned these lessons the hard way, today I tell our officers, “Don’t take no for an answer. Keep pushing so that you can get it as close as we can to what’s best for our men and women in uniform if we’re going to be fighting a war, and certainly watch out for people who lie, cheat and steal.” The deceit and the deception that was going on during the Vietnam War in the Johnson administration was something that I wanted to make sure did not happen during my and [former Secretary of Defense William] Bill Cohen’s watch. We both were very conscious to watch for that when we were over at the National Security Council meetings…for people that might not be entirely candid and working their own agenda.

So more recently, what lessons have we learned from the Iraq War?
In Iraq, we have seen that while you can extrapolate lessons from other military engagements, you can’t take a cookie-cutter approach. We had a very successful operation going into Afghanistan, and it was successful because on the ground in Afghanistan was the Northern Alliance, the indigenous fighters, and they had been at war for years. They could get close to winning against the Taliban, but they could never quite get over the hump, so the idea [former CIA Director] George Tenet and I had was take our special ops guys—who were the only troops in the world trained to go in—and take over an indigenous force and fight with them, and bring the high-tech pieces of the battle to them. When we went into Iraq, Secretary of Defense Donald Rumsfeld took some of that logic but applied it to a very different set of circumstances when he said, in effect, “We don’t need all these troops, so we’ll pare down this war plan that’s on the shelf and get it down to almost nothing and go in and we’ll kick Saddam Hussein out.” But as King Abdullah of Jordan told me, “What you need in order to stabilize Iraq is an individual that has some of Saddam Hussein’s ability to manage these different religious and cultural factions but who is a good leader who doesn’t abuse his people—if you can find someone like that. But you’ve got to have a strong man to keep them apart because if you don’t, they’ll go to war with each other.” Rumsfeld just didn’t want to hear that—he had a different mission and that was to prove to the world that he could go in and win this war with a small force. As he and General Tommy Franks [of the United States Central Command] both found out, it fell apart days after we beat Saddam, because no one could keep these factions apart. We also took out their police, dismantled their military, and now we wonder who runs the country? If you break it, you own it!

Doesn’t it always seem that politics trumps good policy?
It’s up to who’s in command as well as the risks the leader is willing to take to do the right thing. I carried a force to Miami after Hurricane Andrew; I was told they could carry weapons but no ammunition. So we started patrolling the streets where there was no law enforcement. Then the gangs started moving in. So I told them, distribute the ammunition but here’s the rule everyone will follow: Make sure there’s an imminent threat before you fire, period. Then, afterwards, be prepared to tell me why it was an imminent threat. I wasn’t going to have a service member killed on my watch by a gang member because we didn’t give them ammunition to fire back. And I felt that the American people would be solidly behind me. It worked because our great soldiers in the 82nd were properly trained and disciplined and could follow orders very well. That’s how these cases should be handled.

You were critical of the detainee program in Guantanamo. The flip side says the federal courts will tie it up forever. What’s the right way to deal with this?
It’s not a simple issue, but the problem I have with Guantanamo is we should not bring people, terrorists or anyone else, into Guantanamo and let them serve the rest of their life there without some kind of due process. I fully agree with bringing prisoners, of bringing individuals that have been captured like in Afghanistan that we think are terrorists, into Guantanamo, but we need to move faster to produce the evidence, bring charges against them, try them and dispose of them in a just manner, whether it’s to the gallows or whether it’s to freedom, but not keep them there for five or 10 years without some kind of process. That bothers me. I picture myself, for example, being thrown into an Iranian prison…

Meaning what happens when the tables are turned? Yes. And I think it’s the same thing when it comes to waterboarding. It comes down to one fact that concerns me greatly: I don’t want to see our own troops waterboarded. I think we need to comply with the Geneva Convention and the rules of land warfare.

Our intelligence apparatus has been faulted for coming apart under the Carter administration, particularly in the Middle East, starting with Iran. Do you agree?
I think the big mistake that we made with the intelligence services was we thought peace was going to break out all over the world, and we really started drawing down, particularly our human intelligence, around the globe. That was particularly true for what were labeled as Tier Three and Tier Four countries— countries whose names you will recognize, like Haiti, Colombia, Afghanistan and Iraq….Because technology was going to replace the humans…and so it really meant that we had a big void in our intelligence, in our ability to transform the information into something that a commander can use.

Speaking of Iran, do you have any sense for what is happening there and how concerned should we be?
Well, I think first and foremost we need to recognize that Iran is the most terrorist-exporting nation in the world today. A nation that’s on the brink of developing a full-scale nuclear weapon. In fact, my guess is that they probably have the capability right now to pull it together.

What about Pakistan?
Pakistan is a nation that really concerns me. It’s a nation that I think could very easily disintegrate on us if we aren’t careful, and the al-Qaeda elements, and the Taliban, would be very quick to move in and take control. And we know where they stand, relative to the U.S. I think we need to do everything possible to work with the Pakistanis and remain a friend. The same is true for the Indians, because they’re a friend of ours as well.

On the subject of global politics, how concerned are you about WikiLeaks?
The fact that a young specialist could have access to the highest level State Department documents that were derogatory, had derogatory information about world leaders in it, just blows my mind.

Let’s switch to a subject that all directors have to deal with—diversity. How has the military made it work so effectively?
I grew up in an era that was racist, frankly, and in my early childhood I can still remember specific doors being marked “colored” or “white.” And when I’d go to the movies on Saturday, the blacks sat up in the balcony and the whites sat down below. And I remember even as a child thinking, “This is not right.” But in the Army, by 1963, that had gone away. The Army started putting a lot of emphasis on training and using situational vignettes, if you will, to train our people as to what constituted racism and how it might not be self-evident when you first looked at it, but ultimately it was.

Directors have ongoing issues with management compensation. Is compensation of our military and flag officers a similar concern?
I had lunch with the late [former Yankees owner] George Steinbrenner down in Tampa when I had just been promoted to four stars, and he asked me, “General, how much do you make?” and I said, “George, I make $150,000.” And he said, “Holy…$150,000 a month? Well, we gotta do something about that.” I said, “George, I said per year, not per month.” And he went ballistic. I thought the guy was going to have a heart attack. Then he turned to me and said, “You’ve got to do something about that,” and I said, “George, that’s not the way we operate in the military. Those guys are not motivated by pay, they just aren’t. They’ve done it all their lives, you know, they love what they do. They have a great sense of accomplishment at what they do.” In fact, by law, all of the four-stars are limited to the pay of the newest-serving member of Congress. That’s as high as you can ever get as a general. It’s not an easy problem to resolve, but again, monetary compensation is just not the key motivator in the military.

You became a corporate board director not long after your retirement. What’s your recommendation to future flag officers with their sights set on the boardroom?
Well, I think the first thing they need to do is take off the stars—leave ’em home, you are now general or admiral “retired”— and try to bring some humility with you when you come to the boardroom. You know, almost everyone respects flag officers for what they’ve achieved, and the skills they bring are just incredible skills that will be very adaptable to the corporate world. But I think from their perspective, there are lots of things that are different in the corporate world that they need a better understanding of. For example, as we talked about earlier, compensation. I think that each of these individuals, when they come into the business world, they need to understand there is more give-and-take; the rules are not quite as cut-and-dried as they are in the Defense Department. Sarbanes-Oxley, SEC rules clearly are, and they won’t have any problem dealing with that, but I think a greater understanding of board dynamics can be achieved by going to NACD-sponsored events and listening to the dialogue that goes on, and don’t go in with a mind-set of “This is the way it ought to be.” So I believe going to NACD-type courses as quickly as possible will help bridge that gap and bring them up to date and up to speed in some of these areas.

How did you manage your transition from chairman of the Joint Chiefs, the highest-ranking military officer, to the collegial world of the boardroom?
Jeff, I really did not find it difficult, and it’s the way I have always been. The first thing I did when I joined a board was to ask my board colleagues not to use my former title, but to call me Hugh (although they don’t always listen). And even during my service I preferred to be called “Dad” rather than “General” by my sons when they were in the military. And my grandchildren call me “Gramps.”

So now that you have been officially promoted to “General Gramps,” my final question: Are you optimistic about America’s future?
From a personal and personnel standpoint, I am extremely optimistic. I mean, we talk about the threats we have from other nations and our educational challenges particularly in the areas of math and science, but when I walk among the Shelton Scholars, Park Scholars and Caldwell Scholars at NC State, my alma mater, I walk away from there saying, “Boy, they are dynamite.” We won’t have any trouble producing future leaders because we seem to have an unlimited supply of really smart individuals. I guess my greatest concern for America right now deals with the economy. I get a little more concerned about our economy than I did in the past because I see it every day now that I am retired. But I’m also confident that we have individuals graduating from our universities with the right ethics, attitude and conscientiousness to figure out how to bring it back. To me, that’s the American way.

Malcolm Forbes (seated) with his sons (L-R) Timothy, Steve, Robert and Christopher (Kip) (Michael I. Price/Getty Images)

But don’t tell that to Stewart Pinkerton, a longtime editor of Forbes magazine and, like many Forbes employees, a recipient of the family’s largesse— and now the author of The Fall of the House of Forbes, a hyper-critical examination of the sons’ stewardship of the assets inherited from their father.

Apart from money and fame, it’s not a simple task to decipher the reasons for writing a book. Pinkerton’s raison d’être may be obvious in that he tells a story of decline and decay from the perspective of a romanticized vision of the past. The truth behind the Forbes legacy is that the sons did what they had to do to survive the tumultuous aught years of this century—just as they previously did what they had to do to thrive in the go-go ’90s.

My role in this colorful saga was as the magazine’s publisher from 1990–1998, when Forbes was the leading magazine in America. I reported directly to Steve and Kip Forbes, the CEO and vice chairman, respectively (at the time), and later indirectly to Bob and Tim Forbes as well. I count those years as an infinitely better business education than a Harvard MBA mixed in with a Tony Robbins refresher course.

For directors looking for a tale of rags to riches to rags in three generations (Malcolm’s father, B.C. Forbes, founded the magazine in 1917), you’re in for a surprise: this third generation has actually gone from advertising-driven riches to a more diverse set of riches with far less risk. Others looking for the inside story behind the Forbes legend and its alleged downfall will need to keep in mind that the author’s real beef is a longing for the good old days of paradise publishing under Malcolm Forbes. What makes the Forbes story so interesting—and one that Malcolm would be proud to realize—is that he ultimately passed on something other than flamboyant, literary, cultural, political junkie, bon vivant, collector and adrenalin rush (as in fast vehicles) genes. He passed on a survivor’s instinct.

The sons are criticized roundly in the book for pawning cultural icons for wads of cold cash. But the Forbes were looking at a business that had huge risk and no downside protection. Magazine products such as BusinessWeek could be worth a $1 billion one decade and $5 million the next. I see it as pragmatism that fell not far from the root. Malcolm was once overheard saying that if all else fails, his sons could sell the Fabergé eggs. Eventually they did—to a Russian oligarch, at the height of the Russian playboy billionaire philanthropist era under Boris Yeltsin.

Similarly, they partnered with global media companies to produce low-risk, high-gloss overseas versions of Forbes. They sold off most of the other collections, including paintings, autographs, toy soldiers, palaces, islands, eventually the Highlander itself and the Boeing 727 Capitalist Tool. That cash— plus the $500 million valuation with half up front from Elevation Partners, rock star Bono’s private equity firm—made these sales the smartest moves in the magazine industry.

But the question begs asking, was selling off assets and diluting the Forbes mystique the right move or the only move? As George Kennan, the famed global strategist, once said about statecraft, “There is more respect to be won…by a resolute and courageous liquidation of unsound positions than by the most stubborn pursuit of extravagant or unpromising objectives.” There is special glory in staying afloat while others are sinking. Ask Bill Gates or Warren Buffett.

Another reason for the lopsided storytelling in Pinkerton’s account is that he never spent much time in the back office. This was part of the genius of Malcolm S. Forbes: he compartmentalized like a mad dictator, but his madness was actually pure common sense. No employee could truly understand his Byzantine way of keeping everyone on a flotilla that pointed to Malcolm and allowed each of us to shine although not eclipse his reflected glory. Malcolm knew you, and you knew he knew you, and he knew you knew it. It made him omnipresent and omniprescient, which only increased his magnetism as his fame spread and his iconic stature grew.

The sharing of duties fell to the sons as well. Steve was groomed to become the CEO and the editor-in-chief, mirroring Malcolm’s own rise to the family throne, which Pinkerton covers ably. Steve keeps his own counsel and can at times seem sphinx-like in demeanor, but his prophetic gifts and dynamic qualities emerge when he writes his column or stands before a podium talking politics or the economy.

Pinkerton calls Steve’s two runs for president the $75 million sales call. This is pure balderdash from those who weren’t there. Steve believed in his cause, which was to bring back the tenets of Teddy Roosevelt’s bully pulpit mixed with Adam Smith’s free-market capitalism using common sense in place of needless regulation, and adherence to the gold standard to avoid inflationary levels of money supply. Like the way he ran Forbes, Steve’s political vision was to set firm boundaries, invoke a moral force to guard against overreaching, and then let the natives do their thing.

Kip Forbes, the vice chairman at the time, has the virtues of a professor of Renaissance studies combined with an aristocratic bearing (it helps that he is, in fact, an aristocrat)—ideal for wining and dining all manner of VIP, which he does beyond brilliantly. But few know how precisely trenchant he can be about things, sizing up people and situations instantaneously. He is the ultimate consigliere to the high and mighty and instinctively knows their weaknesses and their tastes, which make him both compelling and a confidante. Steve and Kip make a great team, and in the past decade Bob and particularly Tim also came into their own and pushed the business in very important directions, such as launching Forbes.com, one of the most highly trafficked financial websites, and Forbes Life, a glossy publication whose tagline might well have been “living well is the best revenge.”

So, what ultimately cost the sons part of their patrimony? It wasn’t bad management, as Pinkerton alleges. In fact, like so many other challenged empires from Rome to Britain, in the end it was timing. The Internet was meant to liberate us, but it also liberated us from one another and, in many respects, from our long-cherished habits. Magazines no longer had a call on people’s time because there were now so many other things to do, watch and listen to.

As for Forbes.com, it did move the needle significantly, but the loss of magazine revenues and prestige could not be undone in the span of only several years. Which is why, as of this writing, Elevation is understandably taking a harder look at the asset and its lofty valuation, and the Forbes brothers have had to step aside even further.

Who knows where that ends? Covenants will always trump common sense. But the sons are still associated with the business that carries their name, and the business itself is well regarded by a new generation not wedded to the gilded era of magazines. Steve still writes his column. Kip travels the world on behalf of the company. Noblesse oblige. Sometimes you accept the role graciously and wait for another day, and if the timing still isn’t right, sell another asset. Be grateful you have assets to sell. Malcolm would agree.

Patti Hart (Associated Press)

Yahoo nominating committee chair Patti Hart is a legendary telecom executive with Internet chops (currently CEO of IGT) and is precisely the right person to push this iconic portal into a new era of investor satisfaction. Hart brings both outstanding management skills and a very deep level of board experience to the task. She’s as tough as they come when necessary but is also a realist. So Hart knows turning Yahoo around or finding a reasonable exit strategy will not be simple. Technology companies’ rise and fall makes Wall Street’s “eat their young” look like an aggressive form of badminton. New Year’s prediction: Hart will make it happen.

Jeff Cunningham is managing director and senior advisor to NACD. He is nationally known for his views on boards and corporate governance. Prior to starting Directorship magazine, he was publisher of Forbes and managing partner of the U.K. private equity firm Schroders. He has served as an independent board chair or director of 10 public companies.

In your book, Without Hesitation, you were deeply critical of Secretary of Defense Donald Rumsfeld’s Iraq war planning. What was wrong with his thinking?

General (Ret.) Hugh Shelton

In Iraq, we have seen that while you can extrapolate lessons from other military engagements, you can’t take a cookie cutter approach. We had a very successful operation going into Afghanistan and it was successful because on the ground in Afghanistan was the Northern Alliance, the indigenous fighters, and they had been at war for years. They could get close to winning against the Taliban but they could never quite get over the hump, so the idea [Former CIA Director] George Tenet and I had was take our special ops guys who were the only troops in the world trained to go in and take over an indigenous force and fight with them, and bring the high-tech pieces of the battle to them.

When we went into Iraq, Secretary of Defense Donald Rumsfeld took some of that logic but applied it to a very different set of circumstances when he said in effect, “We don’t need all these troops so we’ll pare down this war plan that’s on the shelf and get it down to almost nothing and go in and we’ll kick Saddam [Hussein] out.”  But as King Abdullah of Jordan told me, ”what you need in order to stabilize Iraq is an individual that has some of Saddam Hussein’s ability to manage these different religious and cultural factions but who is a good leader who doesn’t abuse his people—if you can find someone like that. But you’ve got to have a strong man to keep them apart because if you don’t, they’ll go to war with each other.” Rumsfeld just didn’t want to hear that, he had a different mission and that was to prove to the world that he could go in and win this war with a small force. As he and [General] Tommy Franks [Commander of the United States Central Command] both found out, it fell apart days after we beat Saddam because no one could keep these factions apart. We also took out their police, dismantled their military, and now we wonder who runs the country? If you break it you own it!

You were critical of the detainee program in Guantanamo. The flip side says the federal courts will tie it up forever. What’s the right way to deal with this?

It’s not a simple issue but the problem I have with Guantanamo is we should not bring people, terrorists or anyone else, into Guantanamo and let them serve the rest of their life there without some kind of due process. I fully agree with bringing prisoners, of bringing individuals that have been captured like in Afghanistan that we think are terrorists, into Guantanamo, try them and dispose of them in a just manner, whether it’s to the gallows or whether it’s to freedom, but not keep them there for five or ten years without some kind of process. That bothers me. I picture myself, for example, being thrown into an Iranian prison…

Meaning what happens when the tables are turned…

Yes. And I think it’s the same thing when it comes to water boarding. I don’t want to see our own troops water boarded. I think we need to comply with the Geneva Convention and the rules of land warfare.

Generals Hugh Shelton and Stanley McChrystal

Their career highlights speak volumes: Shelton, who has served in Vietnam, Haiti, Kosovo and the Gulf War, was commander in chief of the United States Special Operations Command (units include Delta Force, Seal Team 6 and Army rangers), which focuses on major covert and clandestine missions, and was chairman of the Joint Chiefs of Staff under Presidents Clinton and Bush. McChrystal served as commander, United States Army Central in Camp Doha, Kuwait. He led the Joint Special Operations Command and later directed all NATO forces in Afghanistan. His successes include the capture of Saddam Hussein and the death of Al Qaeda’s Abu Musab al-Zarqawi.

No board has a corner on crisis management skills. And yet, having this degree of experience on hand assures whatever threats lurk ahead for a company, they will be seen as just another skirmish on the road to victory.

Jeff Cunningham is managing director and senior advisor to NACD. He is nationally known for his views on boards and corporate governance. Prior to starting Directorship magazine, he was publisher of Forbes and managing partner of the U.K. private equity firm Schroders. He has served as an independent board chair or director of 10 public companies.

Doug Oberhelman

A lot has been written and discussed about the role of the board in strategy, especially in this time of economic uncertainty, changing customer dynamics and increased governmental and regulatory scrutiny. Oberhelman shared his perspectives during a recent NACD Chicago chapter meeting before a distinguished group of directors and governance professionals, including Theodore L. (Ted) Dysart, vice chairman of Heidrick & Struggles, and NACD Chapter President Michele J. Hooper. Oberhelman both spoke and responded to questions about the challenges of operating in today’s public policy environment; the importance of focusing on the customer, particularly in the current global environment; and the value that boards can and do bring to the strategy process.

Oberhelman is a director for the boards of Eli Lilly and Co. and The Nature Conservancy’s Illinois chapter. He is a member of the boards of directors of the National Association of Manufacturers, the Manufacturing Institute and the Wetlands American Trust. In addition, he is a member of the Business Roundtable and The Business Council. He is a former director for the board of Ameren Corp.

I. Succession Planning
I want to discuss several things, starting with succession planning and Caterpillar’s leadership development philosophy of promoting from within. We’ve never had an outside CEO or chairman in the history of our company; we’ve been public since 1929. Sometimes that brings great things, and sometimes that can bring an inward focus. But we’ve always done it that way, and I would say that CEO succession at Caterpillar is an outflow of the way we do succession planning throughout the year and over a long period of time. We really have a solid succession planning process, both internally and with our board.

We spend time throughout the year on succession planning, leading up to a session with the board in October of every year. But the way it starts is from the bottom up. Every one of our officers sits down at least once a year with their management teams, and then as a group, and talks through all of their people and assesses their long-term potential. That’s an active process—a minimum of once a year. We follow a similar process in the executive office. And that process takes most of the year to work its way through. We just finished that this summer, and by the time we get to the board in October, we—the six of us in the executive office at Caterpillar—have a good understanding of the highest-potential candidates out of the top 3,000 positions within our company. And over a period of years we get to develop the people who are in these positions—whether they’re in China, Russia, the United States or anywhere—we prepare them to be senior leaders. By the time we get to the board in October, we spend time mostly on our officer level, which would be about 35 people—who’s going to retire, what’s our succession plan for each of those jobs, who are our functional experts, who are the best high-performers to serve in that leadership role. We talk a lot about developing diverse candidates to fill these roles, and I will tell you, that’s a challenge for our company at the officer level and across the board in all facets of having a diverse and inclusive leadership team, but we really work hard on it. We brought together a process that I think will help us down the road, but it’s a continuing challenge—and by that I mean developing and placing Asian leaders in Asia, European leaders in Europe, U.S. minorities and females for positions everywhere we do business, and on and on.

I give a great deal of credit to our board for managing this over the years, for the most part very quietly. My predecessor, Jim Owens, is a great guy. I worked for him off and on for 15 years, and between Jim and our board, they devised a succession plan for me that resulted in my ascension to the CEO position that was very quiet, very orderly, and over a year’s period of time. Every one of our executive officers that was there before the transition is here today. We operate as a team, and I give the board and Jim great credit in making sure that was the case so that we did not hit The Wall Street Journal for things that a lot of companies go through on CEO and succession transition, which I think is very unhealthy for an organization. It essentially allowed me to hit the ground running.

Now I’ll take my CEO hat off and cross the table as an outside board member of some experience—to make sure that when management is working on succession planning for the CEO, that it’s a much deeper process, something along the lines of what I just described. I don’t think enough companies really spend enough time on that. I think many companies do, but if you don’t start from the bottom up and work it all the way through, it’s going to be very difficult to do that at the CEO level as well. I think that’s where a lot of companies get into trouble. Certainly one where the candidate can come from within—if it works within that organization—and sometimes it doesn’t—can be healthy; sometimes change is needed.

II. Setting the Strategic Goals
Switching gears a little bit to strategy. We’ve had a good CEO tradition at Caterpillar that the first few months or year of a new CEO is a time to think about strategy. No surprise—everyone probably does it that way. But in my succession, Jim provided me with six months to head the strategy group, which I did. He continued being CEO and chairman of the company and held off all the other things that come at a new CEO from day one, and I think that was great. Jim’s predecessor had done that when he came in as CEO; it was fabulous, and to the extent that you can get that done, it works, and it sure worked for us.

We appointed a group of 16 to our strategy group, six of whom were in the executive office that I mentioned, our group presidents that report to me, and myself, and then 10 others from around the world—the most diverse group we had ever put together. We sat down in November of 2009 and wanted to be finished by May of 2010. We asked, “What do we want to do with our company?” We had fairly modest expectations to begin with, and as we sat down and looked at all of the things we were doing and needed to do, we quickly realized we needed to make some fairly deep cultural changes. Caterpillar has a culture that is very, very deep and very, very strong, but very hard to change. And while we did a lot of things very well—and always had—and were performing relatively well, we were just in the thick of the recession, which provided a great sense of urgency and a great burning platform to really attack the way we looked at what we were going to be when we grew up—this team. Our strategy-planning group met for about six months, two weeks a month, and really dissected the company. We hired two outside advisors, one a professional consulting firm we had worked with and knew us very well, and one from HR to help us on the culture change and where we drive the company. I would do this again, and if I went to another company, I would do it there because this process was really effective and top-notch.

The other thing that helps get strategy right is to take what I call a board-level view. I firmly believe the words have to be direct and as plain-language as possible. If you can’t explain it at a board level that makes sense, you aren’t going to be able to explain it to your own people. That was very helpful to us, and that’s the lesson I learned out of that process. You’ve all been on both sides of the table of management and a board—you’ve got to put it in a way that members who meet every 60 days for a board meeting can get enough into it without too much detail and without being too high-level. And that’s really an art to get that right.

When we wrapped up that strategy, we put it all on an 8 1/2- by-11 card. We’ve explained that now, for almost two years, what it is we want everybody to do. And one of the key communication pieces by management is communicate, communicate and communicate that strategy, whatever it is.

In our case, it’s back to the basics of Caterpillar: make greatquality products; get everyone to want your brand, to be associated with it because they love your brand; make sure it offers the lowest owning and operating costs; if you’re a contractor, make sure he or she has the lowest owning and operating costs he or she can get; and when it comes time to resell that product, make sure it has the highest resale value. And when it comes time for service, it happens instantly. We basically refurbished that strategy and realigned all kinds of things to do that. It’s no different than the strategy that whoever it was back in the ’40s and ’50s made for Caterpillar. It wasn’t all that far off from “back to the basics.” In fact, we talked about naming it that, but we didn’t.

III. Changing the Culture
As part of that, we decided that the culture had to be changed. And we decided we were going to shock the culture. And one of the great cultural strengths of Caterpillar is it was a promote-from-within company. And one of the great cultural weaknesses it brought was a sense of job entitlement until retirement. And it had gotten more and more ingrained with time, so we said, in order to get everyone’s attention, we are going to realign the company. We formed business units—we already had business units, but we formed them at a higher level and were careful they were “in charge” of all levels, end to end. We put the P&L leader in the executive office, and we essentially reduced 20 percent of the officer ranks in one fell swoop. And that got everybody’s attention, because we hadn’t done that, ever. Once that group was in place, we replaced another 17 percent of the next level down, and that really emphasized we were serious. Those two single moves got everybody sitting up in their chair, and then we started talking about a key piece of our new strategy, which was accountability and personal ownership for results. That has really helped, and we communicated that.

Then we got into strategy implementation, and this is where we had more help from the board. I would say this led up to our acquisitions of last year—we have spent almost $11 billion. But that puts pressure on a board. And that was a big, big change for us, because we had not typically been an acquirer; the biggest deal we had ever done prior to that was for about one and a quarter billion for an engine company 13 years ago.

But part of what we did with our strategy was to identify key industries where our customers make a lot of money, where we think we can make a lot of money and add value, and where people appreciate the Cat brand and what we can bring to it, and that are growing. So we identified oil and gas, mining and rail, electric power and a couple of others, but the big three as key to our future long term. So our first moves with this new team last summer and fall were right in those sweet spots—our rail, mining and gas-engine acquisitions. And we committed to the board and our people that we were going to grow where it made sense with our strategy, and we really worked hard on that. As a result, when it came time to take these acquisitions to the board, they could connect the dots back to what we talked about, almost two years ago now, when we originally took them through our strategy build-up.

But having said that, the few key things—again, board-level communication— we tried to do all the way through. We were in the throes of the Bucyrus acquisition last fall, and our board, to their credit, put us through the paces: “Why do you think coal mining is going to be so good when everybody hates coal mining?” All we saw was everybody burning coal and electricity and so on. And it forced us to really dig in to coal mining and also what we’re going to have to do around clean coal. And that single piece to me more than paid for the board’s salaries for many years, because it forced us into deep thinking. We went back to customers, we went back to think tanks, we went back to NGOs to talk about coal, the whole thing. And that single question really helped us with this, because we understood now where coal mining was going, what we have to do to address this going forward and the risks that come from that. It’s also made us a believer in clean coal and helping to find ways to improve its use. So that’s just a one example where I thought our board was very helpful as we pushed through an $8.8 billion acquisition.

IV. The Role of the Board
Just a note about our board: we have, I think, one of the strongest and have had a reputation for a strong board for years. Six of our board members have been with us over 10 years, and we typically have long-standing, deep expertise on our board—not unlike what we do in our company—and we really work on that as well. It takes a while to get to know a company our size, with nearly 150,000 in our workforce. Like any global business, we’ve had ongoing challenges in certain areas. Our board helps us with those, and, in our case, I’m a big fan of that outside perspective coming in to help us.

If you have a strong, diverse board, and we do—we have a member from Mexico, the U.K., we have retired CEOs, active CEOs, just nobody close to our business—and if you listen carefully, you’ll get lots of input and won’t become internally focused. And I have found that’s very helpful. Of course, I’ve been associated with the audit committee of Caterpillar since I was CFO, so I’m a little partial to that one, but that one is the wake-up call you can get, and as an audit committee member you should give, because that’s really the most responsible place for financial reporting, integrity, values and, really, the core backbone of your company. So I had some good training in that for a long period of time, and that’s one that I view at the top. You really have to be sure when you assign audit committee members that they can really stand up and have the gravitas to get into it, especially at a big company like ours where things can get really complicated.

A couple of things I’ll throw in that I’ve learned the last year and a half or so on leading the board, and we’ve kind of waded our way through this a little bit. We try to listen to what everybody likes to do—and I do this at Eli Lilly as well—and tell management what we like to hear and not hear on both sides of the table. But we’ve really stepped up our board attention at Caterpillar. Our process for how we deal with the board—their advance material, how we get them to our meetings, how we manage a meeting and so on— was kind of splintered at Caterpillar. So we immediately, under our general counsel, set up a very focused board group. I now have one person, the assistant general counsel, who I go to for everything about the board. And it’s his responsibility to make sure the advance material is complete. That has been a tremendous help to me as chairman of the board and CEO, because in the past we had three or four people helping, and now it’s—I would hope like everything else at Caterpillar—one accountable person for that. I think that’s important, and I think our board would tell you that’s helping them as well. That means we can focus on the things that are most important.

We’ve also gone to more private sessions, with the board and myself and with the board alone. And I think that’s important because typically at Caterpillar, we had invited, which I think is also very good and it needs to happen, the executive office to participate as liaison to the committees, the dinner and the board meeting with very little time of private discussion among the board. One of the pieces of feedback I got early on from the board was, “Let us have more time with you,” and, “Let us have more time by ourselves.”

That didn’t scare me a bit; in fact, it’s helped us. Now we start with an hour-long executive session with me before the board meeting, where I review what I’ve been doing, the challenges I’ve worried about, the things we’re thinking about, maybe tee up a couple of subjects that are going to be tough for the board meeting. Then at the end of the board meeting, I go in with the board for a few minutes; they get to shoot and pick, then I leave them alone, and then our presiding director will talk to me afterwards about anything that would have come out of that. I think that’s a great process—it’s essentially a Lilly process that they use as well—and we’ve had good feedback on that. Again, that was a change. It does compress the board session a bit, and you have to be crisp because the number of hours you have to get through the big stuff is short. It has helped the board to feel like, so far, they’re more tuned in and know what’s going on.

VERBATIM

Jeffrey M. Cunningham: In a company as dynamic as Caterpillar, the expectations for board performance are equally great. How do you assess board candidates?

Doug Oberhelman: We have just added four new members to our board, and we went through a formal process. I think the most important piece of selecting new board candidates is having some connection to that person by someone you know or trust. The other nice thing about a strong, diverse, well-placed board that we have is that they know a lot of people, and that network can really help you when it comes time for that.

JC: Let’s turn to one of your favorite subjects, strategy. How did you discover you needed more emphasis on strategy?

DO: When we asked 300 of our leaders what the Caterpillar business model was, we had 301 answers. I thought, Wow, we’ve really got an issue here. We went through some union negotiations last year, and I grabbed one of our visitor tour guides who takes our customers through our plants, and I said, “Let’s walk in the back door and tour a plant and just walk down the assembly line. And that had never happened—well, I’m sure it happened back in the ’50s, but it hadn’t happened in a long, long time. And I learned more from that experience of walking up to a guy on the line, and stopping and saying, “I’m Doug Oberhelman, the new CEO of the company. What do you want to tell me?” Two reactions: one was “You’re kidding me, man,” and the second was a 20-minute download on everything we’d ever done in the factory that was bad. But it was great.

JC: How difficult is it to assess strategic ability at the board level?

DO: It’s a tough call to make both on our board and at Eli Lilly. Frankly, there’s never enough strategy discussion. But yet, on the flipside, you can go overboard with details that don’t help. And that’s a fine line. It’s an art, not a science.

JC: Are you surprised by people’s understanding of strategy?

DO: It’s surprising to me how many senior leaders struggle with strategy. In my own case, I never looked at myself as a trained strategic thinker. And as I entered the strategy-planning process, we made sure we had what I thought was the best outside consultant in strategic thinking and that two or three of our people on the committee had some strategic accomplishment or strategy planning in their background, and I found that experience invaluable.

JC: How is government involvement, whether through regulation or politics, affecting competitiveness and a CEO’s ability to run a global business?

DO: This is one of the things about being CEO and chairman that I am surprised about—that is, the amount of time required to influence public policy. Now, is that an indication of the current administration’s attitude or where we are, or timing, or place in the world? I don’t know. I have been amazed, frankly, with the amount of time I’ve had to spend on government policy.

JC: You went from CEO designate to CEO and president, and from there to CEO, president and chairman. How has the combined role made a difference?

DO: I was CEO for four months while Jim Owens was chairman for those four months at the end of the transition period. And we both agreed at the end of that, there is no way ever that we should split those roles. And the reason was that he was getting questions as chairman that he couldn’t answer about the day-to-day operations of the company, and I was getting questions about governance and things he had responsibility for as chairman that I couldn’t answer. For our company, the way we’re managed, the way we have come down through the ages, I am an opponent, for us, of separating chairman and CEO. It’s not too big of a job; we’ve got a very strong presiding director. He’s very independent and that job will always be. I listen to him, I talk to him. It works very, very well for us.

JC: How do you stay in touch with the rank and file, who are at the heart of Caterpillar’s culture?

DO: One of our big, big customers gave me a little plaque about my second month in and said, “Doug, you know I read about what you’re trying to do, and I thought about this for you.” This plaque said, “A desk is a dangerous place from which to view the world.” I made that into a sign, which I put right outside our executive office door that you have to pass on your way in. I’m going to have it there as long as I’m CEO. So one of the commitments I made to our management team was that I would visit a customer face-to-face, once a week, since the first of 2010— which, at the time, I thought, Boy, that will be easy. Those of you that have tried it, it’s hard. It is really hard. I also spend as much time as I can visiting Caterpillar facilities and just talking to our people. It’s amazing how smart they are!

JC: Your passion is running Caterpillar, but you also have a passion for nature. Are people surprised when they learn this?

DO: Jim Owens, my predecessor, called me Caterpillar’s tree hugger at one point. My real hobby is restoring a coal mine in central Illinois that my wife and I bought a number of years ago. It was reclaimed by the coal company to some degree, and I’m trying to get it to zero erosion. It will be my retirement project, and I love it.

JC: What difference has it made that your company is headquartered in our nation’s heartland in Peoria, Illinois?

DO: Actually quite a few companies are headquartered in small towns—John Deere over in Moline and Cummins down in Columbus, Indiana. I’d say there’s a great benefit and a great distraction. The real challenge and distraction we have is—and we get accused of it all the time—of being Peoria, Illinois, Midwest, U.S.-centric. And with almost three-fourths of our sales offshore, that’s a challenge. What we’ve tried to do and what we’re doing every day are twofold. Of the six of us in the executive office, two are offshore—one is in Hong Kong and just moved over, and one is in Geneva, where we’ve had a presence for a long time. Almost 20 percent of our officer group resides in Asia, so we’re really working to establish regional headquarters almost around the world, and we’re having good luck with that. And then we’ve also brought in more mid-level hires in the last three years than we ever have, and a lot of these are automotive people, to help us with manufacturing, and they’re really good. But we still have this balance of what’s too much Midwest and what isn’t. I think we’ll continue that migration, which I think will be healthy. But American, Midwest values aren’t all bad either.

Corporate Governance Highlights

1974 Code of Worldwide Business Conduct first published to establish a high standard for honesty and ethical behavior by every employee.

1992 Caterpillar board adopts a confidential voting policy for shareholders. While not required by law, Caterpillar established share ownership guidelines in connection with stock option grants for corporate officers and directors more than a decade ago. All of Caterpillar’s equity-based compensation plans have been approved by shareholders. Furthermore, the company has never offered golden parachutes to any officer and has never repriced stock option grants.

1993 Caterpillar’s board adopts written charters for each of its committees, in advance of a mandate by the Sarbanes- Oxley Act of 2002.

1999 Caterpillar board publishes guidelines on corporate governance, which include establishment of an independent board of directors, with sole exception of chairman, and a fully independent compensation committee.

1999 In advance of NACD Blue Ribbon Committee on Audit Committee Effectiveness, Caterpillar implements many of its recommendations, including a fully independent audit committee with a financial expert as chairman.

2005 Caterpillar executes a fourth amended and restated version of its Shareholder Rights Plan with Mellon Investor Services. The modified agreement moves the final termination date of the Shareholder Rights Plan from December 11, 2006, to June 30, 2005, ending the Shareholder Rights Plan approximately 17 months earlier than the original agreement and subsequent amendments had specified. Company policy requires former senior manager-level (or higher) employees of outside auditor to wait three years before being eligible for certain management-level positions at the company, and requires rotation of outside auditor partners in compliance with the requirements of SOX. 2010 Amends Code of Worldwide Business Conduct.

Caterpillar’s Board of Directors

David L. Calhoun, CEO (since May 2010) and executive director (since January 2011) of Nielsen and chairman of the executive board and CEO of The Nielsen Co.; former vice chairman of General Electric and president/CEO of GE Infrastructure. Other current directorships: Medtronic, The Boeing Co. and Nielsen Holdings. Calhoun became a director effective June 8, 2011.

Daniel M. Dickinson, managing partner of HCI Equity Partners, former co-head of global M&A at Merrill Lynch. Other current directorships: IESI-BFC, Mistras Group and HCI Equity Partners. Dickinson has been a director since 2006.

Eugene V. Fife, managing principal of Vawter Capital, and former interim CEO and president of Eclipsys Corp. and non-executive chairman (2001– 2010) when Eclipsys merged with Allscripts Healthcare Solutions; former partner of Goldman Sachs & Co. Other current directorships: Allscripts Healthcare Solutions. Fife, a director since 2002, chairs the governance committee.

Juan Gallardo, chairman of Grupo Embotelladoras Unidas; formerly chairman and CEO (1986–2007). Other current directorships: Lafarge SA. Other directorships within the last five years: Grupo Mexico. Gallardo has been a director since 1998.

David R. Goode, former chairman (1992–2006), president (1992–2004) and CEO (1992–2004) of Norfolk Southern Corp. Other current directorships: Delta Air Lines and Texas Instruments. Other directorships within the last five years: Norfolk Southern and Georgia-Pacific. Goode, a director since 1993, chairs the compensation committee.

Jesse J. Greene Jr., former vice president of financial management and chief financial risk officer (2009– 2010) and vice president and treasurer (2002–2007), IBM. Greene became a director effective Jan. 1, 2011.

Peter A. Magowan, former president and managing general partner (1993–2008) of the San Francisco Giants and chairman (1980–1998) and CEO (1980–1993) of Safeway. Directorships within the last five years: DaimlerChrysler AG, Safeway and Spring Group. Magowan has been a director since 1993.

Dennis A. Muilenberg, executive vice president of The Boeing Co. and president and CEO of Boeing Defense, Space & Security since September 2009. Muilenburg became a director effective June 8, 2011.

William A. Osborn, retired chairman (1995–2009) and CEO (1995–2008) of Northern Trust Corp. and The Northern Trust Co. Other current directorships: Abbott and General Dynamics. Other directorships within the last five years: Nicor, Tribune Co. and Northern Trust Corp. Osborn, a director since 2000, chairs the audit committee.

Charles D. Powell, chairman of Capital Generation Partners, LVMH and Magna Holdings. Other current directorships: LVMH Moët- Hennessy Louis Vuitton and Textron. Powell, a director since 2001, chairs the public policy committee.

Edward B. Rust Jr., chairman, CEO and president of State Farm Mutual Automobile Insurance Co. Other current directorships: Helmerich & Payne and The McGraw-Hill Companies. Rust has been a director since 2003.

Susan C. Schwab, professor, University of Maryland School of Public Policy, and strategic advisor, Mayer Brown. Former U.S. Trade Representative (2006–2009) (member of the President’s cabinet) and Deputy U.S. Trade Representative (2005–2006). Other current directorships: FedEx and The Boeing Co. Schwab has been a director since 2009.

Joshua I. Smith, chairman and managing partner of the Coaching Group. Other current directorships: Comprehensive Care Corp., FedEx and The Allstate Corp. Smith has been a director since 1993.

Miles D. White, chairman and CEO of Abbott Laboratories. Other current directorships: McDonald’s Corp. Other directorships within the last five years: Motorola and Tribune Co. White became a director effective Jan. 1, 2011.

Source: Caterpillar website

Ed Breen

Breen was brought into Tyco in 2002 after the debacle of former CEO Dennis Kozlowski* (now memorialized for throwing a lavish $2 million Sardinian birthday party for his wife) to resuscitate the company that became the poster child for corporate excess. Breen’s low key and affable demeanor belie a razor-sharp focus. One of his first moves as CEO was to ask the entire board to resign—no simple task as they had just hired him. He patiently convinced them this was both the honorable and the right thing to do to set the stage for investors to take a second look at Tyco. He divested businesses, changed managers and downsized for further streamlining. He evinces a modesty that is both genuine and impressive: he parks in the employee lot and eats in the company cafeteria. Breen walks the talk.

*Kozlowski, currently serving a 25-year sentence in Marcy, N.Y., is eligible for parole in early 2014.

Jeff Cunningham is managing director and senior advisor to NACD. He is nationally known for his views on boards and corporate governance. Prior to starting Directorship magazine, he was publisher of Forbes and managing partner of the U.K. private equity firm Schroders. He has served as an independent board chair or director of 10 public companies.

Kiril Sokoloff

I recently caught up with Sokoloff in Geneva, Switzerland—not an easy matter, as he divides his time between residences in Lugano, London, Hong Kong, Nassau and Rio de Janeiro. He spoke to us about the tectonic shifts that are happening in Asia, the Middle East, Russia and Europe, particularly in the area of sovereign debt defaults. Among other topics, he reflected on the Occupy Wall Street movement and the disaffected youth throughout the world, and the role of boards and CEOs and what they must do to win back trust from the societies they serve. Finally, he pronounced the end of the old American dream and the rise of a new dream with far-flung global policy implications.

Is Occupy Wall Street a passing fad, or does it suggest something larger happening in the public arena?
A group of 20- to 30-year-olds in various places of the world were interviewed by the International Herald Tribune, which quoted one person as saying, “We’ve just given up on trying to use our votes, it just doesn’t make sense.” If you have a whole swath of the population not believing in democracy anymore, it can lead to the failure of democracy. This is very serious, very dangerous for stability and global economic growth.

What do you think is behind these vague misgivings?
In June 2007, I coined the expression “inhuman volatility.” My thinking was that we were going to have an inflationary shock and that governments would try to deal with it and disrupt markets. Then came the financial crisis, and it was clear it would lead to a sovereign debt crisis. As governments tried to navigate these several orbits, capital flowed from country to country and place to place, leading to debilitating volatility, great disparities in regions and countries. Closer to home, despite America’s great resources and global dominance, it has had a trade deficit for 30 years, a fiscal deficit for 40 years, and a foreign oil dependency since the 1970s. The inability to solve these issues is not due to a lack of possible solutions; it’s just that the system doesn’t allow it to get fixed. The average American looks at this and is enormously frustrated, and the average European looks at the ongoing crisis with Greece, Spain, Italy and Portugal, and is equally frustrated. So it’s a lack of execution by governments that’s causing mass frustration, and the risk is that democracy itself is not working.

Does that negative sentiment run counter to the Arab Spring in the Middle East? Does the U.S. end up a winner there?
Our historian, Dr. Rufus Fears, who happens to be the David Ross Boyd Professor of Classics at the University of Oklahoma, tells me that what we are seeing is classic Middle Eastern politics—first they rebel and then they exchange one autocrat for another. So the Arab Spring, in his view, is a nonevent. I think the danger for America, as occurred with the Shah of Iran, is that there is a perception that America is not supporting its friends. I find it hard to see that this could be a positive development for America. If I were running Saudi Arabia, I’d be looking around for new friends.

When you examine the role of Pakistan and the troubles we’ve been having, what are the implications for the U.S.?
One way of looking at this is the Metternich perspective of the 19th century and the balance-of-power issue in Europe. On one hand, you have the rise of China, which creates insecurity among other nations. When I visited Far East Russia in 2002, to study whether it could solve China’s land and water issues, I found on the Chinese border tens of millions of unemployed, and on the Russian border— which is equal to the size of China and was in fact once part of China—fertile black soil and huge amounts of water. China could joint venture with Russia in developing this area or gradually move in on its own. This vulnerability of Far East Russia is one reason why relations between Russia and America are improving.

On the subcontinent, there’s no question that it’s a smart strategic move on the part of China to support Pakistan, and I think that makes India and America natural allies. When you look at non-China Asia, while they are trading more and more with China, they want an American presence in the Pacific for balance-of-power reasons.

America veers between global and isolationist foreign policy. Which will serve us best in this environment?
In the new biography of George Washington, it was clear the nation’s first president was totally against any overseas military involvement. There was a great desire by many leading Americans to get involved in the Napoleonic wars at the time and Washington squashed that. America did best when it was not intervening. Of course, when America became isolationist in the 1930s, Stalin and Hitler came to power. So I think American foreign policy has to be delicately balanced and never isolationist. One idea that needs greater debate is the concept that everyone wants freedom. Again, our historian, Dr. Fears, points out that much of the world didn’t grow up in a world of freedom and doesn’t really care about it. The Middle East doesn’t, China doesn’t, so when we’re insisting on human rights and freedoms, we’re pushing a dogma that is antagonizing many people and countries.

Do you see the European Union solving its problems through fiscal discipline, or will it take the international banking sector and a big stick to fix things?
The problems with the euro were well known at its founding in 1999. Those of us who discussed it then foresaw this problem of disparity—what if one country is growing too fast and what if one country is growing too slow and you have the same monetary policy?

I think that it’s very important to remember why the EU was founded. Europe had had 2,000 years of wars. Two horrific wars in the last century, which destroyed the European empires and can only be described as a mass suicide. So the euro was an attempt to bring Europe together. There is more than just economics and politics at stake here. One client suggested to me that Greece and Portugal will leave the euro, and Italy, which has basically been ungovernable for hundreds of years, could live with oversight from EU institutions. Ultimately, the [European Central Bank] will have to buy large quantities of EU government bonds.

How do you feel about American corporate governance, and is our tendency to over-regulate the result of mistrust of business? What should boards be doing differently?
I don’t want to sound like I am giving moral advice, but I have to start with the counsel I would give CEOs and their boards: we live in an atmosphere of extreme cynicism, surrounded by evidence of gross deception and a lot of betrayals and fraud. The antidote is to be consistently, reliably, unwaveringly honest in all communication. When your entire reputation as well as compensation are based on performance, there is a great temptation to spin….You want your stock to go up, you want attention, so you promise a lot. And if you disappoint or step over the line, the cycle of cynicism sets in—more regulation, more investigations and more negative confirmation. It’s better to promise less and deliver more consistently. When a promise is made, whoever the spokesperson is, that promise must be kept. And don’t make promises that can’t be kept, and don’t promise so much that expectations are raised too high. And if circumstances change, then you immediately need to communicate it. One reason Lee Kuan Yew of Singapore was so successful in winning people’s confidence was that you always knew that he would tell you the truth. A blunt truth maybe, but always the truth.

What are your thoughts on the Internet valuations of companies like Facebook?
I have studied social networking as an amateur for years. With no disrespect for the founders of these networks and the hundreds of millions of people who derive pleasure from them, there are negative consequences from their use, in my opinion. Social networking teaches you to multitask and focus on sound bites. It makes you an addict to distraction, but it’s not teaching anybody how to analyze, how to think. I would liken it to learning a street patois, and then finding you need a more formal expression once you get into business and the greater society. For that reason, I think as the young people age and they find they need to make important and significant decisions, they’re not going to get help from Facebook, and they will find they’re going to have to develop the analytical capabilities they lack.

“When your entire reputation as well as compensation is based on performance, there is a great temptation to spin….You want your stock to go up, you want attention, so you promise a lot. And if you disappoint or step over the line, the cycle of cynicism sets in—more regulation, more investigations and more negative confirmation. It’s better to promise less and deliver more consistently.”

The question about American exceptionalism came up at the end of the Bush administration. Is that still a worthy goal?
I think that America needs to retrench and look internally again and solve its own problems, rather than venture into the world to try and make the world a better place. This came home to me when I was traveling with my wife during the financial crisis—literally traveling for 40 straight days around the world, meeting with people in India, the Middle East, China and Asia. It came to me that one of the most lasting things that was to happen from this crisis was a withdrawal of American military power due to strained finances. America spends too much on its military presence all over the world. As America withdraws, what may follow will be a vacuum, and we have no idea what will fill that vacuum.

Is the American dream achievable for today’s younger generation?
One of the most important economic data points to me is that the real American wage has been flat since 1969. It’s a terrible thing and, of course, this exacerbated the wealth divide. In many ways, this was a cause of the housing crisis, because people weren’t creating any real wealth to maintain their standard of living and they took out home equity loans to keep up financially.

Certainly, there was a lot of speculation, but there also was a lot of economic need. So outsourcing had a part in this, and I was very in favor of outsourcing and downsizing in the 1980s and 1990s, but since then I’ve done a revamp on my thinking. America would have been better off to take an area where it could maintain dominance or could create dominance—like Germany has done—and create a fabulous export market in niche products where there is no real competitor. Was it a mistake to sacrifice our manufacturing heartland to lower our costs? I don’t know what different people will say on that, but had we not done that, we would have had a much higher wage and we wouldn’t have this chronic unemployment that we now have and families who haven’t had any sort of real standard- of-living increase.

So, to come around to your direct question, until we change that, I do think that the old American dream is dead, and part of that, of course, was rising expectations, and that was a wonderful thing when it started. The expression “rising expectations” probably began somewhere in the ’40s or ’50s. There was a desire after the Depression and World War II to spend, to borrow and buy. It had been so long and so hard with the Depression and the war, so it was a good thing that there were rising expectations.

What has happened is that Americans’ expectations have gone way beyond what reality is, and there has to be a retrenchment—and, of course, this is what a lot of the political impasse and disunity is about. No one wants to give up their entitlements, no one wants to have their taxes raised, and no one thinks that pension benefits should be reduced.

So the new American dream may depend on whether America wants to be the center of the most exciting innovations in the world. Peter Brimelow, who has written about social and business issues for Forbes, published a book in the 1990s called Alien Nation about how immigration had changed from where the best and the brightest were welcome in America to only those who had a relative already here. And if you contrast that with what Singapore did, which was to focus only on excellence, America should attract the best and brightest from the world, bring them here and incentivize them to stay here. They will create the jobs, they will create the new businesses, they will create the new industries, and it doesn’t necessarily mean that it’s going to be taking away jobs from Americans, it means getting jobs for everybody.

So my idea is, any way you can, get the best and brightest here.

The question we should be asking ourselves is, what will change the world? That’s what we should be focused on in America, and investing in both human capital and our enormous resources. America has been a courageous force in the world, and I fear that America is losing that and somehow must get it back. I believe America can be the modern version of Florence or Athens, a country of enlightenment and learning. I have thought about it almost my entire adult life, and my conclusion is that everybody has this incredible human talent that remains dormant until you’re in a place like Florence in the 15th century, where everybody is an artistic genius, and that unleashes this enormous potential of the human spirit. So what we need is someone who knows how to unleash that, because it’s still here in America, we just need the will and capability along with the power of ideas that will unleash it.

Must Reading

A reader’s guide for globally minded directors, by Kiril Sokoloff:

• A Time Is Born by Garet Garrett (Pantheon Books, 1944)
• Beethoven the Creator by Roman Rolland (1937)
• Bodyguard of Lies: The Extraordinary True Story Behind D-Day by Anthony Cave Brown (1975)
• Civilization: The West and the Rest by Niall Ferguson (The Penguin Press HC, 2011)
• Hard Truths to Keep Singapore Going by Lee Kuan Yew (Straits Times Press, 2011)
• The Language of Genes by Steve Jones (Doubleday, 1994)
• The Last Tsar: The Life and Death of Nicholas II by Edvard Radzinsky (BCA, 1992)
• Masters of Death: The SS-Einsatzgruppen and the Invention of the Holocaust by Richard Rhodes (Knopf, 2002)
• Mellon: An American Life by David Cannadine (Knopf, 2006)
• The People’s Pottage: The Revolution Was, Ex America, The Rise of Empire by Garet Garrett (1953)
• The Private Life of Chairman Mao by Li Zhisui (Random House, 1994)
• The Rasputin File by Edvard Radzinsky (Nan A. Talese, 2000)
• Satan’s Bushel by Garet Garrett (1924)
• Shantaram: A Novel by Gregory David Roberts (St. Martin’s Press, 2004)
• The Singapore Story: Memoirs of Lee Kuan Yew by Lee Kuan Yew (Prentice Hall College Div., 1999)
• Stalin: The First In-depth Biography Based on Explosive New Documents from Russia’s Secret Archives by Edvard Radzinsky (Doubleday, 1996)
• Talleyrand by Duff Cooper (1932)
• Team of Rivals: The Political Genius of Abraham Lincoln by Doris Kearns Goodwin (Simon & Schuster, 2005)
• Treason in the Blood: H. St. John Philby, Kim Philby and the Spy Case of the Century by Anthony Cave Brown (Houghton Mifflin, 1994)
• Tender Is the Night by F. Scott Fitzgerald (Charles Scribner’s Sons, 1933)
• Titan: The Life of John D. Rockefeller, Sr. by Ron Chernow (Random House, 1998)
• Washington: A Life by Ron Chernow (The Penguin Press HC, 2010)
• Why They Kill: The Discoveries of a Maverick Criminologist by Richard Rhodes (Knopf, 1999)
• The Wisdom of Andrew Carnegie as Told to Napoleon Hill by Napoleon Hill (Napoleon Hill Foundation, 2005)
• The Wild Wheel by Garet Garrett (1952)

Hundreds of students gathered, some chanting "We want Joe! We want Joe!". (AP Photo/Matt Rourke)

The public relations lesson I learned in my years as publisher of Forbes was to resist the rush to make an irreversible decision while the accusations are flying. The story is bound to change. Going dark is better than going blind. So despite the board’s overtures and mea culpas the self-appointed media moral brigade continued to lash out at Penn State as an example of institutional ethical failure. The media likes to throw a quick punch at a story like this, so they cover all their bases by damning the entire organization and especially anyone high profile. With blame assigned, they move onto the next crisis while the reality plays out and the board is left to deal not only with the original misdeed but the impact of their own precipitous action.

Think first, shoot second.

Jeff Cunningham is managing director and senior advisor to NACD. He is nationally known for his views on boards and corporate governance. Prior to starting Directorship magazine, he was publisher of Forbes and managing partner of the U.K. private equity firm Schroders. He has served as an independent board chair or director of 10 public companies.

ASSOCIATED PRESS

But skeptics are saying a brilliant résumé isn’t enough; she also needs relevant enterprise experience. Let’s get real. Whitman doesn’t need to know how to write enterprise software to run HP, and in her career she has done little else but run large enterprises. She was chosen at the discretion of an HP board that includes such enterprise and technology luminaries as Marc Andreessen, inventor of the first widely used Web browser; Lawrence Babbio, former vice chairman of Verizon; Rajiv Gupta, former chairman and CEO of Rohm and Haas; John Hammergren, chairman and CEO of McKesson; Ann Livermore, an HP legend who has an insider’s grasp of company strategy; and Patricia Russo, former CEO of Alcatel-Lucent. In short, the “A” team. If the chorus is balking at such an early stage, it may be looking more to the past than to the future. The naysayers need to review not only the bidding, but the caliber of the bidders.

Public vs. Private
Hewlett-Packard’s new executive chairman, Ray Lane, is coming under scrutiny for his role as inside chairman—or, as some wags have called it, a second CEO—and for having overseen the hiring of Léo Apotheker. Take them one at a time. Lane is the kind of director you find in the private equity world: brilliant, brash and brutally honest. You don’t bring his kind on the board to be collegial, but to fix things. Lane knows instinctively that making the wrong decision is one thing, sticking with it is far worse. Second, Lane’s a former No. 2 to Larry Ellison of Oracle, king of the enterprise software geeks, and can provide deep background in the business that Meg Whitman will be able to put to great use. His role as inside chair gives him leverage with the troops, particularly the engineering talent that can make or break a technology company. Unlike a traditional director who might be more concerned about “spin,” these venture and private equity directors think about one thing: value. Create it, and you get more rope. Destroy it, and no one is your friend.

Whitman is the third-richest woman in California and a billionaire. She has nothing left to prove or to earn. If Lane is her inside chair, it’s because she felt convinced that it would be in the company’s best interests. With Whitman at the helm and Lane as her wingman, HP has a chance of a turnaround and a brighter future—not necessarily as the same company, maybe in different pieces, maybe part of another giant, but a future nonetheless, which was a far sight better than only a few weeks ago.

Jeff Cunningham is managing director and senior advisor to NACD. He is nationally known for his views on boards and corporate governance. Prior to starting Directorship magazine, he was publisher of Forbes and managing partner of the U.K. private equity firm Schroders. He has served as an independent board chair or director of 10 public companies.

When the personal computer was still locked out of the IT department, Jobs launched into orbit although at the time how far he would go was not given even scant recognition. Later, IBM decided he was onto something, but unlike his 1955 birth year brethren, Bill Gates, Jobs refused to play ball and did it his way, sticking with a closed operating system. Despite some early success, Apple couldn’t withstand the onslaught of the clones and the Windows/Intel dominance—people forget that for years Apple ran on Motorola chips, again proving that if there is a right way to do something, there was also a Jobs way.

Photo Illustration/Photo of Steve Jobs: Associated Press

After being summarily removed by his board, he left Apple for 12 years. No Moses ever spent more time in the wilderness looking for the Promised Land. He created Next Computer and picked up a small asset called Pixar for $10 million from George Lucas’ ILM studios, who was losing it in a divorce settlement. Jobs spent many miserable years fussing with Pixar until something called Toy Story was launched for Disney. He returned to Apple more than a decade later when the company was written off and no longer relevant except to a few educators and graphic designers. It was a signal moment for a company in the new, new world of Silicon Valley. Michael Dell famously wondered why Apple even continued to exist. Jobs accepted a $1-per-year salary, part of his arrangement to turn things around. What happened then is something we refer to as history. Jobs slowly and quietly began building the transformation that would become the Apple of today, the largest or second largest company in America, focused on the only true infinite resource—communications and entertainment. By some strange calculus, it also was to become the most renowned, admired, emulated and envied company in the world.

What happened? What can we learn from him?

The secret to Jobs’ success is, well, jobs. That is, he made working for Apple a mission and found bright, talented teams who were willing to endure his rants, which were legendary, and his fixation with details and perfection. His team knew Jobs’ wallet was guided by his heart, and that he was not in it for the money, but for the glory of building something great and everlasting, or to use the more common cliché, sustainable.

When you visit Silicon Valley, you see lots of bright young people attending company social events, Friday afternoon pizza parties and the like. Most of them are talented beyond description. That’s the problem. They know what’s happening to their companies before the companies know it. What commands their attention is hot technology that is changing the world now and tomorrow. To keep the young and restless from becoming the old and restless, companies must give these incredibly valuable folks a reason to stay. When you work as hard and long as the average engineer in Silicon Valley—really they’re the equivalent of artists in a Medici studio—and the stock options run south, it means years of hard work are now lost to the entire generation working for the company at the time. So the star engineers, creative designers and sales people, not to mention executives, leave and those remaining are demoralized. It becomes impossible to make a workforce move under duress, find innovations during tough times, and stick with a plan that may take time to work. That’s why Google is getting long in the tooth, and why Cisco and Yahoo are having trouble, and why Microsoft is always fiddling with another round of dividends.

Technology has a loyalty depletion problem because the new is not invented in the same place as the ‘old new.’ Options are to Silicon Valley a drug that cures job angst for a period of up to four years, the typical start-up cycle for venture-backed companies. Once they reach that level of maturity, it’s not fix or fold, it’s fund or fold and when funding dries up and options are under water, there is always another start-up down the road.

Jobs managed somehow to withstand this inexorable cycle, and he found a way to keep employees focused and fixated on building great products simply because he made them believe they could do something great. His creation is really about knowing how to motivate people, not just create technology. Nothing like this turnaround has happened before in Silicon Valley. Steve Jobs proved that human capital is at the center of all value creation. It’s a simple lesson, hard to learn.

Jeff Cunningham is managing director and senior advisor to NACD. He is nationally known for his views on boards and corporate governance. Prior to starting Directorship magazine, he was publisher of Forbes and managing partner of the U.K. private equity firm Schroders. He has served as an independent board chair or director of 10 public companies.

John W. Teets

John W. Teets, 77, former CEO of the Dial and Greyhound corporations for 16 years, died August 5, 2011. He was a self-taught CEO—gruff at times, always good-natured, brutally honest. He created tremendous value at Greyhound, long considered one of the dogs of Wall Street. How?

Touring one of Greyhound’s restaurants with him back in the late ‘90s, I noticed Teets talked to everyone in the kitchen. He leaned toward me and said, “I put a clause in my employment agreement that I could reach down in the organization and talk to anyone. The CEO can’t be hostage to chain of command, and I wanted my senior team to know it.” Joe Fassler, a former Viad CEO, said of Teets: “It didn’t matter if you were wearing a suit and tie or if you were washing dishes. He said everybody had a right to an opinion, and he was willing to listen.”

Like athletic coaches say, Teets knew where to find out what was really happening. He stayed close to the action.

Jeff Cunningham is managing director and senior advisor to NACD. He is nationally known for his views on boards and corporate governance. Prior to starting Directorship magazine, he was publisher of Forbes and managing partner of the U.K. private equity firm Schroders. He has served as an independent board chair or director of 10 public companies.

Jeff Cunningham

A recent story in The Wall Street Journal reported that federal criminal investigations against Indy Mac Bancorp and New Century have stalled, while the U.S. Attorney’s Office in Seattle said it had closed its investigation of Washington Mutual with no criminal charges being sought, and yet the U.S. Attorney declined to comment to reporters’ questions. We were curious— just how many times has the phrase “U.S. attorney declined to comment” appeared in Google’s search rankings?

Answer: nearly 22 million. I guess they just prefer not to talk about it.

Jeff Cunningham is managing director and senior advisor to NACD. He is nationally known for his views on boards and corporate governance. Prior to starting Directorship magazine, he was publisher of Forbes and managing partner of the U.K. private equity firm Schroders. He has served as an independent board chair or director of 10 public companies.

Jeff Cunningham

Hewlett-Packard is going through one of its many strategic iterations. The Silicon Valley original has been snared in an unfortunate spiral: first the failed term of Carly Fiorina, then pre-texting, the wrongful indictment of its chairman, the agonizing departure of CEO Mark Hurd, and most recently, the announcement to spin off its PC division, bought in 2002. Walter Hewlett, the co-founder’s son and a board member, fought hard against the Compaq deal, but when Fiorina won the proxy battle, she had him kicked off. Wall Street hyperventilated initially to news of the spin-off decision by CEO Leo Apotheker and the board, but this may rightfully turn out to be a bold and courageous stroke to put the past behind it. The HP way is the ability to find its way again.

Jeff Cunningham is managing director and senior advisor to NACD. He is nationally known for his views on boards and corporate governance. Prior to starting Directorship magazine, he was publisher of Forbes and managing partner of the U.K. private equity firm Schroders. He has served as an independent board chair or director of 10 public companies.

Jeff Cunningham

Boards take note: When your business is in the crosshairs of regulators, policy is politics. When Standard & Poor’s downgraded the United States’ long-term credit rating in August, the President’s advisors claimed bad math. Allied forces came out blazing: Larry Summers questioned their economics, the SEC is reportedly scrutinizing, and the Department of Justice lit a brighter fire under its ongoing credit crisis investigation. The Senate Banking Committee, led by Democrat Tim Johnson, is also considering a probe. S&P’s response: “As you know, we’re no strangers to attacks by governments.” The irony of the case? A headline the following Monday: “Treasury Saves $647 Million in First Bond Sales After S&P Cut.”

Jeff Cunningham is managing director and senior advisor to NACD. He is nationally known for his views on boards and corporate governance. Prior to starting Directorship magazine, he was publisher of Forbes and managing partner of the U.K. private equity firm Schroders. He has served as an independent board chair or director of 10 public companies.

But who is the shareholder? Is it Warren Buffett, the notoriously long-term investor who has never sold a share of Berkshire Hathaway? Or the hedge fund trader who holds shares for a nanosecond—a time span so short that a blink of an eye is measured in the hundreds of millions of them? Or is the shareholder a state pension fund keen to influence social policy, or the mutual fund that owns the entire S&P 500? Or maybe it’s the activist investor pushing for a change in strategic direction over the next few months, and then sells after the run-up, presumably to less “strategically focused” shareholders.

In corporate governance, all shareholders compete for directors’ attention. Being an intelligent listener in this noisy environment is what the directors of the Directorship 100 do best. The dispersion of shareholder interests means the board has to weigh priorities and make some unpopular choices. In doing so, it looks to those fellow directors who are best at bringing about desired outcomes. People with an unerring instinct for savvy business decisions are wired differently—part investment guru, part business maven, part organizational psychologist. Other directors will follow their lead, even under trying circumstances. A board will stick with a CEO when the “influential” director says it’s the right thing to do, but will terminate once they hear, “Time’s up.”

There are many names for this rarified group of individuals, but we refer to them simply as the Directorship 100. It is an honor bestowed not so much by NACD Directorship, but by the collective wisdom of the boardroom community.

But how is influence related to good corporate governance? In compiling the Directorship 100, we look for both influence and its requisite companion, a sound ethical compass, and then assess these mercurial qualities against all known public information and survey data. Outstanding expert advisors weigh in, more research is followed by more questions and more debate. The result is our list of finalist candidates for the Directorship 100. If any doubts remain or a story is still unfolding as may happen during a period of crisis, we generally defer the decision.

The NACD Directorship 100:

Directors and Officers

Governance Professionals and Institutions

Corporate Governance Hall of Fame Class of 2011

NACD 2011 Public Company Director of the Year and B. Kenneth West Lifetime Achievement Award Winners

People to Watch

We anticipate a faintly Shakespearean reaction from some readers: “Throw out the bankers.” Our answer to why they are on the list at all is that a bank director who survived the debacle of ’08 ought to be recognized, if not enshrined. Board service is not an easy thing to measure, especially by looking at near-term stock market results or even regulatory trauma in this age of indict now, research later. The Directorship 100 tries to bring some insight into these special situations, and hopefully our approach demonstrates a balanced perspective.

A Fluid Environment
The Directorship 100 list is hard to get on and easy to get off. In any given year, a company might experience a corporate governance crisis, and a director rises to the occasion and is recognized. In quiet years, that same director folds happily into the background.

Selecting the Class of 2011
Our two primary lists measure people and institutions. Directors and Officers are chosen for their individual attributes, not because of the board they serve on—although if you are a chair of a major company, that speaks volumes about how your peers feel about you. For the Governance Professionals and Institutions, if you work for the SEC, it is your role that makes you influential. Leave it and you leave the list.

Research Methodology
The term “research methodology” ranks right next to “economic formulae” in generating passionate reader interest. For the Directorship 100, methodology is more of a recipe than a method, and we choose our honorees based on quantitative results from our online survey of NACD members, search engine rankings, and qualitative measures including peer input from NACD chapters, expert review and major media references. The result is better attuned to the reality of the boardroom than you’ll find elsewhere.

We are careful to avoid the “familiarity fallacy.”

A popularity contest would understate results for a great director albeit one ignored by the media. Whereas a story like Mark Hurd’s departure from Hewlett-Packard or News Corp.’s phone-hacking would raise awareness of those directors, for better or worse. Our failsafe mechanism is an editorial advisory board, which devoted valuable time and expertise to a review of more than 1,000 nominations.

In some cases individuals were elevated that did not rank as well as they should have (“poor test takers,” the SAT’s would call them), whereas in others, the numerical ranking was somewhat self-generated by what might be called a “friends and family” approach. That’s okay for cell phone service plans, but not as useful for the D100.

The NACD Board and CBL
Readers should note that the NACD board of directors, chaired by Barbara Hackman Franklin, and the NACD Center for Board Leadership, are recused from the D100 on the grounds that they help select the finalists. We wanted you to know that if not for their role in the selection process, they would rank among the very best in the D100.

One more caveat: Some important names were left off either because they are new to their role, too narrowly focused, or in some cases, just fell out of the spotlight. So we created a new category for them, “People to Watch,” which we think of as our bullpen for future D100 honorees. We would not be surprised if they are brought out to the mound in future years, and that you will be following as we do this grand procession of those who contribute time and effort, as well as ingenuity and thought, to the cause of good governance.

To register for the NACD Directorship 100 gala dinner and forum, please click here.

Jeff Cunningham

Here are some examples from the letter:

The U.S. legal system: “Actions against big companies, justified or not, have the potential to deliver large payoffs. This lack of balance and fairness too often results in outrageous claims.”

Dealing with regulation: “Our ability to compete may be hampered in some instances but actually helped in others. For example, the cost and complexity of all the recent regulations, ironically, could create greater barriers for new entrants and new competitors.”

Mistakes: “Unfortunately, we make mistakes. And unfortunately, and infrequently, sometimes someone in our company knowingly does something wrong. And when it does happen, we take immediate and firm action.”

Regulation: “The Durbin amendment is a terrible mistake— price fixing at its worst. It is arbitrary and discriminatory.”

Bank failure: “Banks should pay for the failure of banks.”

Group think: “We need to beware backward-looking models and ‘group think’ and suspect of what will happen when all market participants essentially are using the same models.”

Optimism about the future: “I remain, perhaps naively, optimistic. As Winston Churchill once said, ‘You can always count on Americans to do the right thing—after they’ve tried everything else.’”

Jeff Cunningham is managing director and senior advisor to NACD. He is nationally known for his views on boards and corporate governance. Prior to starting Directorship magazine, he was publisher of Forbes and managing partner of the U.K. private equity firm Schroders. He has served as an independent board chair or director of 10 public companies.