Editor’s Note: Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton, Steven A. Rosenblum, Karessa L. Cain, and Kendall Y. Fox. This article originally appeared on The Harvard Law School Forum on Corporate Governance and Financial Regulation blog.

In this environment, the challenge for directors is to continue to focus on doing what they believe is right for their corporations while maintaining a sufficient understanding of shareholder sensitivities to avoid a targeted attack that could undermine their ability to act in their company’s best interest. The primary focus of a director, of course, should be on promoting and helping to develop the long-term and sustainable success of their company. This encompasses a wide range of activities, including working with management on the company’s business and strategies, planning for the succession of the CEO and other key executives, overseeing risk management, monitoring compliance, setting the appropriate tone at the top and being prepared to step in to address any corporate crises that arise. At the same time, the board needs to be aware of and address shareholder demands in a constructive manner, consider how a hedge fund or other activist may view the company and its strategic alternatives and try to ensure that the company maintains a shareholder relations program that clearly articulates the reasons for the company’s strategies and engenders support from the company’s major shareholders. In some cases, this may include direct communication between board members and institutional shareholders.

A board need not, and should not, simply accede to every list of corporate governance “best practices” promulgated each year by governance activists and proxy advisory firms. That said, a board should proactively consider how best to organize itself and its committees to meet the increasing demands and responsibilities being placed on the board. And the board should pay attention to shareholder hot buttons, whether it be the structure of executive compensation, the separation of Chair and CEO, the adoption or maintenance of a rights plan, the use of majority voting in the election of directors, or any other issue, making conscious decisions as to the best choices for the company on these issues and developing clear explanations for those choices.

The dynamics of the current environment continue to increase the amount of time and energy that board service requires, the volume and complexity of information that directors are expected to digest and the reputational risks that directors face. Although management is responsible for the day-to-day operation of the business, and the board’s role is primarily one of supervision and advice, many directors are finding that to be truly effective in today’s environment, they are required to take a more active role than in the past. Given this reality, directors should consider the commitment that is required in joining a board, and weigh the other demands on their time, before making the decision to accept a new board position.

A few of the more notable issues that boards will face in the new year are highlighted below.

1. Short-Termism
Much attention has been given by governance activists and academics to the “agency” problem of corporate governance. Viewed through this lens, managers and directors are agents of the shareholders and the central goal of corporate governance is to ensure that these agents carry out the wishes of their principals — the shareholders. This view has given rise to the shareholder-centric model of corporate governance, under which anything that gives shareholders more power is good. Far less attention, however, has been given to the fact that, in today’s world, institutional shareholders, hedge funds and the like are also agents, managing and investing other people’s money. Similarly, little attention has been paid to the fact that the incentive structures created for these money-manager agents are wildly skewed to short-term results, not-withstanding that their principals, who are investing for retirement, financial stability and wealth to pass on to their children and their children’s children, would be better served by a system that rewarded the long-term health and growth of our companies and our economy.

Historically, the academic and activist communities have used the efficient market hypothesis, the theory that stock prices at all times reflect the intrinsic value of the underlying companies, to support their short-term focus. Under this theory, any action that increases a company’s immediate stock price must be good. The corollary to this proposition is that anything that might enable a board of directors to resist a demand for the sale or break-up of a company, or other short-term “value-maximizing” action, should be eliminated. Raiders, hedge fund activists and the like, the argument goes, should not be impeded by poison pills, staggered boards and the business judgment rule. Over the last several decades, the principal-agent model of corporate governance, the efficient market hypothesis and the cry for shareholder democracy have spawned an army of more than 100 activist hedge funds, protected on the flanks by ISS, the Council of Institutional Investors, and union and public pension funds.

2. Shareholder Activism
The growing shift from director-centric to shareholder-centric governance in recent years has facilitated the frequency and effectiveness of attacks on public companies by hedge funds and other activist investors. In the past ten years, there have been more than 300 activist attacks on major companies, and this trend has been accelerating, with the number of campaigns aimed at obtaining board representation or forcing short-term “value-maximizing” actions through September 2012 increasing by 31 percent over the same period in 2011. The trend is even starker among large public companies — the number of companies with a market capitalization of over $1 billion that have been targeted in 2012 through September has increased by 289 percent as compared to the same period in 2009. Careful and proactive planning to respond to these attacks has never been more important.

The “value-maximizing” initiatives demanded by activists have been predominantly focused on short-term value drivers — such as requests for special dividends, share repurchases, divestitures and spin-offs of businesses and other fundamental deviations from long-term corporate strategy — and are typically coupled with a threatened or actual proxy contest to install directors who will facilitate such initiatives. In waging these campaigns, activists have been using a variety of tools and have not hesitated to employ creative and aggressive tactics. These include the use of total return swaps and other derivatives to avoid disclosure requirements or to acquire voting power that does not correspond with their economic stake in a company; exploiting the ten business-day loophole in Section 13(d) reporting requirements to amass a significant shareholding position in the period of time before the position must be disclosed; and abusing the passive investment exemption from reporting requirements under the Hart-Scott-Rodino Act. In addition, activists have been the beneficiaries of favorable proxy advisor policies — particularly ISS’s frequent support for dissident nominees in short-slate proxy contests — as well as the steady erosion over the past decade of takeover defenses, which has been led by ISS’s proxy voting policies.

Notwithstanding these trends, companies can and do successfully defend against activist attacks. There is no one secret to a successful defense, but there are a number of steps that may be helpful. The board and the company should develop and continually refine a long-term strategy that can be clearly articulated and justified. As part of an annual strategy review — or more frequently if warranted by business and other developments — directors should work with management to take a closer look at the company’s business portfolios and strategy, bearing in mind the perspectives of major shareholders and potential activist criticisms. Directors can help management in this review by focusing on the business from a shareholder point of view. In some cases, such perspectives can bring useful insights, whereas, in others, they may unduly emphasize short-term gains at the expense of long-term value creation. But, in either event, the exercise allows the board and the company to make conscious decisions as to the best direction for the company. And if an activist or other shareholder makes a proposal or advocates a strategy that the board has already considered and rejected, the company will be able to explain why the proposal or strategy is not in the company’s best interest.

Governance and executive compensation policies should also be reviewed pragmatically and tailored to the company’s needs and circumstances. The board should be aware of the policies and views of major shareholders and proxy advisory services on these issues, but should not abdicate its role in deciding what works best for the company. The board and the company should, however, be able to explain why they have made the decisions they have made. This process also helps a company’s ability to cultivate credibility and long-standing relationships with significant shareholders. In this regard, the support and efforts of independent directors can be particularly helpful.

A more comprehensive outline of matters to be considered in putting a company in the best possible position to prevent or to respond to hedge fund activism may be accessed at this link: Dealing with Activist Hedge Funds.

3. Balancing the Roles of Business Partner and Monitor
The principal-agent theory of corporate governance and the shift towards a shareholder-centric model has diverted attention away from one of the most important roles of a board of directors — its role as business partner to management. Although a board also serves the role of a monitor of management, and must be ready to step in when necessary to exercise that role, in normal times the interests of the company are best served when directors and management can work together as business partners to promote and improve the business, operations and strategy of the company. So long as independent directors are able and willing to assert their independent judgment when it is needed, there is nothing wrong with directors and management developing relationships of mutual respect, trust and friendship. This type of relationship facilitates the ability of directors to have meaningful input into the key business decisions of the company and the ability of management to draw on the expertise, judgment, experience and knowledge of the company’s directors. Indeed, if a director does not trust and respect management, it probably means that it is either time for the director to leave the board or, if the view is shared by the other directors, for the company to look for new management.

The governance activism and political narrative of the last several years has focused primarily on the board’s role as monitor of management. The emphasis of the independence of directors, the push for non-executive board chairs, the focus on executive compensation and the independence of compensation committee advisors, the growing trend towards the creation of special committees and the engagement of independent advisors to the board in a variety of contexts are all directed towards enhancing the monitoring role of the board. To be sure, the monitoring role is an important one, and there is a place for the use of each of these tools in the appropriate circumstances. But an overemphasis on the monitoring function of the board, and the overreliance on independent advisors to the board, particularly if it comes at the expense of the role of the board as business partner, threatens to create a dysfunctional situation that can undermine the ability of the company’s business to succeed and thrive.

4. CEO Succession Planning
The single most important responsibility of the board is selecting the company’s CEO and planning for his or her succession. While CEO volatility was down in 2012, with a 10.3 percent turnover rate, 2011 featured the highest turnover rate at Fortune 500 and S&P 500 companies since 2005, at 12.6 percent. This compares to an overall average of 11.9 percent between 1995 and 2012. The front-page publicity surrounding recent turnovers at major corporations—including Apple, Hewlett-Packard, Yahoo!, Citigroup, Lockheed Martin and Best Buy—underscores the need for advance preparation in the event of both expected and unexpected departures.

Succession planning is not a check-the-box activity for boards. In making succession planning decisions, directors should not unduly defer to the current CEO, rely on résumés, or otherwise outsource the process. Instead, the directors leading the process should take it upon themselves to get to know each of the candidates personally. With respect to internal candidates, one step toward achieving this may be greater exposure of senior company officers to the board. Pipeline development should be a key initiative, and internal candidates should be carefully considered. Indeed, promotion from within has often proven to be far more successful than hiring a CEO from the outside. Booz & Company’s 2011 CEO Succession Report, for example, found that between 2009 and 2011, CEOs promoted from within the company delivered higher shareholder returns and served longer terms. Boards should also exercise their independent judgment when pressure is brought to replace a CEO due to indiscretions or other perceived inappropriate conduct. In some cases, of course, replacement may be necessary. But a board should evaluate whether the company and its businesses may be harmed by replacing a CEO, as opposed to imposing some lesser punishment, when the indiscretion or inappropriate conduct does not truly mandate removal.

5. Board Composition
Recruiting and retaining a balanced board of directors—with the right mix of industry and financial expertise, objectivity, diversity of perspectives and business backgrounds—continue to be key challenges for boards. Achieving this balance is complicated by a number of factors. First, the emphasis on ultra-stringent standards of independence often comes at the expense of industry expertise and familiarity with the company’s business, and boards today have limited flexibility under applicable stock exchange standards and governance activists’ “best practices” to manage this tradeoff. Second, the workload and time commitment required for board service continues to escalate; the 2012 Public Company Governance Survey of the National Association of Corporate Directors reported that public company directors spent on average over 218 hours performing board-related activities, compared to the 155 hours reported in 2003. Finally, individuals who possess top credentials, the requisite independence and other sought-after qualities, and who are willing and able to shoulder the substantial time commitment required, may nevertheless be discouraged from serving on boards due to the very real reputational risks of withhold-the-vote campaigns, sensationalist publicity over executive compensation, shareholder litigation and the potential for high-profile product failures or other risk management lapses.

Another hurdle to achieving a balanced board—namely, the lack of gender and other diversity on boards of directors—gained greater prominence in 2012 in light of the European Union’s proposal to impose quotas for women directors on boards of EU companies. The law, as proposed, would require women to comprise at least 40 percent of non-executive directors at Europe’s listed companies. The proposal highlights statistics for EU-listed companies: 8.9 percent of executive board members, 15 percent of non-executive board members and 3.2 percent of boardroom chairs are female. The percentages of women on boards of U.S. companies are similar: 16.1 percent of board members and 2.6 percent of boardroom chairs.

While diversity, including gender diversity, is an important factor in facilitating a range of perspectives in boardroom discussions, boards should be careful not to overemphasize diversity at the expense of other qualifications. The single most important factor in determining the effectiveness of boards is the competence of those who serve as directors. The ability of the members of the board to work together, and with management, in a collegial and constructive fashion is also key. Legislating one-size-fits-all requirements for boards of public companies is unwise and can have unintended consequences, as illustrated by the emphasis on independence requirements for directors. Determining board composition requires a thoughtful, individualized approach in which all factors are taken into account.

6. Special Investigations
As the financial crisis demonstrated, one of the key roles that a board must fulfill, when and if the need arises, is to provide careful guidance and leadership in steering the company through a crisis. The board should maintain an active role and should not cede control to lawyers, accountants and outside experts. Independent investigations by special committees (or by audit committees), each with its own counsel and, in some cases, forensic accountants and other advisors, pose a particular risk of spiraling out of control without steady oversight by the board. Despite good intentions, the expense of internal investigations can balloon to unreasonable proportions. As we have previously warned (see The Board’s Role in Overseeing Special Investigations), in many instances, internal investigations may ultimately cost a company far more than the relatively minor amounts involved in the alleged misconduct. Noting this fact, Chancellor Leo Strine of the Delaware Court of Chancery opened a 2010 decision by saying, “This is an unfortunate case in which it is clear that the parties have spent far more money investigating and litigating over certain matters than those matters involved.”

It goes without saying that, if there is credible evidence of a violation of law or corporate policy, the allegation should be investigated and appropriate responsive actions should be taken. The board, however, should be mindful not to overreact, and judgment should be applied to determine, among other things, the appropriate scope and objectives of the investigation. For example, while the U.S. Sentencing Guidelines offer reduced penalties to companies that have effective compliance programs and take reasonable steps to respond to misconduct, this does not mean that companies will get credit for going overboard. Once an investigation begins, the board should actively supervise special committees and advisors, and periodic reviews should take place as a “sanity check” on those who are conducting the investigation.

7. Say on Pay
In 2012, the second year of mandatory “say on pay” votes under Dodd-Frank, companies continued to be largely successful in obtaining favorable shareholder votes on their executive compensation. While failure rates remained low — only 53 Russell 3000 companies (2.6%) failed to obtain majority shareholder support — there was an uptick in negative say on pay votes from 2011, during which the same companies saw only 38 failures (1.4%). One factor that clearly influenced the failure rate was ISS recommendations. Where ISS recommended “against” say on pay, shareholder support, on average, was 30 percent lower than where ISS recommended “for” the proposal.

ISS’s negative recommendations largely resulted from a perceived “pay for performance disconnect.” Such a disconnect exists, under ISS’s voting recommendation policies, where (i) there is a lack of alignment between CEO pay and total shareholder return, as compared to an ISS-selected peer group and (ii) the company’s compensation, from a qualitative perspective, is not sufficiently performance based. ISS’s pay for performance criteria has continued to face criticism by companies and commentators alike, particularly with respect to the peer groups used by ISS to evaluate whether a pay for performance disconnect exists. Indeed, in many cases, ISS’s peer group selection has borne little relation to the peers against which a company might actually assess its own performance. In response, as part of its 2013 policy updates, ISS will take into account a company’s self-selected peer group when choosing companies for the ISS peer group, and it will, to some extent, relax its requirements relating to size of peer companies considered, thereby permitting companies with larger and smaller market capitalizations to be considered peers.

While a failed say on pay vote will undoubtedly bring unwanted negative attention to a company’s compensation policies and, by extension, the board’s oversight decisions, the legal ramifications are limited. In fact, Dodd-Frank expressly states that the shareholder vote “may not be construed” to “create or imply any change to the fiduciary duties of such issuer or board of directors” or to “create or imply any additional fiduciary duties for such issuer or board of directors.” This status quo was affirmed in January 2012, when a federal court dismissed a suit against bank directors arising out of a negative say on pay vote, finding that Dodd-Frank did not alter directors’ duties and that a negative vote does not suffice to rebut the business judgment protection for directors’ compensation decisions. Similarly, in October 2012, a federal court and a state court separately refused to enjoin shareholder say on pay votes despite allegations of inadequate executive compensation disclosure.

In assessing executive compensation, boards should bear in mind that their ultimate goal is not to secure a successful say on pay vote, but rather to attract, retain and incentivize executives who will contribute to the long-term value of the company. In that regard, although compensation consultants can be a useful source of advice, as a practical matter, they may be particularly sensitized to the publicity surrounding a negative say on pay vote and, as a result, motivated to err on the side of caution and follow the ISS preferred approach as the path of least resistance. Directors should be aware of the executive compensation guidelines that ISS and similar groups promote, but should not allow this to override their own judgments as to the compensation programs that are best for their companies. Directors should also be prepared to participate in soliciting favorable say on pay votes from major shareholders in order to overcome a negative recommendation by ISS.

8. Corporate Governance “Best Practices”
With very few exceptions, governance activists have achieved most of the reforms they have sought to effectuate. According to Spencer Stuart’s 2012 U.S. Board Index, 84 percent of S&P 500 companies have adopted a majority voting standard, 83 percent have annually elected boards, and 84 percent of their directors are independent — to name but a few of the more trendy governance issues in recent years. However, those who make their living in the corporate governance industry will undoubtedly continue to push these proposals at smaller companies, and come up with additional requirements and heightened standards to propose with each new proxy season. By way of example, ISS’s 2013 corporate governance policy updates tighten its board responsiveness policy and recommend that shareholders vote “against” or “withhold” their votes for incumbent directors who fail to act on a shareholder proposal that received the support of a majority of votes cast in the previous year, as compared to ISS’s prior standard which looked at whether the proposal received a majority of outstanding shares the previous year or the support of a majority of votes cast in both the last year and one of the two prior years.

One byproduct of the proliferation and institutionalization of corporate governance mandates has been the advent of the corporate governance board secretary role. In light of the substantial time required to monitor, manage and respond to corporate governance developments—including Rule 14a-8 shareholder proposals, say on pay shareholder outreach campaigns, implementation of the latest SEC and stock exchange requirements and the various governance decisions that must be disclosed and explained in the company’s proxy statement—many companies have accumulated a sufficiently critical mass of governance-related work to warrant the creation of a corporate governance board secretary role. If such a role is created, however, care should be taken to ensure that the corporate governance secretary’s ultimate objective is to assist the board in pragmatically assessing the merits and drawbacks of corporate governance choices, rather than reflexively advocating the latest ISS recommendations and other purported best practices. While a corporate governance secretary may be able to contribute valuable expertise and advice, directors should make their own reasoned and independent decisions on governance matters that take into account the specific needs of their companies.

Steven R. Walker

How management provides information to the board makes or breaks directors’ oversight role. Providing directors with the information they need to execute their duties is essential to fostering an environment where directors can succeed and be of most value to the company.

Through all my years of serving as general counsel, I have never received formal training on what directors require for their oversight role. Some questions that may arise are: What are their expectations for management? What perspectives do they bring to the table? What keeps them up at night? How much information is enough?

To help executive teams answer these questions, NACD recently introduced Executive Professionalism: Understanding Board Expectations, an innovative program that allows the executive team to step into the boardroom in order better understand the fiduciary and strategic responsibilities that influence the questions directors ask. Led by seasoned directors, this in-boardroom program is specifically designed to help the senior management team better understand the role of the board, deliver the information directors need, and understand how to best engage with their board to meet and exceed expectations on both sides of the table.

In addition to my team’s direct experience with our clients, the issue of gaps in expectations between the board and management is raised by NACD’s members much more frequently. NACD has developed two tools to help companies address this gap:

• Bridging Effectiveness Gaps: A Candid Look at Board Practices addresses the gaps in information flow between management and the board.
• C-Suite Expectations: Understanding C-Suite Roles Beyond the Core offers guidance for interacting with non-traditional members of the C-suite such as the chief risk officer and the chief corporate responsibility officer.

Barry Libert

The result: It is time for directors to think anew about the meaning of corporate governance in the social age.  In addition to all their existing roles, boards now have the added responsibility of shepherding their leaders and organizations into today’s digital world. Boards that avoid this obligation risk having their organizations fall prey to the speed and might of today’s social networks as they seek corporate reform and accountability. The boards and executives of Best Buy, Kodak, Blockbuster, Hewlett Packard, and Susan G. Komen have all learned this reality the hard way.  So did the 12 nations of the Arab Spring.

So how does a corporate director think anew about his or her role?  First, start with the facts.

• Social Technologies Change Performance:  Enterprises that fully deploy social and mobile technologies to engage their crowds (customers, prospects, and alumni) in the cloud produce 9 percent more revenues, 26 percent more profits, and a 12 percent higher market valuation than their peers, according to research by MIT and Cap Gemini.
• Social Technologies Change Engagement:  Less than 30 percent of CEOs use social media according to recent research, despite the fact that more than one billion of their customers, employees and investors do.  Furthermore, The Conference Board and the Rock Center for Corporate Governance at Stanford University report that 93 percent of boards do not use social intelligence to make informed decisions about their networks’ sentiments or engagement.
• Social Technologies Change Investor Relations:  Finally, research at University of California at Berkeley and MIT reveals that social media is a leading indicator of stock price movement.  As such, directors of publicly traded companies need to be receiving this information in real time or risk not knowing what their institutional investors know and how they will act based on insights derived from social and cloud networks.

Given the above, there are seven rules for corporate governance in today’s connected age:

1. Rethink Strategy
Boards need to align their strategy with where value is found today.  In the industrial age, value was based on the amount of an organization’s physical assets and manufacturing capabilities. In the services age, it was based on how many people the firm employed and its billable hours. In the information age, it was software code and data.  In the social age, value is a function of the size and vitality of an organization’s network and how well it is connected both inside and outside the company.

Corporate strategists are thinking anew about how to use technologies and people with common interests and passions to improve their performance.  For example, Unisys created  “mission-critical” computing environments.  It did this by leveraging social technologies to significantly improve productivity, collaboration, and knowledge-sharing among its 20,000 global employees. The result: Unisys launched 10 social circles based on “communities of excellence.” Over, time more than 16,000 employees joined to solve technical challenges, answer questions, and share relevant content and company best practices.

2. Rethink People
As corporate directors, board members need to fully understand that an organization’s next big idea may come from anywhere and anyone. As such, corporate directors need to ask their management teams and HR directors how they are leveraging the collective wisdom of not just their own employees, but also the organization’s crowds.  From them, companies cannot only find solutions to their most difficult problems and, with them; companies can create new products and services.

HR departments are developing new thinking in a growing number of companies.  For example, original programs at Starbucks and Dell look beyond their own people for innovative ideas.  In addition, Red Hat has shaken-up the software industry by partnering “with the world” (and not just their internal R&D department) to create new solutions. It even crowd-sourced its own corporate strategy. Another great example is Apple. Apple inspired 345,000 members of its crowd outside the organization to develop apps that deliver billions of dollars of revenues and market value to the company.

3. Rethink Processes
Yesterday, companies focused on their internal processes to maximize execution and improve efficiency. That “inside-out” focus worked in a supply-constrained world in which customers had few choices.  But today, consumers can buy from anyone and everyone, both online and off. As such, boards need to ask management how they are shifting their focus from inside-out to outside-in to drive growth and innovation.  And for good reason, social networks are most often outside the company, and to tap into their wisdom, an organization needs to shift its focus from inside to outside. Without helping management teams think anew about their business processes, the future may be at risk.

Based on the increasing size and power of social networks, Nike reinvented its marketing processes to outside-in in order to capture the capabilities and insights of their fans and followers.  To do this, Nike built Nike Digital Sport in order to develop products that allow the firm to be with and where its customers are 24/7/365. This became the focal point of transforming Nike into a social company that has dramatically increased its revenues, while cutting expensive television advertising costs. The result has been a large increase in earnings before interest, taxes, depreciation and amortization, according to Fortune Magazine.

4. Rethink Technology
Technology is not just about IT policies; it is also a strategic asset that can be leveraged for success. Boards need to play a prodding, if not active, role in ensuring that management think anew about its technology strategy and how it can add value and minimize risks by actively integrating today’s social, mobile, cloud, and big-data technologies into everything it does.  Research from Cap Gemini shows that social enterprises (versus traditional businesses) shift market and operating risk to other less-tech savvy companies that still think the connected and web world will not affect their business models.

For example, on Jan. 10,  Kenneth I. Chenault, CEO of AmEx, announced that the company would change its travel service business strategy and investment in technologies, cutting 5,400 people as it reallocates its capital to online initiatives. In making this announcement, Chenault said that the travel industry had been “fundamentally reinvented” by technology.   In support of this change, AmEx noted that more than half of its corporate customers book trips using online e-commerce sites and their mobile phones rather than call an Amex Agent. “Because customers are using tools directly online [using mobile, social and web technologies], we need less customer-facing people, such as travel counselors who take reservations and bookings,” said Kim Goodman, president of AmEx’s global business travel unit.

5. Rethink Leadership
The concept of traditional, top-down management is quickly losing steam in a world in which everyone has a voice—including customers, employees, partners and investors. Social technologies allow people to say and publicly share whatever they want about an organization, its leadership, and culture.  In the context of increasing demand for accountability, transparency and open approaches involving all stakeholders, corporate directors need to think anew about their board composition and competencies.  Although many have done a good job diversifying their board, most still lack members with today’s technology and strategy skills according to research by Spencer Stuart.

To make sure that his board contained an expert in social and mobile technologies, Harold Schultz, Starbucks chairman, announced on Dec. 14, 2011, that Clara Shih, CEO of Hearsay Social, was elected to the Starbucks board of directors.  “Clara is a true technology leader….We could not be more thrilled about the social-media expertise and ideas Clara will bring to our business as we continue to amplify the online experience and interactions Starbucks has with our customers, partners and communities.”

6. Rethink Finance
Boards and leaders hold a number of historical and framing biases that make it a challenge for them to see and invest in today’s “intangible” and unmeasured sources of value, such as social network membership and intelligence. This is especially critical given that less than 25 years ago, physical and financial assets constituted about 80 percent of corporate market value. Today, that amount is less than 20 percent, according to research by Ocean Tomo.  As such, leaders need to think anew about their capital reallocation strategies, especially given research by McKinsey that indicates that most companies continue to invest in the same things that they invested in last year.

As corporate directors, it is critical to ask CFOs to go beyond traditional accounting treatments of such valuable intangible “assets” as employees and customers. To ensure that the latent and real value of an organization’s social network is properly presented, directors need better and more complete reporting.  Infosys and others are already creating new measurement and reporting systems that more fully capture the value of their organization and capital allocations to intangible assets.

7. Rethink Governance
The future for boards is less about traditional governance and regulatory compliance, and more about network alignment, capital reallocation to new sources of value and technology, and business model strategies. Looking backward through the lens of financial reporting will only go so far. Today, boards and CFOs require social intelligence about the future desires and needs of their stakeholders. Leveraging real-time data from social technologies and mobile networks offers a more complete view on what is coming next.

Directors and management teams who are questioning whether social media is relevant to their companies should ask Netflix CEO Reed Hastings for his thoughts on the matter. “A 43-word Facebook post Hastings penned in July noting that subscribers had watched one billion hours of video in June made Netflix the subject of a Securities and Exchange Commission probe. The commission is concerned the Internet subscription giant may be violating the Regulation Fair Disclosure rule, or Reg FD, which requires all investors to receive information that could affect company stock at the same time.”  While the debate on this issue is just beginning, boards must be proactive in understanding the critical impact of social media.

Questions to Ask
Corporate directors who are in the process of reviewing their company’s 2013 business plan with their management teams should take a moment and ask the following questions of themselves and their leaders:

• Social Technology:  How do we view social, mobile and cloud technologies?  Do we see them as simply Facebook, Twitter, and LinkedIn, or do these technologies play an integral role in every aspect of our business?

• Business Performance:  Are we viewing our next year’s business plan and financial forecasts through the lens of last year’s finances or, more importantly, in the context of todays research by companies like Cap Gemini, Deloitte, and McKinsey?

• Technology Skills:  Do we have the right board members with the right skills including social, mobile, and cloud experience, to insure our company’s future? In addition, does our management team members have the skills they need to insure success?

The bottom line: Boards need to think anew about their role in the social and mobile world. For corporate directors, there is no time to waste.  Directors must join the social and mobile ranks. New board members must be recruited, and new business models must be fashioned based on these technology realities.  Social enterprises are here to stay and they are faster, better, and more competitive than traditional businesses.

Barry Libert, CEO of OpenMatters, is a technology investor, corporate director, and strategic advisor to boards and their leaders seeking to become great social enterprises. Sally Ourieff is a partner at OpenMatters.

Kate Iannelli

Uncertainty trumped optimism in the fourth quarter of 2012. And not without reason—a close presidential election coupled with the looming fiscal cliff and Congress’ inability to develop a solution left the nation waiting until the last minute. Conducted in the first weeks of December, NACD’s Q4 BCI score dropped nearly three points from 54.5 to 51.8. A score above 50 represents optimism regarding the current state of the economy. Scores near 50 mark uncertainty.

Attitude Shift in Future Outlook
The 51.8 score represents the second-lowest registered by the BCI—the lowest was 47.5 in Q3 2011. In its two-and-a-half-year history, scores have fluctuated between uncertainty and moderate optimism. These composite scores are generally the result of boardroom pessimism in the short-term state of the economy buoyed by an optimistic long-term view of economic progress—both progress made to date and to come.

In Q4, however, the outlook shifted to optimism in the boardroom’s retrospective view—current economic conditions versus those three months and one year ago—lifting pessimism in both the short- and long-term future states of the economy. Looking ahead to the state of the economy in three months, boardroom confidence dropped eight points—15 percent—to a gloomy 44, the lowest score to date.

Peer indices provided mixed sentiments in the fourth quarter. The Conference Board’s quarterly CEO Confidence Index posted a recovery of 4 points, moving from 42 in Q3 to 46 in Q4. However, a score of 46 still places the index in negative territory. Consumer indices moved in the opposite direction. The Conference Board’s Consumer Confidence Index dropped 6.4 points in December to 65.1. A similar measure, the University of Michigan’s Consumer Sentiment Index fell nearly 10 points in December, from 82.7 to 72.9.

Editor’s Note: Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Lipton, Steven A. Rosenblum, Karessa L. Cain, and Kendall Y. Fox originally published on the Harvard Law School Forum on Corporate Governance and Financial Regulation.

In this environment, the challenge for directors is to continue to focus on doing what they believe is right for their corporations while maintaining a sufficient understanding of shareholder sensitivities to avoid a targeted attack that could undermine their ability to act in their company’s best interest. The primary focus of a director, of course, should be on promoting and helping to develop the long-term and sustainable success of their company. This encompasses a wide range of activities, including working with management on the company’s business and strategies, planning for the succession of the CEO and other key executives, overseeing risk management, monitoring compliance, setting the appropriate tone at the top and being prepared to step in to address any corporate crises that arise. At the same time, the board needs to be aware of and address shareholder demands in a constructive manner, consider how a hedge fund or other activist may view the company and its strategic alternatives and try to ensure that the company maintains a shareholder relations program that clearly articulates the reasons for the company’s strategies and engenders support from the company’s major shareholders. In some cases, this may include direct communication between board members and institutional shareholders.

E. Thames Fulton

A 2006 research article, Critical Mass on Corporate Boards: Why Three or More Women Enhance Governance, from the Wellesley Centers for Women (WCW) and the University of Western Ontario supports this thesis:  ”The magic number seems to occur when three or more women serve on a board together. Women start being treated as individuals with different personalities, styles and interests. Women bring a collaborative leadership style that benefits boardroom dynamics by increasing the amount of listening, social support and win-win problem solving. Women are more likely than men to ask tough questions and demand direct detailed answers.”

The experience when you have multiple females can help the range of the conversation to be more encompassing—during the business sessions as well as the time between the meetings, the casual time, says experienced director Stephanie Kushner. “In some ways, it was more personal—people connected more on a personal basis. But also, there was a lot of comfort in terms of talking and sharing perspectives. I felt that the board was particularly collegial, collaborative. There was an openness. People expressed their thoughts and opinions more freely.”

Mary Kier

With regard to diversity, women have different experiences and different mindsets from their male counterparts. Men tend to be more individual in their decision making, excelling at taking swift corrective action, according to McKinsey Quarterly’s “Achieving the Promise of Women Executives” from March 2012. Women, on the other hand, tend to be better at collective decision-making and at incorporating the environment and values of the organization. Ultimately, board diversity is about combining alternative and complementary views that lead to more knowledgeable discussions and better board decisions.

Another experienced director, Cindie Jamison, says: “Women on boards leads to good decision-making; you can consider alternate points of view to drive toward the best decision possible. And, when there is critical mass, you can get traction on additional issues—issues that aren’t always discussed or debated and even things no one thought were issues.”

The point here is not to suggest that one way of thinking is better than the other, or that all men and women think and act in narrow gender-defined parameters. Rather, it is to suggest that a diverse blend of thinking improves company performance. Extensive research, including a 2011 Deloitte study, Women in the Boardroom: A Global Perspective, suggests a correlation between the financial bottom line and the proportion of women on boards (or at least in senior management). In fact, the McKinsey study cited earlier shows that companies with three or more women in senior management roles scored higher on criteria related to organizational health and effectiveness.

Perhaps not surprisingly, Fortune 500 companies are doing a better job of including women on their boards than mid-cap companies. The Deloitte study shows 15.7 percent of Fortune 500 board directors are women, while that number falls to just 12.3 percent for a broader sample of nearly 1,800 companies, which of course includes mid-cap companies.

While that might not seem like much of a difference, other studies call attention to the problem for mid-cap companies. A December 2011 report from the InterOrganization Network (ION), an alliance of 14 women’s business organizations in the U.S., says that underrepresentation of women on mid-cap company boards is acute. The report states that “although the Fortune 500 companies in some regions exceed the national benchmark in terms of their percentage of women directors, the comparable percentages on the boards of smaller companies drag down the overall performance.”

The NACD recently published a Blue Ribbon Commission report titled, The Diverse Board: Moving From Interest to Action. Click here to access a copy of the BRC on Diversity.

By their very size and nature, mid-cap companies often fly under the governance spotlight, avoiding the direct pressure to address the issues of gender diversity on boards. While that may be true today and for the short term, regulatory pressures are increasing for all companies. Compounded by the diminishing lack of trust that boards and corporations will “do the right thing,” governance watchdogs and disgruntled investors don’t need much incentive to act.

“Pink” quotas dictating board makeup may only be a reality in Norway, France, Italy, Belgium, Iceland, the Netherlands (where a “comply or explain” policy exists) and Malaysia, but global awareness of this issue is growing. There is similar legislation in the works in Spain and India, and the U.K. and Sweden have embraced voluntary targets. Surely quotas are not out of the realm of possibility in the U.S. if complacency  continues to thwart progress. Why wait to be shamed into doing the right thing?  Boards need not hide behind their generalized “diversity” statements in their proxies, but should lead by example in their board appointments and proactively include more women. What’s more—as if mid-cap companies need another incentive—gender diversity simply is good for business, leading to better decision-making and better organizational dynamics.

Mid-cap companies do face challenges of their own recruiting women to their boards, of course–not the least of which is competing directly for talent with their more prominent counterparts in the Fortune 500. Even so, it is imperative that sitting directors, nominating and governance committee members, and executives of mid-cap companies charge ahead with assertive and coordinated recruiting campaigns to identify talented female executives who will bring diversity of thought to the board.

The decision to include women should start with governance committees,” says experienced director Rita Foley. “Board members should insist on seeing female and diversity candidates on the slate. Think of your daughter; if she were a qualified candidate you would want her to have the same open opportunity. The slate shouldn’t be considered complete if there isn’t diversity on it.”

To accomplish this, mid-cap companies should examine their own proxies as a guide to bolster diversity; most all companies emphasize a commitment to diversity there. Make that commitment serve as more than just empty words:

• Act upon them to bring gender diversity to the board. As an added benefit, including more women on boards can help lead to more women rising up into the ranks of senior management, which in turn expands the pool of potential board candidates over the longer term.
• Be proactive by insisting that women board candidates appear on the slate whenever recruiting board directors. Mid-cap company boards–and their nominating committees–should not consider the slate to be complete unless it has several well-qualified women who align with the company’s strategies and goals. Then, if possible, commit to interview at least one woman for every board vacancy that opens up. Adds Jamison: “In order to draw these female candidates’ strengths out, you need to interview them differently–ask different questions; think about the approach and the situation. The way questions get asked and the way women choose to answer them can be surprising and off-putting. That right there is a gatekeeper. Be open to the way you interview and qualify—take into account the question and the nature of it and how it can be perceived. There are ways to ask things about a woman’s background without being negative that will allow her to demonstrate her expertise and value.”
• Use an executive recruiter to ensure that diversity is a component of every slate of candidates. Partnering with an objective resource like a recruiter helps make the search process run smoothly and efficiently, freeing up senior management to spend their time wisely. It enables the board to embrace a process that introduces candidates at the right time. Recruiters also bring a unique third-party perspective, best-practice experience and a sense of urgency to the search process.
• Encourage radical and creative thinking by casting a wider net to find exceptional female board candidates. Historically, women are scarce among the ranks of sitting CEOs or CFOs. Beyond those top spots, however, consider exploring other functional areas such as legal or human resources, or looking at women who hold important leadership roles in smaller organizations.

Boards often speak about the importance of gender diversity within the organization at the executive and middle management levels; it follows that if such diversity is important at these levels, surely it is important at the board level. At the very least it sets a good example for that rest of the organization and ultimately serves to improve company performance.

E. Thames Fulton is a managing director and head of Board Advisory Services at Cook Associates. Mary Kier is CEO of Cook Associates Executive Search.

In 2012, the composition of the NACD Directorship 100 mirrors Congress. Of the directors named to the list—men and women who have made outstanding contributions to their boards and their companies’ performance—29 percent are women. This marks a 53 percent increase over 2011, in which 19 percent of the honorees were women.

Particularly this year, the increase is a welcome result. Although NACD has championed diversity in the boardroom for the last 35 years, in 2012 it was the subject of our Blue Ribbon Commission (the report was released in September). Numerous roundtables have also been convened across the nation to discuss increasing diversity, and it is a critical area of focus for the NACD Directorship 2020 initiative.

The current complex and fast-paced business environment necessitates a board with the skill sets and experiences to guide its company in meeting strategic objectives. In analyzing the 2012 list of honorees, several data points stand out:

36: Percentage of honorees with MBAs. Fifteen percent have master’s degrees, 13 percent have PhDs.

Harvard University: Most frequently attended school, for both undergraduate and graduate degrees. For undergraduate degrees, honorees also attended Princeton University, Cornell University, Georgia Institute of Technology, and Tufts University. The top-five list of graduate schools is rounded out with the Wharton School of Business at University of Pennsylvania, Stanford University, University of Chicago, and Columbia University.

232: Number of public companies represented.

43: Age of the youngest NACD Directorship 100 honoree. The average age is 64.

8.2: In years, the average board tenure held by honorees.

Now, let’s see how boards are finding the answers.

Preliminary data from the 2012 NACD Public Company Governance Survey to be released this fall shows:

• 92 percent of boards conduct full board evaluations.
• 83 percent of boards conduct committee evaluations.
• 48 percent of boards conduct individual director evaluations.
  • Of those individual evaluations:
  • 56 percent are self-evaluation.
  • 51 percent are peer evaluation.
  • 31 percent are evaluation by the governance committee.
• 12 percent of boards allow management to evaluate them as part of a 360° review.

What Do the Numbers Tell Us?
Clearly the vast majority of companies are conducting board evaluations of some type. Is this the result of regulation or a commitment to good governance? Some companies are required to perform evaluations by stock exchange mandate. Others have been influenced by the 2009 Securities and Exchange Commission (SEC) rule on proxy disclosure enhancements, which required boards to expand disclosures with regard to directors’ individual skill sets, diversity and overall board composition.

While meeting regulatory requirements may be part of the motivation behind board evaluations, in our experience of facilitating evaluations, we’ve found that the primary driver is a desire to build a high-performing board, well-suited to anticipate, meet and overcome the challenges ahead. Increasingly, boards are moving away from the “check-the-box” mentality and utilizing evaluations as a tool to ensure the board is aligned with the company’s long-term strategy.

As noted above, almost half of our survey respondents conduct individual director evaluations. While self- and peer-evaluations continue to be the thorniest of the bunch, we’ve found they tend to yield the most fruitful results.

Now is the time to look at your board’s evaluation processes. When was the last time your board examined its composition and performance? Do you approach evaluations as a pro forma exercise, which can minimize insights, or are you taking an honest look at whether your board’s practices and composition are optimized to meet the company’s long-term goals?

Steven R. Walker is NACD’s general counsel, secretary and director of Board Advisory Services.

Kim Van Der Zon

It may be time for a Rooney Rule to jump-start corporate boardrooms out of their inertia on gender diversity. The “same old, same old” that I hear from highly qualified women every day is that they are routinely overlooked for board seats for which they would be well-suited. And women already on boards tell me that resistance to diversity often remains entrenched. A female director of a leading financial services company says, “There’s always an excuse. The female candidate hasn’t been a CEO or hasn’t followed a conventional, linear career track.”

The numbers bear out the anecdotes. According to Catalyst, a non-profit organization devoted to gender diversity in business, only 16.1 percent of board seats at Fortune 500 companies were held by women in 2011. In both 2010 and 2011, about one-tenth of companies had no women directors at all. And for the past seven years the percentage of women directors has hovered at a little under 15 percent.

These statistics are doubly discouraging given the general consensus today around the business case for diversity of all kinds – global and technical aptitude, as well as race and gender. From tapping into new markets to making better decisions to fostering innovation, the diverse perspective of a diverse team is widely seen to contribute to superior business performance. For boards, it has increasingly become a risk oversight issue to ensure this diversity of competence/experience, but many of the skill sets currently required of directors (such as digital) are rarely part of the traditionally targeted (and primarily male) CEO background. Nevertheless, the needle stays stuck. A boardroom Rooney Rule could help move that needle with a simple, self-imposed good governance requirement that nominating committees interview a diverse slate for all independent director openings.

And there are other immediate motives to look beyond the CEO profile when filling board seats. The reality is that, for a variety of reasons, that candidate pool has been shrinking significantly anyway. Most sitting CEOs already hold the one outside board seat that most boards limit them to – and some boards do not allow any outside seats. The SEC and ISS closely monitor the total number of seats all directors hold, and even most retired CEOs now limit their seats to 3, rather than 4 or more as in the past. Addressing the issue of gender balance would be one handy tool to grow the talent gene pool.

Note that this recommendation is emphatically neither a hiring quota nor a regulatory proposal. A board would simply elect to adhere to an internal best practices requirement that some women and other diverse candidates be included in the full-dress vetting and interviewing process. Despite the entirely voluntary nature of this process, the headcount of diverse board members will surely go up. Why? Because most of the people who have made it to corporate boards are smart and perceptive.  Once top-flight, highly qualified diversity candidates have at least been “invited to the dance” and the sitting directors have seen more than just resumes, the boards are likely to make what they believe is the best business decision for the organization.

It worked in the NFL. In 2002, the year before the Rooney Rule was implemented, three head coaches were minorities. Going into last season, 11 minorities were interim or full-time head coaches and five minorities were general managers. We can level the playing field in the boardroom as well.

The process is not flawless. The objection has been made that teams can evade it simply by conducting sham interviews with minority candidates before hiring someone they had in mind from the beginning. And, under the Rooney Rule, the Saints were within their rights when they ducked the issue entirely by staying in-house and choosing assistant coach Joe Vitt. But despite all the potential maneuvers, inevitably the tide will turn with the Rooney Rule, in large part due to the sea change of consciousness that it represents.

And the profits would be realized in all quarters. Diversity candidates benefit no matter which candidate is ultimately chosen, because just going through interview process helps them up their game for the next opportunity. Not to mention that the directors conducting the interviews sometimes sit on more than one board, giving the diversity candidates invaluable exposure. Majority candidates would get a wake-up call that the old boys’ network no longer guarantees board appointments.  Boards would find themselves with fewer cases of buyer’s remorse brought on by neglecting to engage in a thorough and competitive process.

Most importantly, by casting a wider net, boards could greatly boost their odds of finding not just someone who is good but someone who is truly extraordinary. The last six Super Bowls have featured at least one team with a minority head coach or general manager. That’s the real intent of a Rooney Rule, whether for the locker room or the board room — not simply to increase the diversity numbers for diversity’s sake but to help find genuine leaders to take the organization to the highest level.

Kim Van Der Zon is a Senior Partner in the New York office of Egon Zehnder International. She leads the U.S. Board Practice, has expertise in CEO succession and has extensive international client experience. She has successfully served Fortune 500 clients across a broad spectrum of companies from financial services and consumer packaged goods to pharmaceuticals and technology.

Steven R. Walker

To that end, boards need to embark on a continuous process of self-assessment. We cannot do better tomorrow until we ask ourselves an important question: How are we doing today? Only where self-reflection is part of the board’s DNA can it provide the strategic guidance that defines its mission.

While many large and small questions drive self-reflection, three essential questions begin the process.

• Are we independent?

There are often fundamental warning signs that a board is no longer thinking independently and that self-interest may be clouding its judgment. One is tenure. How long has each member served? Is it possible that, as a result of many years of service, some members have become too narrow in their perspective or that their own personal investment in the company might create a conflict when big decisions need to be made?

“It is generally agreed that director perspectives on a particular company can become stale and even compromised after many years of continued service,” according to the Bridging Board Gaps report by the Columbia Business School and the University of Delaware. “It may be difficult to remain objective about a company one has served for a long time.”

In other instances, circumstance simply makes independent judgment impossible. If a family business goes public, for example, family members cannot function as independent-thinking board members.

The self-reflection that a board needs to assess its own independence has to be a tough-minded, conscientious process. Hard questions need to be asked. But the board that has the courage to ask itself the hard questions is all the more likely to have the courage to act decisively to address critical problems in the future.

• Do we have chemistry?

There has to be some real chemistry in the boardroom if discussions are to be open and free-wheeling. Board members have to trust each other. They have to feel free to float new ideas and challenge others. They don’t have to be best friends, but board members need a sense of camaraderie to assure a creative group dynamic.

An attentive, enthusiastic and engaged board means more efficient decision-making. Are your board members attentive, engaged and active? Are there certain directors who are not? Is there some adjustment, some way to change the chemistry to ignite a higher level of enthusiasm?

• Do we have the right team?
  

Having the right team means building a well-constructed board, with members from a variety of backgrounds who are ready to meet the challenges ahead. Having the right team means a broad range of skills, talents and perspectives that can feed the company’s strategy in multiple contexts. It is a competitive necessity, reflecting varied work experiences, personal backgrounds and educational training.

Really think about your board composition. Do the directors around the table offer a diverse mix of industry experience? Do you have expertise across various disciplines such as operations, marketing and finance? Watch out for too much expertise in any one industry. Whatever the company’s business, independent input is essential if the board is to advise on the multiple opportunities and problems that confront management.

In fact, board members are often all the more valuable when they can see the company as other stakeholders see it.

Self-reflection is a never-ending process. Questions about your independence, chemistry and  diversity must be constantly revisited and broadened to ensure optimal service.

Self-reflection is also a challenging initiative.  Performing an objective, holistic evaluation of your board may require the engagement of independent professionals who stand ready to provide the benefits of their significant experience and intellectual capital.

Sometimes others need to see you before you can really see yourself.

Steven R. Walker is NACD’s general counsel, secretary and director of Board Advisory Services.

Kurt Groeninger

Perhaps the most interesting finding came from a new question that asked, “Do you believe the lead director structure is more effective than that of a non-executive chairman?” Nearly 43 percent of the respondents answered in the affirmative while only 16.3 percent said, “No.” However, a significant portion (27.9 percent) believed that the structures had the same effectiveness (13 percent said, “I don’t know”).

The strong support for the lead director structure may stem from a variety of sources. For one, many boards favor a combined CEO/chairman for “ensuring clear strategic alignment throughout the company,” as stated in Home Depot’s 2012 proxy statement. Other companies, such as Pfizer, see benefit in the lead director’s “strong leadership skills.

Regardless of the rationale, structure is not the heart of the issue, as a variety of structures can provide the leadership crucial to an effective board. Rather, the effectiveness of the individual serving in the role can make the critical difference. For example, the lead director can enhance board effectiveness by following six practices outlined in last year’s Blue Ribbon Commission Report:

• Consider the bigger picture.
• Organize information for action.
• Give a voice to every director.
• Conduct effective executive sessions.
• Plan for director succession.
• Provide leadership in a crisis

To learn more about these six practices, review the BRC Report on the Effective Lead Director.

Richard Crespin

But what counts as corporate responsibility (CR) and when and how should boards and CEOs take an interest in it?  When we use the term “CR” we define it as maximizing the positive impact while minimizing or eliminating the negative. A closer look at the survey shows that a good chunk of the respondents report a CR issue as among their top three priorities for the board, including risk and crisis oversight (27.1%), shareholder/owner relations (6.4%), and disclosure and transparency (4.7%).  We argue that boards and CEOs need to take a more expansive view of CR and a more active role in CR leadership.

This article originally appeared on the Forbes Corporate Social Responsibility blog.

Fortunately, there seems to be a growing number of business leaders who agree.  In our 2011 Corporate Responsibility Best Practices Study, 72 percent of companies reported having a formal CR program, up from 62 percent in 2010.  These programs take on the full spectrum of CR-related issues (see table).  Moreover, 86 percent of respondents said their CEOs believe CR is important, up from 81 percent in 2010 and 66 percent of CEOs have led a CR-related initiative in the past 12 months.  When it comes to board leadership, 84 percent of boards get briefed on CR-related issues and 34 percent of them have led a CR-related issue in the past 12 months.

At the same time, in talking with management and directors, we hear a lot of confusion about the role boards should play in CR.  In the NACD study, only 4 percent of respondents said they had a committee dedicated to “Public Affairs/Policy/Social Responsibility.”  We would argue that this, again, too narrowly defines CR.  Using our broader definition, and many respondents have committees with some CR responsibility: Risk Oversight/Crisis Management (12.5%), Ethics/Compliance (5%), Environmental Policy (4%), Public Affairs/Policy/Social Responsibility (4%), and HR/Labor Relations/Management Development (2.1%).  By taking this broader view, companies would make progress on one of the principal deficiencies pointed out in the NACD study: the need for better risk management.

Many investors we’ve spoken with look at CR programs, especially those related to disclosure and ethics, as proxies for risk management. In the NACD study, fully 20.7 percent of respondents say CEO “ethical performance is not measured,” and 11.4 percent say “board and management do not gather information to assess ethical risks.” The NACD study finds a high correlation between the existence of formal risk management programs and board satisfaction with risk reporting, stating that, “those with formal programs were more likely to find that the program informed management and the board of the organization’s risks to a ‘great extent.’”

What do you think?  The NACD study also found that most boards characterize current disclosure and reporting requirements as “excessive.”  Are we asking too much of boards?  Should CR continue to be defined more narrowly?  Should boards have more formal roles in CR oversight and leadership?  Share your thoughts.

Richard Crespin is executive director of CRO Association and president of SharedXpertise Media.

One director may say, “We owe our duties to our shareowners. Period.”

Another director may add, “Yes, but we need to pay special heed to the interests of long-term shareowners. Some shareholders are speculators and not truly owners; they are more like renters.”

And yet a third director may say “Why the focus on shareholders alone? As directors, we in fact owe our duties to the corporate entity, and as such, to all its stakeholders.”

If you have a sense of déjà vu it’s because you’ve heard all this before—including the pages of NACD Directorship. It’s a perennial debate.

Alexandra R. Lajoux

But no matter which position you take, you must agree that over the long term, the interests of shareholders and other stakeholders all converge. And furthermore, you must agree that to serve those interests requires that a company be sustainable—that is, able to stay in business over the long term, and not crash due to some unforeseen and/or managed risk—including an environmental or social risk.

So how can investors and other stakeholders gain confidence on that score? Enter the Global Reporting Initiative (GRI), the globally accepted standard for reporting nonfinancial information about a company.  In a series of recent chapter programs, NACD has been introducing the topic of GRI to our membership in a show affectionately nicknamed the “Why GRI?” show.

GRI Who?
When the Global Reporting Initiative first opened an office in the United States in October 2010, its acronym – GRI – drew mostly blank stares in U.S. boardrooms. Although a majority of the largest global companies were using this template for reporting nonfinancial data, American reporters were relatively few in number and low in profile.  Today, after a mere 18 months of promotional efforts by a US-based director, GRI is becoming a familiar name. Indeed, as of February 2012, nearly 250 U.S. organizations now report on their sustainability using the GRI template—almost double the number that reported prior to the US office launch. And even more important, there is a growing awareness that GRI is not merely about reporting: this reporting initiative seeks to improve the quality of corporate strategy and risk oversight—and therefore corporate value itself.

GRI Now!
One catalyst for the new and deeper GRI awareness has been a series of NACD chapter programs being generated at the grass roots level. Combined attendance at the first two events topped 100—a decent number for a topic that is relatively new to U.S. boardrooms.

The Kansas City Program
I’m going to Kansas City. Kansas City here I come! Appropriately for a dynamic start, the inaugural program started when Laura McKnight, co-chair of the chapter with Charles Peffer, invited GRI’s US Director Mike Wallace to address the Heartland Chapter in November 2011, along with EMC’s chief sustainability officer Kathrin Winkler.  As chair of the Greater Kansas City Community Foundation, McKnight understands the importance of corporate social impact.

During a breakfast panel on “The Board of Directors and Corporate Sustainability,” Winkler explained how her board oversees her corporation’s social and environmental presence. At EMC, management regularly reports on sustainability matters to the EMC governance committee and the full board.

At least twice a year, the chief sustainability officer provides an update to the EMC governance committee on sustainability initiatives and progress. Topics discussed on the EMC board to date include stakeholder engagement—including feedback from customers and relations with employees. Furthermore, sustainability discussions play a major role in board discussions of the company’s strategic plans and the board’s related oversight of risk. More details on EMC’s program will be forthcoming in the March-April 2012 issue of NACD Directorship.

The LA Program
From this pioneering start in the Heartland came an even more ambitious program in the City of Angels, focusing on “Corporate Strategy and Reporting in a Global Economy: the Board’s Converging Roles.”  Held at the historic California Club in January 2012, the Southern California Chapter event attracted the leaders of the LA business community, including Dann Angeloff, Chairman Emeritus of the chapter, and a Lifetime Member of NACD, in recognition for his 35 continual years of membership. Dan was the seventh person to join NACD—back in 1977, and he looks as young as ever (good governance is good for your health). But not all attendees were local. Richard Crespin, executive director of the Corporate Responsibility Officers Association attended as well—traveling all the way from Washington, DC.

Program chair Fay Feeney, CEO of Risk for Good, a governance consultancy that supports GRI as an Organization Stakeholder, moderated a panel featuring GRI’s Wallace plus three others: Mary O’Malley, Chief Sustainability Officer, Prudential; Chad Spitler, Director Corporate Governance and Responsible Investment, BlackRock; and Mary Ann Cloyd, Partner, Center for Board Governance, PwC.

The invitation to the event framed the issue precisely:

Boards are increasingly involved in helping to develop and monitor sustainable corporate strategies. At the same time, board oversight of corporate reporting has grown as well. So what is a board to do?  How will you provide oversight as a Director?

When it comes to strategy, boards are faced with tradeoffs between short term and long-term gains, and differing interests of stakeholder groups. When it comes to reporting, we have the SEC, FASB, IFRS, GRI, ISO, Carbon Disclosure Project and IIRC–all of which are providing guidance and/or standards to companies about reporting.

Add the fact that there are an increasing number of shareholder proposals seeking disclosure on a wide variety of environmental and social issues, and shareholders with strong views on both sides of these issues … what is a company to do?

After an introduction from Chapter President Chris Mitchell, Feeney set the stage by pointing out that today a major percentage of any company’s value lies in intangibles rather than tangible assets. How right she is! In a very real sense, reputation is worth more than money. As Shakespeare wrote, “Who steals my purse, steals trash… but he that filches from me my good name …makes me poor indeed.” (It so happens that a villain said this in a tragedy but it is still true!) Feeney also pointed out the many names that sustainability may take on: corporate social responsibility, corporate citizenship, sustainable development, and so forth. It’s all about having a “meaningful conversation around value,” said Feeney.

Wallace explained the GRI reporting system as a highly adaptable model for reporting nonfinancial information in a variety of organizational types—in most cases on a voluntary basis.  In the U.S., company managers report sustainability on a voluntary basis as a way of informing the board, stockholders, and others about their companies’ social imprint. But Wallace noted that some governments and stock exchanges outside the U.S. are making GRI reporting mandatory for companies and their suppliers, and these mandates are touching U.S. companies as foreign and domestic buyers ask U.S. companies to disclose sustainability information.  In fact, Microsoft and Apple are both asking their key suppliers to produce sustainability reports according to GRI. Being a GRI reporter prepares companies for these unfolding compliance demands.

In his remarks about investment styles, BlackRock’s Spitler hammered home a key point. Investors may have differing expectations, including social expectations, but Blackrock favors GRI reports for financial, rather than moral, reasons. BlackRock wants to make sure the company is a good financial bet for the long term and GRI reports make it easier to compare companies’ non-financial performance.  Spitler explained that while there may be some very good information about a company in these SEC reports, much may be missing. And when companies put out their own reports on their activities in the world, it is not always easy for shareholders and others to compare one company to another as they may use different terms and categories. For many years, to compare sustainability across firms was like comparing apples to oranges to aardvarks, one might say. GRI makes the comparisons easier or shareholders—a point emphasized by Spitler.

Bringing in a high-level corporate perspective, O’Malley described the history of the reporting program at Prudential, making a very useful point for beginners. The purpose of sustainability reporting, she said, is not to brag about how sustainable we are. Its aim is set sustainability goals, disclose the goals, and reveal how far along the company is in achieving them. In short, sustainability is not a destination; it is a journey.

Rounding out the discussion from a boardroom perspective, Cloyd of PWC underscored the need for director attention to information about various stakeholder issues, as a matter of risk oversight as well as strategic opportunity.

Summarizing comments and T-ing up the peer discussions, Feeney sees this panel as the beginning of a long-term dialogue about matters of strategy and sustainability.  Watch this website for an upcoming blog by Feeney on her ongoing peer-to peer discussion program.

Moving On
And there’s more. The next NACD event to feature GRI will be the March 12-13 Master Class in Scottsdale, Arizona, where Wallace is slated to copresent with Suzanne Fallender, Director of the Global Corporate Responsibility Office at Intel, a GRI reporter.

And later this year, the Why GRI traveling show will visit new cities. On the horizon: possible events at the New York Stock Exchange and NASDAQ in conjunction with the New York Chapter.

As this road tour makes clear, corporations are more than their revenues minus expenses; more than their cash flow; more than their reportable assets. Corporations are actors on the world stage, interacting with not only investors but also customers, vendors, employees, communities, regulators, and others, and all of these constituencies want to know information about the company that goes beyond financial statements and the 10-K and proxy reports that supplement them.  GRI makes this possible. So stay tuned—and stay sustainable!

Alexandra R. Lajoux is NACD’s chief knowledge officer.

Michael W. Peregrine

These days, it is “standard operating procedure” for the board to evaluate looming controversies and crises through the use of the special investigative committee. And such procedure owes much to the structure, process (and courage) applied by the Powers Committee. Working under enormous economic, social and political pressures, the committee moved quickly but thoroughly through enormously complicated facts to deliver a comprehensive analysis less than two months following Enron’s filing for bankruptcy. The format of the Report, the independence and qualifications of the committee members, the style in which it pursued the inquiry, and the presentation of its conclusions served to “set the bar” for future efforts of this type.

And the Report pulled no punches in its analysis. To be certain, it assigned appropriate blame to the “smartest guys in the room”—the Skillings, Fastows and other recognizable executives. But it didn’t stop there, reserving some its harshest criticism for the board itself. Board members were “called out” for severe fiduciary lapses; e.g., inadequate and poorly implemented internal controls; failure to exercise sufficient diligence over corporate operations; failure to adequately respond to “red flags”; cursory review by key committees on critical matters; failure to insist on proper information flow from management; and an inability to appreciate the significance of information with which it was provided. There was no “sugar coating”, but rather a direct recognition of the full extent to which the inadequacies of board conduct contributed to the demise of the company.

The Report’s legacy also rests in its influential effect on the evolution of the corporate responsibility movement. It’s an impressive historical roll call. The Powers Report was a principal source for the subsequent July 8, 2002 Senate Permanent Subcommittee on Investigations report on Enron, which reached additional, complementary findings on the problematic conduct of the Enron board. The Senate Subcommittee Report provided substantial fodder for the governance and financial integrity provisions of the Sarbanes-Oxley Act, which was enacted on July 30, 2002. The governance failings cited by the Powers Report and, subsequently, the Subcommittee Report, formed the basis for many of the observations and recommendations incorporated in the ABA’s highly regarded “Cheek Report” on the role of lawyers in corporate governance. The lack of board compliance awareness identified in the Powers Report helped spark the 2004 Amendments to the Federal Sentencing Guidelines. These guidelines revised compliance plan effectiveness criteria to include specific board level plan oversight obligations. Finally, the Powers Report discussion on the role of Enron’s legal counsel contributed to the influential best practices on the lawyer’s role in corporate governance, proposed in 2006 by the Bar Association of New York City.

Many of today’s board members weren’t in office 10 years ago. Enron and its progeny are something of a distant memory to most. But the governance failings chronicled by the Powers Report were real. They happened 10 years ago and they could occur again, in another boardroom in another industry. The tenth anniversary of the release of the Powers Report is thus worth more an acknowledgment by today’s boards—for how the Report was prepared, what it said, what it ultimately influenced—and for a reality check on proper standards of board conduct.

Michael W. Peregrine, a partner in the law firm of McDermott Will & Emery LLP, advises corporations, officers and directors on issues related to corporate governance, fiduciary duties and internal investigations. Mr. Peregrine’s views do not necessarily reflect the views of McDermott Will & Emery or its clients.

Christopher Y. Clark

Though her examples ranged from mortgages and lobbying to the FDA, many of her points should ring true in our community and I share just two of them with you below.

• “One fundamental problem is that disclosure requirements merely get information onto the table, but themselves demand no further action. According to political theory, disclosure is both a citizen’s right and a tool to ensure good government and consumer protection, because it provides information that leads to informed decisions. Instead, disclosure has often become an end point in the chain of responsibility, an act of compliance with the letter of the law rather than the spirit of transparency.”
• “In the beginning, disclosure was a means to an end, and now it’s often an end in itself,” said Kevin P. Weinfurt, professor of psychiatry and behavioral science at Duke University. “People think, If we’ve disclosed we’ve fulfilled our responsibilities.”

Given the above, we all might percolate on a sentiment I shared with Holly Gregory of Weil Gotshal and Fay Feeney of the Risk for Good blog last Friday, transparency without clarity is worthless… and I believe I did hear a subsequent amen.

Christopher Y. Clark is publisher of NACD Directorship magazine and Directorship.com.

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.

Jeff Cunningham writes about leadership and business, boards and corporate governance. He is the founder of Directorship magazine and currently serves as managing director and senior advisor to NACD. Previously, he was president of the Internet venture firm CMGI, 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.

This commentary was originally published by the authors as a PDF and sent via email from Weil Gotshal & Manges.

All corporate governance participants—boards, executive officers, shareholders, proxy advisors, regulators and politicians—have both an interest and a role to play in rebuilding trust in the corporations that are the engine of our economy. In our annual reflection, we offer thoughts on how, without the need for regulatory intervention, boards and shareholders can seize the opportunity to rebuild trust and, by doing so, help resolve some of the tensions that are stalling our economic recovery.

Part I – Opportunities for the Board to Rebuild Trust

1. Focus on the long-term. Boards carry out their fiduciary duties in the face of pressures from the market and short-term traders for immediate results, pressures that too often undermine the long-term planning and investment required for a sustainable enterprise. While management must focus on the day-to-day operations of the company, the board has the ability and responsibility to look forward and consider what is in the best interests of the corporation and its shareholders over a time horizon notably longer than the quarter at hand. The board should bring its objectivity and judgment to issues ranging from dividend policy, strategic direction, risk and executive compensation to corporate social responsibility and ethical culture. When coupled with a clearly articulated strategy, the board’s commitment to the long-term should help a company withstand undue short-term pressures. This requires effective disclosure of board decisions and policies and concerted efforts at shareholder relations and communications, both areas where boards often could focus more attention.

2. Redefine board priorities. The part-time nature of director service combined with ever-expanding expectations about the board’s role and increasing regulatory mandates may lead to an unfocused and overly long board agenda. Boards should delegate to board committees, corporate management and advisors those matters that do not require the attention of the full board so that the board can focus on key priorities. Defining board priorities is the board’s task, one that should be undertaken in an informed manner with advice from management and counsel but not be delegated to them. We suggest that boards consider an 80/20 rule: Approximately 80 percent of board time should be spent on those issues that are reserved by law to the board, that will benefit from the exercise of fiduciary judgment or as to which management has inherent conflicts, such as corporate strategy and the major risks to that strategy, material transactions, management performance and succession, and executive compensation. The board should also reserve “quality time” for matters of its own performance and composition. This is a simplified list and of course every board will need to work it out based on its own challenges and characteristics, but the key is to maintain significant time for the significant and difficult issues. Leading the effort of redefining board priorities and ensuring sufficient agenda time for priority matters are roles for the board’s independent leader – either a separate independent chair or a lead director. We note that the number of companies with separate independent chairs is continuing to rise, and it is now well-accepted that public companies should either have an independent chair or have a lead director with a role that is defined to include a number of tasks that would otherwise typically fall to a board chair.

3.  Apply objectivity and “backbone” to fiduciary judgments. Directors must decide for themselves what is in the best interests of the company. Clearly, management has a view that it will advocate, but the board needs to test the underlying assumptions and come to its own conclusion. While undue deference to management is not appropriate, neither is abdication of fiduciary decisions to shareholders. Fiduciary decision-making cannot be abdicated, even if a majority of shareholders have a definite preference on an issue. This may pose challenges when significant shareholders have strongly held views, or when a proxy advisor takes a stance and in effect serves to coordinate support for that stance among its client shareholders. The bottom line is that directors need to be willing to do what they believe is right, even if doing so jeopardizes re-election.

4. Listen to and communicate with (“engage”) shareholders. Success in withstanding pressures for actions that the board does not believe are in the company’s best interest depends on the board’s ability to communicate effectively with shareholders. The starting point is knowing who your significant shareholders are and what concerns them. (It helps to maintain open channels of communication with the persons who have voting and investing authority, and these roles are often split in large institutional investors.)

Encouraging feedback generates goodwill and can elicit good ideas. Obtaining a preview of concerns also provides opportunity to avoid acrimony by working through issues in advance. Directors should listen hard to what shareholders have to say and consider any disconnects between the views of shareholders and the board, for example, where a management proposal or a director receives a negative (or not overwhelmingly positive) vote at the annual meeting. Boards should work with management to ensure that board decisions are adequately explained to investors, regulators and other users of corporate information. Disclosure documents should be reviewed with a critical eye towards enhancing understandability and slashing boilerplate. Communication with shareholders(and employees) will become even more critical once the SEC adopts new disclosure requirements relating to internal pay equity and pay-for-performance as required by the Dodd-Frank Act of 2010.

5. Be self-critical. If shareholders are to give boards the time and space to take the long view, and generally defer to and support their judgments, they need assurance that boards will bring objectivity and backbone to judgments about the board’s own effectiveness. Re-nomination decisions need to be based on an active assessment of director performance and whether the director continues to be a strong fit. All directors need to have skill sets that continue to be not only relevant but necessary to the evolving direction of the company’s business and be engaged in board and committee activities at a high level.

Board “refreshment” mechanisms such as age limits and term limits should be carefully considered. While they can help to assure compositional change, they are imperfect substitutes for active assessment of individual performance, and they may set an inappropriate expectation of long tenure. Similarly, the annual self-evaluation of the board and its committees provides an opportunity for reflection about areas for improvement. This should not be allowed to become a rote exercise. Consider changing up the methodology from time to time, for example, by every several years taking a deeper dive through an interview method rather than relying on paper questionnaires. No matter what method is used to gather viewpoints from directors, every year the evaluation should result in a focused board discussion of areas for improvement.

6. Pay special attention to “hot button” issues. Boards should make decisions about “hot button” issues in the best interests of the company and persuasively communicate the reasons for those decisions. Proactively discuss any anticipated negative feedback from the proxy advisory firms on relevant issues. The issues requiring special attention will depend on the company, but for most companies will include strategic direction, risk oversight, executive compensation, proxy access, board composition, succession, board leadership, political contributions disclosure, corporate social responsibility and structural defenses.

• Corporate Responsibility. The 2012 presidential election year is likely to bring heightened attention to issues related to corporate responsibility generally and to corporate political power in particular. In 2011, both the number of social and environmental proposals brought by shareholders and the support for these proposals increased. Boards should be prepared for particular scrutiny of their oversight of corporate political spending and should be sensitive to that issue. In addition to calls for greater disclosure of board policies and decisions with respect to political spending, boards should expect calls for greater disclosure regarding corporate impact on natural resources, with an emphasis on water and air quality and supply chain sustainability. Boards should ensure that these topics receive appropriate attention on the board agenda and should keep tabs generally on public sentiment as it relates to the company and issues of corporate responsibility generally. This is an area where the board may be particularly well positioned to assess the general environment and advise management.
• Executive Compensation. Say on pay acted as a “release valve” allowing shareholders to let off steam in 2011, resulting in fewer “withhold” and “against” campaigns targeting individual directors in elections. It will still be high on the shareholder agenda in 2012. To bolster support in the coming year, boards and compensation committees should recognize that many shareholders are looking for them to demonstrate restraint. Expect pay for performance to continue as the primary factor in obtaining shareholder approval, with shareholder sensitivity to pay levels relative to peers and pay increases out of proportion to performance trends. Consider the shareholder perspective on (and public perception of) the company’s executive compensation program and related disclosures, including, how the program matches up the new ISS guidelines (given its influence). Don’t just read a final draft of the proxy statement – advocate early that it explain the company’s compensation philosophy, and the alignment between pay and performance in clear and understandable terms. Finally, be willing and available to follow-up with key shareholders to discuss the board’s approach to say on pay. Boards of companies that failed to receive a majority vote in favor of executive compensation or received a high proportion of negative votes (even though receiving a majority vote in favor) should identify the primary shareholder concerns and take a hard look at whether changes are called for, based on fiduciary judgment.
• Majority Voting. Boards should expect a concerted effort from shareholders to extend majority voting to the remainder of the S&P 500 and beyond to the next tier of companies in 2012. Boards at companies that have not yet adopted a majority voting standard, or a director resignation policy in the event a director fails to receive a majority of the votes, should be prepared to address this issue with shareholders.
• Proxy Access. 2012 is the first year in which shareholders may bring proposals seeking bylaw changes to allow proxy access for shareholder nominations of director candidates in competition with the board’s own nominees. (Any adopted bylaw changes will not be applicable until the next year.). While public pension funds and union funds are expected to bring a relatively focused set of proposals concentrating on high-profile companies that have had significant governance, compliance or performance issues, individual shareholders involved in the U.S. Proxy Exchange (USPX) and the Norwegian Pension Fund Global (NPFG) have already submitted a dozen or more proposals. The non-binding USPX proposals generally ask that the board adopt a bylaw to permit proxy access for director nominees from shareholders that have held continuously for two years percent of the company’s eligible securities and/or any party of 100 shareholders each of whom satisfy the basic SEC Rule 14a-8(b) eligibility standards (holding a $2,000 stake for one year). The NPFG’s proposals are reportedly binding proposals and also have a low threshold, requiring that a shareholder hold a minimum of 1% of company stock for year. Boards should follow developments in this area closely. Maintaining strong relationships with significant shareholders and understanding and, as appropriate, addressing their concerns continues to be the best preparation for a potential proxy access proposal.
• “Vote No” Campaigns. Boards may see an up-tick in the number of campaigns against directors up for re-election. ISS has a fairly long list of circumstances that will cause it to recommend voting against a director in an uncontested election. In addition, “vote no” campaigns may target compensation committee members at companies where shareholders and proxy advisors deem the committee and board unresponsive to the 2011 say on pay vote even where the proposal “passed”. Boards should review ISS’ recently revised policies early to understand where vulnerabilities may lie so that they can take appropriate action, including, if necessary, targeted shareholder outreach.

Part II – Opportunities for Shareholders to Rebuild Trust

1. Focus on the long-term. Shareholders should give the board and management freedom to make decisions over a long-term time horizon. Focusing on the long-term is particularly critical during a downturn. While plowing resources into R&D and other job creation and growth strategies may restrain the bottom line in the near-term, such investments are necessary to reap rewards for the company and its shareholders—and society—later on. Shareholders may need to evaluate their own decision-making structures and ensure that they are not rewarding high-risk behaviors, whether through direct investments or through the monies they invest through other entities.

2. Refine shareholder priorities and reduce “noise.” Boards of public companies are bombarded with a wide array of viewpoints about corporate governance and social and environmental issues. Institutional shareholders should identify the two or three issues (in addition to return on investment) that are most important to them and then clearly and consistently articulate their views. Laundry lists of concerns should be prioritized to ensure that the board can hear and focus on the things that are most important to shareholders. These priorities can also help shareholders to ground their approach to voting analysis (see below).

3. Vote responsibly. With power comes responsibility. Where shareholders do not have the resources to become informed on an issue on a company-specific basis, it makes sense for them to generally defer to the board’s recommendations. We note that many may consider this heresy, but presumably most shareholders have invested in a company because of faith in the direction that the board and management are taking the company. Alternatively, they are investing because the company has been included in an index that the shareholder invests in, deferring to the judgment of others. Deference to board recommendations in most instances would allow shareholders to focus scarce voting analytic resources on companies where a significant performance or other red flag issue is apparent. In such instances, shareholders should apply their resources to becoming well informed prior to voting.

4. Delegate and/or rely on others responsibly. A corollary of the admonition to “vote responsibly” is to delegate or rely on others responsibly. When choosing advisors to assist with voting analysis and recommendations, do so on an informed basis after performing due diligence as to their capabilities. Consider whether they have the resources to provide informed and tailored advice specific to portfolio companies or are unduly reliant on a set of fairly rigid voting guidelines. The more reliant they are on junior seasonal workers who turn over every year, the less likely that they are able to provide rigorous, sophisticated and tailored analysis. If you are having the advisor tailor policies specifically to your specifications, consider using a performance screen and instructing the advisor that so long as the company is performing well and there are no significant red flags (and mere failure to adopt a particular governance policy favored by the advisor shouldn’t count as a red flag), to vote as the board recommends.

5. Speak up, but be willing to listen. Shareholders should share their concerns with boards and should also provide feedback when requested. Shareholders should also be prepared to listen to what boards have to say – communication is a two-way street. Communication can take various forms, from formal meetings conducted in accordance with Regulation FD, to posts on Twitter or other social media tools. Remember in communicating with a board that other shareholders may have different—and even conflicting—views. Also recognize that some means of communicating lack nuance. An example is the up-or-down vote on say on pay resolutions which provides shareholders with an imperfect forum in which to let the board know how it is doing on compensation and, indirectly, on performance generally. Follow up with concrete suggestions and give the board the opportunity to respond. Recognize that it takes time to make significant modifications to a company’s compensation program. Also, remember that while shareholder views about appropriate compensation should be considered, executive compensation is fundamentally the board’s responsibility.

6. Carefully consider private ordering options. Shareholder proposals relating to proxy access—whether by way of precatory resolution or binding bylaw amendment—should include meaningful ownership thresholds and other qualifications to ensure that director elections proceed in an orderly manner and are not hijacked by special interest groups. Proxy access should be viewed as a last-resort mechanism. Engagement with the company’s nominating committee on board composition should always be the preferred course.

Ira M. Millstein is a senior partner at the international law firm Weil, Gotshal & Manges LLP, where, in addition to practicing in the areas of government regulation and antitrust law, he has counseled numerous boards on issues of corporate governance. Holly J. Gregory is a partner in corporate governance at Weil, Gotshal.

But the cumulative effect of uncounted governance decisions can be tremendously important. Are boards — and the corporate officers who report to them — focused long-term gains or short-term goals? Are systems in place to allow effective communication between investors and the management and boards of the companies in which they share an interest? Do shareholders have effective mechanisms to ensure that their voices are heard and their opinions are considered? Do boards respond in a thoughtful and comprehensive manner? And is the disclosure that companies provide to shareholders and potential investors sufficient — especially in terms of risk management?

This commentary is an excerpt of SEC Chairman Mary Schapiro’s remarks at the Transatlantic Corporate Governance Dialogue.

In short, are shareholders and boards, along with management, sufficiently engaged to ensure a quality of corporate governance commensurate with the demands of managing a public company?

When the answer to this question is, “yes,” we believe that economies broadly benefit as well-run companies flourish and grow, and that investors in particular benefit from quality information and insight into management’s priorities, allowing investors to balance risks and to allocate their capital accordingly.

Effective engagement is a strong positive. But, in attempting to foster effective engagement we face a challenge: the definition of “effective engagement” is imprecise. In fact, the definition of effective engagement can vary significantly from company to company, as investors and boards interact in very different ways, but achieve similarly positive financial results and equally satisfying relationships between shareholders and boards.

There is no exact formula. I do, believe, however, that engagement lies at the crossroads of communication and responsiveness. And that, as a regulator, my goal should be not to detail the type of communication or the level of responsiveness, but to put in place structures that encourage governance practices characterized by these attributes.

Accurate disclosure of material financial information is, of course, a first principle of this type of regulation. And here, we do not shy away from detailed disclosure requirements.

But engagement is more than disclosure. Shareholders should have a voice and a straightforward and transparent process for engaging with companies on issues that are important to them. Shareholders and boards should have clear conversations about how the company is governed — and why and how decisions are made. As a general rule, interested, aware and active shareholders are good for public companies, and I believe that more shareholder engagement is better.

But here, detailed prescriptions are more difficult to write.

And so, as regulators, we do not see our role as quantifying “appropriate” levels of engagement or laying out precise steps to reaching it. The SEC is not interested in determining the communications strategies of individual companies.

What we are interested in is breaking down barriers that may prevent effective engagement, impact investor confidence and, ultimately, diminish financial performance to the detriment of shareholders.

As a regulator and as a former board member, I believe that it is vital that shareholders and board members become more engaged in the shared pursuit of high quality governance. And, as chairman of the U.S. Securities and Exchange Commission, I have made crafting a regulatory framework that facilitates effective engagement a priority.

As you already know, we are moving toward a framework in which investors have better information, qualitatively and quantitatively, and more effective ways of expressing their reaction to the information that is disclosed.

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 writes about leadership and business, boards and corporate governance. He is the founder of Directorship Magazine and currently serves as managing director and senior advisor to NACD. Previously, he was president of internet venture firm, CMGI, publisher of Forbes Magazine, 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.

Chris Clark

Chris Clark: In general, where do retiring partners of accounting firms rank amongst all board candidates in terms of priority/desirability?

Arun Dhingra, Co-leader, U.S. CFO practice, Egon Zehnder International: When seeking board candidates, nominating committees consider a mix of factors. Given the expanded responsibilities of audit committees, retired accounting firm partners, with their financial expertise, are much sought after. Combine that with vertical industry experience and they are highly desirable board candidates.

Clark: Does the demand differ greatly when looking at a Big Four firm partner versus non-Big Four partner?

Dhingra: While Big Four partners may have greater name recognition, when it comes down to it, it’s really the expertise and the clients served that are most seriously considered by the nominating committee.

Clark: In either case, what qualities or career achievements would put an accounting firm partner significantly ahead of his/her peers?

Dhingra: Personal reputation in the market always comes first. Then it’s finding the right match between what a particular board is seeking in experience and skills and what an individual candidate has to offer. But some big accounting firm partners, who have honed their expertise on accounting committees, such as the FASB, may be even more desirable as candidates for the audit committee.

To learn more about becoming a better director candidate, take NACD’s multimedia How to Be(come) A Director course.

Clark: Do you believe writing articles for well-known media platforms, networking at director conferences, contacting a major recruiting firm, or directly approaching chief executives and directors within one’s own network is most effective in their quest to become a public company director?

Dhingra: Making one’s name known in the marketplace can certainly help but, at the end of the day, it’s the specific skills sets that will both get the attention of the nominating committee and make one an effective director.

In turn, I posed the same basic questions to Nels Olson, vice chairman and co-leader, Board & CEO Services, Korn Ferry International…and his answers differ a bit from those of his peers.

Olson: Accountants have a unique skillset that gives them unprecedented access to multiple aspects of the workings of a public company’s board – including regulatory issues, governance, risk and strategy. Generally, the most desirable candidates from the accounting firms tend to be among the top four or five senior partners at a firm. These senior professionals usually have an excellent track record and board-level experience that is invaluable for board effectiveness. And, of course, SEC regulations require that the chairman of the Audit Committee have accounting or related financial management expertise. At least one member of the audit committee is expected to be an “audit committee financial expert” as defined by the Commission. So, it makes sense when you look at the leading multinational public companies that the majority have at least one accountant on the board.

Partners from the larger accounting firms are more desirable candidates for board positions because they typically have a high level of visibility with boards through their work and have likely worked with multinational companies, directly with the most senior executives in many cases. The Big Four partners are also more likely to have international business experience – an area of experience that many public company boards now consider critical.

The key areas to develop in order to enhance the chances of successfully being recruited for a board position are practical experience and developing a strong network of contacts. Ultimately, boards are looking for new directors who are, a) proven in a given sector with experience of the latest issues, and, b) familiar with the company, its history of decision-making and strategy and its particular governance and risk issues. Other qualities include experience of working with large, multinational companies on critical issues, such as governance, risk and strategy; and specific sector expertise.

Yes, it is essential that an accounting partner employ as many of these tactics as possible in order to introduce his or her skills to a broader universe potential public company board directors. Accountants have a significant advantage in preparing for a directorship position, when compared to other professionals, in that they have a mandatory retirement age of 62. This allows them to hone their profile and skills in the run up to retirement and then join boards at a relatively young age – which can be very desirable for some companies.

Thought leadership positioning is an effective way to showcase a candidate’s point of view on critical board-related issues and display an understanding of the current business tactics related to public company accounting. Developing one’s own network of supporters and advocates is as vital as ever. Boards still to this day first ask their own contacts for recommendations for board members before casting a wider net. By leveraging relationships with industry-specific publications and general business publications – accounting partners can “manage their brand” as it relates to their expertise. A well-written article can serve as a calling card that could open doors to future opportunities. Working with a leading recruiting firm will help broaden a candidate’s universe of opportunities and also provides consulting services, such as leadership assessment and training, which can help candidates recognize their value and understand where their skills will be best served.

Successful board members are the ones that can advise on the regulatory issues and other risk factors critical to business operations. In an ever-changing business environment, it is important that accounting partners have broad experience of the issues affecting the marketplace – whether it’s regulatory or governance issues, risk management or strategy development. Developing these skills with existing clients is a useful exercise.

And finally, seeking board positions on non-conflicting organizations such as non-profits, alumni associations at prestigious business schools, can all help gain valuable board-related experience prior to retirement, as well as building a network of other directors.

Last, but certainly not least, Michele Heid, managing partner at Heidrick & Struggles, cuts to the chase.

Heid: When it comes to securing financial expertise, boards can examine several routes. Certainly one path to securing a board member with strong financial fundamentals and acumen is to seek a retired accounting partner. However, if the company seeking a board member is audited by the same public accounting firm where this individual retired, this individual must have had a three year hiatus to be considered independent.

In general, there is a slight preference to those from a Big Four firm due to exposure and size of their client base and the experience gained from that. If the partner comes from a large regional firm, they would have some of same experience. However, Big Four experience generally provides more specialization with regard to industry, as opposed to a generalist coming from a non Big 4 background. Someone with this in-depth knowledge of industry provides more perspective and is considered more desirable.

With regard to qualities, certainly, leadership and integrity are a given. Beyond that, with regard to career achievements, I would say a couple of things. One is they have managed some of the large, global accounts so have had exposure to the boards of those companies, as well as significant exposure to the senior management team. Also, any experiences where they have been involved beyond just audit advisory services is heavily considered. Experience with M&A, deal structuring, and exposure to capital market transactions bring a perspective beyond just a pure advisory audit partner.

Networking obviously makes it known that you would like to join a board. Most board searches are initiated by the Nominating and Governance Committee, so familiarity with existing board members is helpful. In addition, all major recruiting firms, including Heidrick & Struggles, have a board practice, so connecting through those contacts is also useful.

Staying active, even if retired from a public accounting firm. Make sure you are current on the regulations and up-to-date on your field of expertise. With regulations constantly changing, a retired partner needs to remain current to add the value a board seeks.

Well, there you have it. Personal reputation, sector expertise, and multinational company/global experience are the key threads.

Good luck my friends, stay hungry for that first directorship.