At the same time, however, there’s another story beneath the headlines: For most managers, dealing with complexity has become an ongoing, day-to-day challenge: keeping up with constant e-mails, attending innumerable meetings, connecting with the right people across the matrix to make decisions, coordinating processes across cultures and time zones. It’s exhausting, and many managers are frustrated, overwhelmed, and worried that they might unintentionally be creating the next Lehman.

But it doesn’t have to be this way. While some of the complexity that managers experience comes from globalization and new technologies, a large portion is of their own making. If we want to prevent the next Lehman, and if we want companies to be more successful and managers to be more energized and innovative, then directors have a responsibility to insist that simplification be part of the executive agenda.

Four Sources of Complexity
Nobody gets up in the morning with the intention of making the organization more complex. Rather, like weeds in the garden, complexity continually insinuates itself into the fabric of a company in four principle ways: through changing structures and reporting relationships; through product design and proliferation; through the evolution of work processes; and through unconscious managerial behaviors. Directors need to challenge executives to address each of these sources of complexity, both individually and in combination. Here are some brief descriptions of these complexity-creators and a few ways that directors might work with their executive leaders to counter them:

Structural complexity: Organizational structures are like biological organisms in which cells continuously grow, split, and reform. Reorganizations don’t happen alone, but rather are initiated by executives to align people by function, product, geography, business unit, customer, or some other factor in an attempt to be as competitive and efficient as possible. At the same time, managers add or combine units due to acquisitions or internal growth; and they add or subtract layers based on people’s capabilities and their beliefs about how many people should report to any one manager. The result of all this seismic structural activity is that many organizations end up being fragmented, sprawling, and confusing, without a clear logic to how things were put together—leading to unnecessary costs, poor communications, and the danger that high-risk or poorly performing units get lost in the maze. For example, AIG’s structural complexity was one factor that allowed a small, under-the-radar unit to operate in a way that almost destroyed the company.

To counter this type of complexity, directors should ask executives questions such as:

• How does the structure of the company directly support and advance the business strategy?
• Can most employees explain the logic of how the company is organized?
• How many levels of management are there between the CEO and first line supervisors?

Product complexity: Products and services are the lifeblood of any organization, and managers are constantly looking for new ways to satisfy and delight customers. Unfortunately, it is much easier to add new products than to subtract—so most companies end up with vast portfolios of products and services that are costly to maintain, control, update, support, and sell. In addition, many product developers focus on the technical elegance of their products without worrying about whether their customers, or their own internal colleagues, truly understand how they work and what will happen to them over time. This kind of complexity was clearly at play in the financial crisis, as investment banking wizards created collateralized debt obligations (CDOs) and other arcane securitized products that neither customers nor their own risk managers fully understood—until it was too late.

To counter product complexity, directors should ask for thorough reviews of new products and services to make sure executives fully understand how they work and the risks involved. In addition, directors should make sure that managers are reviewing the entire product portfolio with an eye towards sunsetting and retiring products as appropriate.

Process complexity: Most work in organizations is done through processes. Sometimes these are highly structured and disciplined, such as with manufacturing activities. At other times, the processes are loose and ad hoc. However, no matter how much rigor and six sigma-type efforts managers put into process management, the processes continually evolve and change as new people get involved, new issues emerge, and new ideas are introduced. Changing organizational arrangements and new product requirements further complicate processes, often making it difficult for people to understand how things really get done. The result is that companies often find themselves with convoluted decision-making, multiple committees, un-ending budgeting and planning cycles, and general lack of control. For example, many of the problematic financial institutions in the past year found themselves with fragmented and inadequate risk management and forecasting processes that left them unprepared for the downturn.

To counter process complexity, directors should first agree on the key processes that are most critically in need of being controlled and disciplined (such as risk management, new product commercialization, or succession planning). They then need to periodically ask executives to walk through the “map” of these processes to make sure that the right controls are in place, that roles are clear, and that cycle times are appropriate.

Managerial complexity: In addition to structures, products, and processes, managers also cause complexity through their own ways of directing and leading organizations. Particularly in dynamic environments, when processes and structures don’t provide clear guidance, managers create the neural networks that give people direction about what to do and how to do it. When managers are clear with their instructions, they can actually reduce complexity. But when managers unintentionally give nebulous assignments, open-ended deadlines, conflicting instructions, mixed messages, and foster fuzzy accountability, they create enormous amounts of additional complexity and confusion. For example, leading up to and during the financial crisis, executives at many of the financial firms gave their people extremely mixed messages about continuing or stopping product transactions, were unclear about what data was needed for decisions, and rewarded people for poor performance.

It is impossible to counter managerially-generated complexity completely, since much of it is unconscious and unintentional. But directors can hold a mirror up to their executive leaders to help them make their own assessments about the clarity of their directions, the crispness of their decision processes, and the discipline applied to getting things done. In addition, directors can make sure that executive compensation plans are simple, straightforward, and geared to rewarding the right strategic actions over time versus only short-term performance. Finally, directors can insist that succession plans take into account the ability of managers to simplify their organizations.

Simplification as a Business Imperative
Almost every company quite naturally focuses most of its attention on growth, particularly in today’s highly competitive environment, adding more products, services, geographic locations, and employees. But what companies don’t do very well—unless they are forced by an economic or competitive crisis—is prune these growth shoots. Managers don’t like to say “no” or make choices, especially when they are trying to respond to customer needs, beat their competitors, and satisfy shareholder expectations. So, instead, managers keep adding more plants and fertilizer to the garden and end up with a tangled jungle. But to maintain healthy organizations, managers and executives need to constantly prune while simultaneously fostering growth, without waiting for a crisis to force the issue.

The crisis of the past year forced almost every company to cut back, perhaps faster and more deeply than anyone would have preferred. But as the crisis passes, and companies move back into growth mode, it will be easy to slip back into old patterns as the lessons of Lehman and the pain of the financial downturn fade away. One way to prevent this from happening is for directors to insist that simplification become an ongoing business imperative for their companies, such that executives keep a focus on simplification not only in bad times, but in good times as well.

Ron Ashkenas is a managing partner of Robert H. Schaffer & Associates, a Stamford, Conn., consulting firm and the author of the forthcoming book “Simply Effective: How to Cut Through Complexity in Your Organization and Get Things Done” (Harvard Business Press, December 2009). He can be reached at ron@rhsa.com.

“I am shocked that in this time of extreme financial crisis for the bank that you would spend the time and legal expenses to challenge a resolution of this sort when the bank could simply ask the proponent to withdraw in light of the fact that you were now implementing the advisory vote,” wrote Tim Smith of Walden Asset Management in a letter to BofA executives. Walden was behind one of the say-on-pay proxy initiatives. “Is this a sign that bank executives don’t even know how to have a simple conversation with their shareowners to work out a basic agreement?” he scathed.

The BofA case highlights a well-known fact in the relationship between boards and shareholders: what we have here is a failure to communicate. The financial crisis and swooning stock market have heightened investors’ hunger for more information on corporate governance issues. Frustrated shareholders unsatisfied with structures in place for executive compensation, CEO succession planning, board nominations, and other hotly debated governance issues, are calling for a forum to voice their concerns directly to the board. “The collapse of the economic system has everyone talking about corporate governance… boards need to have a rational dialogue with shareholders,” says Stephen Brown, director and associate general counsel of corporate governance at TIAA-CREF.

Currently, the majority of boards do not have an open forum in which both sides are receptive and willing to meet to hear the other side’s concerns. Proxy resolutions, viewed today by some activists as a way to “knock on the door” of boardrooms, could instead become a last resort should changes be made in how investors and directors communicate with one another.

The news is not all bad. According to a recent survey by Spencer Stuart, data collected over the past 10 years from proxy reports filed by S&P 500 companies and surveys of corporate secretaries and general counsels found that 45 percent of respondents reach out to shareholders in some way. However, despite this number, only recently has progress been made toward regular dialogue that seeks to find middle ground between boards and investors. Pfizer was something of a test case in 2007, when it planned a meeting with large shareholders to discuss governance issues. Last summer, UnitedHealthcare Group created an advisory committee to allow shareholders to suggest new directors. PepsiCo signed a broad set of governance guidelines last June known as the Aspen Principle, which includes a promise to facilitate more communication with their shareholders. The boards of Home Depot, Hewlett-Packard, and Northrop Grumman have held dialogues with shareholders on compensation issues or even to discuss board nominees.

The Reg FD Effect

These companies are still the exception rather than the rule. Over the last several years, major changes have occurred that have curtailed the amount of information disclosed to investor groups. Barry Genkin, partner at Blank Rome, who has advised CEOs, boards, and audit and compensation committees in proxy battles, believes a lot of the unrest began when regulation prevented the amount of information companies made public, known as Regulation Fair Disclosure or Reg FD. “Companies used to meet with analysts and those analysts would write up reports,” says Genkin. “After new regulations intended to prevent ‘selective disclosure,’ companies were limited to only information they could place in an 8-K or press release.” Instead of working out other ways to inform investors, companies simply sent out less information, he says.

Edward E. Lawler III, a professor at the University of Southern California Marshall School of Business and founder and director of the University’s Center for Effective Organizations, believes that the SEC’s more recent efforts to push companies for more disclosure has backfired. “In a failed effort by former SEC chairman Christopher Cox, who pushed for more disclosure—what he got was more paper,” argues Lawler. “It backfired. With 30-page proxy statements, I don’t think people became more knowledgeable.”

“Information didn’t dry up,” adds Genkin. “But it wasn’t as robust.” Overall, Genkin agrees that companies have not dealt well with the disclosure requirements to investors. “A constant communication mechanism needs to happen,” says Genkin. “Enlightened companies who are aware of their company’s communication shortcomings need to be very aggressive.”

Some experts think that boards will soon have little choice but to communicate better with large shareholders. “Early on, investors were rebuffed because they were coming from a single direction,” says Patrick McGurn, special counsel at proxy advisory firm RiskMetrics Group’s ISS governance services unit. “Investors were reaching out and directors did not reach back.” McGurn emphasizes that the old way of communication is being absolved. He advises boards to open the door to large investors, and he says progress is being made, with some boards more actively connecting with their largest shareholders and telling them the changes their board is looking to make. “[Directors] want to stop any backlash that might happen when such information is actually disclosed in a proxy statement,” says McGurn. Establishing an open line of communication could help directors and investors avoid lengthy and costly proxy battles later on.

Last year, the National Association of Corporate Directors assembled a blue-ribbon commission on board and shareholder communications. Among its many recommendations was that the governance committee should have oversight of board and shareholder communications and make efforts to ensure that they are open, candid, and productive.

Pfizer’s Breakthrough

The concept of open communications is not new. As far back as 1992, Martin Lipton, a partner at Wachtell, Lipton, Rosen & Katz, and an opponent of “excessive” input by investors, and Harvard Business School professor Jay Lorsch called for the boards of U.S. companies to “meet annually in an informal setting with five to 10 of the larger investors of the company,” according to the paper, Talking Governance: Board-Shareowner Communications on Executive Compensation, co-authored by Stephen Alogna of Deloitte & Touche and Stephen Davis, project director at the Millstein Center at the Yale School of Management and the founding editor of Global Proxy Watch.

“The collapse of the economic system has everyone talking about corporate governance…boards need to have a rational dialogue with shareholders.

- Stephen Brown, TIAA-CREF

“It’s still a very slow and very rare process in the United States for boards to open up dialogue,” says Davis. “The investor relations function tends only to get investors to buy shares when pushing out information, but a two-way dialogue is what is needed.”

An important step toward opening the lines of communication occurred in 2007, when pharmaceutical giant Pfizer’s board decided to plan a meeting with larger shareholders for the sole reason of discussing governance issues. “When it comes to finding channels and pioneering ways of opening dialogue, Pfizer is a good example,” says Davis. Pfizer’s board met with 30 of its largest investors and took questions from them on corporate governance issues. “This is not about strategy, and it’s not about a dog-and-pony show,” Margaret “Peggy” Foran, former senior vice president of corporate governance, associate general counsel, and corporate secretary of Pfizer, said at the time. “[The board] just wants to gather as much information as possible to make the best decisions. I never thought of listening as a dangerous sport.”

Foran, now vice president, general counsel, and corporate secretary of Sara Lee, believes that eventually Sara Lee will follow the example set by Pfizer. She believes informal “listening exercises” involving large investors, lead directors, the CEO, and executives like herself, can lead to an official meeting, such as Pfizer’s. With many issues investors are seeking to address, boards realize that shareholder groups are diverse—and not everyone is going to leave the table happy.

Pfizer director Suzanne Nora Johnson agrees that creating a dialogue can be a positive step in building trust between boards and stakeholders. Yet, she says, the board serves a broad range of sometimes competing stakeholder interests, and it cannot select the ideals of a few at the expense of the many. “There are many different types of stakeholders,” says Nora Johnson. “You have to listen carefully and best evaluate whether the stakeholder has both short-term and long-term interests.” Since the 2007 meeting, the Pfizer board has not met again with shareholders apart from the annual general meeting, scheduled for April. But Nora Johnson says the board found the experience to be beneficial and says it will hold similar meetings again in the future, either annually or biennially.

“I think you will see a lot more informal [meetings between shareholders and directors],” says Foran. “For the past five or six years, boards have gotten more involved, with the help of shareholder proponents like RiskMetrics.” Moreover, Foran says, it’s becoming noticeably routine that all board members are attending annual meetings rather than only a select few.

Yet some directors do not agree that such meetings can be productive. Ashok Shah, a director at Sapient, a technology consultancy, thinks that opening the lines between directors and shareholders could create static. “I believe strongly that the relationship with the shareholder should be with one body in the company,” he says. “Today it’s mostly the CEO and the management team, and having that one relationship with the shareholder is the most productive and healthy method, rather than introducing one more conversation with the board. Otherwise, you have two teams talking with shareholders, which could lead to confusion and contradiction.”

J. Thomas Presby, a director who serves on multiple boards, including American Eagle Outfitters and Tiffany & Co., isn’t sure if greater communication is the answer. “At this moment, I’m not persuaded. I’ve attended a lot of annual meetings; most are orderly, and there are some but not a lot of questions. No one has stood up and said they need more communication,” he says.

To be sure, shareholders are a varied lot, often equipped with competing agendas and different views on governance. Genkin warns of the shareholder wolves in sheep’s clothes—the investor who is only interested in short-term performance. From his experience, there are shareholders out there looking to pursue their own aims under the guise of everyone’s interest. He notes that boards can hone in on who is legitimately concerned with the company’s long-term well-being and those looking for fast returns. Careful listening is required. “I’ve had activist shareholders approach boards saying ‘we’re your friends,’ while offering views that could be useful to the board,” says Genkin. “Some of the ideas of activist shareholders have become beneficial to the company and it becomes a win-win.”

Good Listeners

Many directors are warming up to the idea of establishing better communications with investor groups. Last fall, Bonnie Hill, a director at Home Depot, told a gathering of directors at an NACD conference: “Directors are accountable to—and should be responsive to—shareholders.” She said it should be the lead director or committee chairs who meets with large shareholders and that the talks should be structured and well planned. “The chairman or CEO should be the first point of contact. Then I think there are directors who might be clearly involved, such as the chair of the compensation committee. But it’s important to identify in the boardroom what kind of communication will take place—and who will do what.”

Some directors say that any outreach should be more of a listening exercise for boards than engaging in a back-and-forth dialogue. “It would certainly benefit the company if there were a more open line of communication between shareholders and directors,” says Charles “Randy” Whitchurch, a director at SPSS and Scan Source. “But this should be more of a one-way conversation, the board ought to be hearing the shareholders. I do not think the board should be the voice of the company speaking to shareholders; that’s the role of management. I think the danger of having a conversation is that it will become more of a two-way debate. Directors aren’t always as tuned into what the company’s message is. You run the risk of directors going off message…having been a CFO of a public company for 17 years, it was very important that we followed clear protocols on who and how we communicated with shareholders.”

Thomas C. Wajnert, lead director at Reynolds American, agrees that the focus should be on gathering feedback from shareholders. “Yes, they should be communicating, but I think it should be in the context of listening,” he says. “I think where the board has to draw the line is engaging in a debate—the board needs to be in listening mode.” Governance Road Show Opening the lines of communication means going beyond a telephone call or email. TIAA-CREF’s Brown suggests a “governance road show,” where a combination of general counsels, corporate secretaries, and lead directors, go out to meet with their investors. The hope is that relations will improve and become more accessible if investors know senior leaders in the company are interested in their concerns. “One firm we work with sends its general counsel to make the rounds with its large investors,” says Brown. “The feeling on our side is: we have access and feel as comfortable picking up the phone as he does.”

“I think the dangers of having a coversation is that it will become more of a debate. Directors aren’t always as tuned into what the company’s message is. You run the risk of directors going off message.”

- Charles “Randy” Whitchurch

Boards are expected to enact a more proactive role in listening to issues concerning shareholders. Experts believe that boards who refuse to adjust their communications strategy risk repercussions during proxy season. “The boards who are worried [about lack of communication with shareholders] are who should be least worried,” says Nell Minow, editor and co-founder of The Corporate Library. “Those who aren’t worried…they’re in trouble.” Minow advises that boards be open to more frequent dialogue, even if that means overhauling the way business is done.

Once the doors to dialogue are opened, rather than a lot of “babbling,” says Foran, it is better to seize the opportunity and narrow the criteria. “Shareholders should use the dialogue constructively— not micromanage,” she warns. “If boards allow shareholders to use the opportunity to talk as a weapon, boards are not using their fiduciary duty in the correct way.” Foran believes that in most cases, investors are trying to learn and understand—not attack. She notes some companies are initiating dialogues before a crisis rather than fending off shareholders made angrier because they feel ignored.

There may be another reason to for boards to seek more open communications with shareholders: majority voting. Some experts think that shareholders may withhold votes for directors who they perceive to be unopen to hearing their concerns. “There is a carrot and stick equation with communicating—with majority voting being the stick,” says McGurn. “If companies don’t dialogue when they’re approached by investors, they’ll see some effort to withhold or vote against.” If that begins to happen, some directors may be putting their largest shareholders on speed dial.

Quick, can you answer the following five key questions? Of course you will face many pointed questions over the next months, but these five may be most critical in establishing your credibility:

1. Who are your top five shareholders?

2. How do shareholders view the company vis-à-vis the competition?

3. Can you explain the company’s strategy in a sentence or a paragraph?

4. How well is management executing on the strategy? That is, how do you know, point by point, that management is creating long-term value for shareholders?

5. Can you explain the executive compensation program and why it is shareholder friendly?

Now more than ever, boards must convey how their work contributes to the strength and soundness of the enterprises they oversee. Consider that scrutiny of boards is on the rise as taxpayers have essentially become phantom shareholders through the public bailout of the private sector. Unlike shareholders who may be more educated about the role of the board of directors, the public at large may not understand the function—and value—of the governance role. How do boards of directors build trust in this era of greater accountability?

Increasingly, boards will utilize communication as an effective, strategic tool to build credibility and engage shareholders. Directors, however, must be prepared and educated on this front. As the season of annual meetings approaches, there is no time to delay. The shareholder meeting is a tremendous opportunity to transform what has long been a sparsely-attended pageant into a ripe opportunity to connect with shareholders.

Six Steps to Build Trust and Engagement with Shareholders

1. Don’t Wait—Act Now (Build a Strategic Communication Policy)
The best practices endorsed by the National Association of Corporate Directors (NACD) and the Business Roundtable offer a template for boards to develop their own communication policy. There is no one-size that fits all. Rather, each board will want to establish its own guidelines. At the same time, developing the right message is highly situational: Is it business as usual, a major transaction or a crisis? By dividing communication into those three general buckets, boards can begin to coalesce their thinking.

By past practice and history, boards have not been externally focused. In fact, they have operated very quietly and below the public radar. Yet the financial failures of the past year have caused shareholders—and even now, the general public—to investigate how boards add value and whether they have remained true to their stated directives. Boards will find that education is a key element of communication, letting shareholders know what boards do—provide oversight—and do not do, namely manage the company. Nor should boards confuse communication with public relations. Boards are unlikely to ever undertake a PR campaign, but any board policy will acknowledge the current state of the external world. A board with a strategic communication policy can use transparency and communication as effective risk management tools. Conversely, a board with its head in the sand pretending that no one is looking is courting disaster or shareholder mistrust.

2. Engage an Independent Communication Advisor
Communication is not a primary board function. Over the years, most board communication has been informal, ad hoc and likely provided by the company staff. The world has changed. It is important for boards to have an objective outsider to help them craft a policy to anticipate and avoid crises, and to protect the company’s brand. CEOs have come to see that a strong board enhances the leadership position and serves as an extension of the company’s reputation. With each passing year, business success and sustainability have become increasingly dependent on reputation as word of mouth and third-party endorsements take on greater importance.

While legal counsel generally advises board clients to limit disclosure, the court of public opinion has changed the rules. In the face of shareholder activism, including majority rule and say on pay, boards face a host of very public issues. Whether it’s a change in leadership, compensation issues or managing disclosure issues about the CEO’s health, boards that have a written communication policy about how and what communication will take place are better equipped to navigate the waters more easily and with better results.

An independent communication counsel can help facilitate the board’s adoption of guidelines to shareholders on the communication process and appropriate topics. Guidelines should also distinguish between management communication versus board communication.

Hiring board-level communications counsel is not a redundancy. Management’s communication staff, including investor relations, does not speak for the board. A board communication resource separate from management’s ensures the board’s independence while retaining linkages with the company’s values and strategies.

3. Ensure Relevance and Timeliness—Use the Web
Generally, board communication on the web is a static display of governance materials resulting in an impression that all boards are alike. As the financial world melted down in the final quarter of 2008 and continued its decline into early 2009, there was little indication on most board sites that anything dramatic had occurred.

There are a few exceptions. A letter from the chairman and signed by the members of the Tellabs board begins, “Dear Fellow Shareholders, In a year in which we collectively have experienced the largest financial shock since the Great Depression, shareholders have naturally focused on the governance and management of the companies in which they invest. Tellabs has a talented management team, a sound strategy, and the discipline to execute in a market that continues to grow and change…” Tellabs’ statement was among only a small handful of board-level communications willing to address the current crisis clearly and honestly.

4. Use the Compensation Discussion and Analysis (CD&A) to Convey a Shareholder-Friendly Philosophy

The Security and Exchange Commission mandated that public companies thoroughly explain their executive compensation practices. In practice, this disclosure is burdened by excessive legalese, complex quantitative models, and difficult-to-follow analysis; all of this serves to confuse rather than clarify the board’s approach to rewarding management. Begin with a one-paragraph description of the compensation philosophy, then use the tools of a journalist—table of contents, headlines, bullets, summaries and callouts—to provide the details. These narratives must be written for your shareholders at a level that assumes some baseline knowledge of the financial markets and business practices—but definitely not written expressly for the SEC professional. While the document satisfies an SEC requirement, it should be targeted to an educated layperson.

5. Communicate to All Shareholders the Path of Shareholder Petitions
Even shareholders who are not involved in a specific shareholder petition should know and understand the process of making suggestions to the board and how the company responds.Shareholders are not a monolithic group but rather represent many points of view. Nor should shareholders be encouraged to believe that they can micromanage the company. The board should take shareholder suggestions into consideration, but ultimately board oversight is not a democracy. Boards are called upon to be stewards, to bring their experience and business judgment to their role.

6. Make This Year’s Annual Meeting an Effective Platform for Communication

Take a page from Warren Buffett’s playbook. No, it will not require renting the Qwest Center to prepare for 31,000 shareholders or answer questions for six hours, but directors should use the meeting as an opportunity for stronger shareholder engagement. Many boards are finding value in interacting with key shareholders on a quarterly basis—whether through a phone call after the earnings call or other related tactics. It is clear the journey back to a 14,000 Dow and historic share prices will be a long one, and keeping shareholders invested in the company’s strategy and plans has value.

After operating behind closed doors for so long, boards may find no better time than the annual meeting to share its communication policy with shareholders. The most important act for board members may be listening. With advance preparation, board members—particularly the lead director or chairman as well as chairs of the audit, compensation and nominating committee—should be available to take questions.

Webcasting the proceedings also increases transparency and inclusion. Posting the webcast on the website adds tremendous value and signals a move to greater openness.

Transparency and communication serve as risk mitigation strategies for the company and the board. It’s an opportunity of limited duration. Smart directors will take the lead in acting now.

Karen Kane was formerly the Senior Vice President of Corporate Affairs and Board Secretary for the Federal Reserve Bank of Chicago and served as communication officer for the bank and the Federal Reserve System. Her firm, Karen Kane Consulting, specializes in providing independent communication counsel to corporate boards.

In these volatile times, how do you—as a companydirector—convey your competence in understanding the business before you, whilealso showing an appreciation for the gravity of your governance responsibility?A critical group of shareholders and a skeptical public are watching.

Quick, Mr. or Ms. Director, can you answer five keyquestions? Of course you will face many pointed questions over the next months,but these five may be most critical in establishing your credibility:

1. Who are your top five shareholders?
2. How do shareholders view the company vis-à-vis the competition?
3. Can you explain the company’s strategy in a sentence or a paragraph?
4. How well is management executing on the strategy? That is, how do you know, point by point, that management is creating long-term value for shareholders?
5. Can you explain the executive compensation program and why it is shareholder friendly?

Now more than ever, boards must convey how their workcontributes to the strength and soundness of the enterprises they oversee.Consider that scrutiny of boards is on the rise as taxpayers have essentiallybecome phantom shareholders through the public bailout of the private sector.Unlike shareholders who may be more educated about the role of the board ofdirectors, the public at large may not understand the function—and value—of thegovernance role. How do boards of directors build trust in this era of greateraccountability?

Increasingly, boards will utilize communication as aneffective, strategic tool to build credibility and engage shareholders.Directors, however, must be prepared and educated on this front. As the seasonof annual meetings approaches, there is no time to delay. The shareholdermeeting is a tremendous opportunity to transform what has long been asparsely-attended pageant into a ripe opportunity to connect with shareholders.

Six Steps to Build Trust and Engagement with Shareholders

1.     Don’t Wait—ActNow (Build a Strategic Communication Policy)

The best practices endorsed by the National Association ofCorporate Directors (NACD) and the Business Roundtable offer a template forboards to develop their own communication policy. There is no one-size thatfits all. Rather, each board will want to establish its own guidelines. At thesame time, developing the right message is highly situational: Is it businessas usual, a major transaction or a crisis? By dividing communication into thosethree general buckets, boards can begin to coalesce their thinking.

By past practice and history, boards have not beenexternally focused. In fact, they have operated very quietly and below thepublic radar. Yet the financial failures of the past year have caused shareholders—andeven now, the general public—to investigate how boards add value and whetherthey have remained true to their stated directives. Boards will find thateducation is a key element of communication, letting shareholders know whatboards do—provide oversight—and do not do, namely manage the company. Norshould boards confuse communication with public relations. Boards are unlikelyto ever undertake a PR campaign, but any board policy will acknowledge thecurrent state of the external world. A board with a strategic communicationpolicy can use transparency and communication as effective risk managementtools. Conversely, a board with its head in the sand pretending that no one islooking is courting disaster or shareholder mistrust.

2.     Engage anIndependent Communication Advisor

Communication is not a primary board function.  Over the years, most board communication hasbeen informal, ad hoc and likely provided by the company staff.  The world has changed.  It is important for boards to have anobjective outsider to help them craft a policy to anticipate and avoid crises,and to protect the company’s brand. CEOs have come to see that a strong boardenhances the leadership position and serves as an extension of the company’sreputation. With each passing year, business success and sustainability havebecome increasingly dependent on reputation as word of mouth and third-partyendorsements take on greater importance.

While legal counsel generally advises board clients to limitdisclosure, the court of public opinion has changed the rules.  In the face of shareholder activism,including majority rule and say on pay, boards face a host of very publicissues. Whether it’s a change in leadership, compensation issues or managingdisclosure issues about the CEO’s health, boards that have a writtencommunication policy about how and what communication will take place arebetter equipped to navigate the waters more easily and with better results.

An independent communication counsel can help facilitate theboard’s adoption of guidelines to shareholders on the communication process andappropriate topics. Guidelines should also distinguish between managementcommunication versus board communication.

Hiring board-level communications counsel is not aredundancy. Management’s communication staff, including investor relations,does not speak for the board.  A boardcommunication resource separate from management’s ensures the board’sindependence while retaining linkages with the company’s values and strategies.

3.      Ensure Relevance and Timeliness—Use the Web

Generally, board communication on the web is a staticdisplay of governance materials resulting in an impression that all boards arealike. As the financial world melted down in the final quarter of 2008 and continuedits decline into early 2009, there was little indication on most board sitesthat anything dramatic had occurred.

There are a few exceptions.

A letter from the chairman and signed by the members of theTellabs board begins, “Dear FellowShareholders, In a year in which we collectively have experienced the largestfinancial shock since the Great Depression, shareholders have naturally focusedon the governance and management of the companies in which they invest. Tellabshas a talented management team, a sound strategy, and the discipline to executein a market that continues to grow and change…” Tellabs’ statement wasamong only a small handful of board-level communications willing to address thecurrent crisis clearly and honestly.

4.     Use theCompensation Discussion and Analysis (CD&A) to Convey a Shareholder-Friendly Philosophy

The Security and Exchange Commission mandated that publiccompanies thoroughly explain their executive compensation practices. Inpractice, this disclosure is burdened by excessive legalese, complexquantitative models, and difficult-to-follow analysis; all of this serves toconfuse rather than clarify the board’s approach to rewarding management. Beginwith a one-paragraph description of the compensation philosophy, then use thetools of a journalist—table of contents, headlines, bullets, summaries andcallouts—to provide the details. These narratives must be written for yourshareholders at a level that assumes some baseline knowledge of the financialmarkets and business practices—but definitely not written expressly for the SECprofessional. While the document satisfies an SEC requirement, it should betargeted to an educated layperson.

5.     Communicateto All Shareholders the Path of Shareholder Petitions

Even shareholders who are not involved in a specificshareholder petition should know and understand the process of makingsuggestions to the board and how the company responds.

Shareholders are not a monolithic group but rather representmany points of view. Nor should shareholders be encouraged to believe that theycan micromanage the company. The board should take shareholder suggestions intoconsideration, but ultimately board oversight is not a democracy.  Boards are called upon to be stewards, tobring their experience and business judgment to their role.

6.     Make ThisYear’s Annual Meeting an Effective Platform for Communication

Take a page from Warren Buffett’s playbook.  No, it will not require renting the Qwest Centerto prepare for 31,000 shareholders or answer questions for six hours, butdirectors should use the meeting as an opportunity for stronger shareholderengagement.  Many boards are findingvalue in interacting with key shareholders on a quarterly basis—whether througha phone call after the earnings call or other related tactics. It is clear thejourney back to a 14,000 Dow and historic share prices will be a long one, andkeeping shareholders invested in the company’s strategy and plans has value.

After operating behind closed doors for so long, boards mayfind no better time than the annual meeting to share its communication policywith shareholders. The most important act for board members may be listening.With advance preparation, board members—particularly the lead director orchairman as well as chairs of the audit, compensation and nominatingcommittee—should be available to take questions.

Webcasting the proceedings also increases transparency andinclusion. Posting the webcast on the website adds tremendous value and signalsa move to greater openness.

Transparency and communication serve as risk mitigationstrategies for the company and the board. It’s an opportunity of limitedduration.  Smart directors will take thelead in acting now.

Karen Kane wasformerly the Senior Vice President of Corporate Affairs and Board Secretary forthe Federal Reserve Bank of Chicago and served as communication officer for thebank and the Federal Reserve System.  Herfirm, Karen Kane Consulting, specializes in providing independent communicationcounsel to corporate boards.

Levinson will no longer be CEO, but will be charged with steering integration of the two companies, serve as a scientific adviser, and be nominated to the Roche board, the Swiss company said in a statement released yesterday.

Roche has appointed several of its own executives to top non-research positions at Genentech as of May 1, including Pascal Soriot as CEO.Roche said Susan Desmond-Hellmann, president of product development at Genentech, will hand over her responsibilities by mid-year, after which she will also act as an adviser to the company and join the scientific advisory board.

During the eight-month-long takeover battle that ended in March, Roche had said it expected Genentech senior management to stay on, but some shareholders and analysts have surmised that the biotech company’s prolific scientists and top managers would view the acquisition as an opportunity to leave.

Roche said Richard Scheller, executive vice president of Genentech research, will lead an independent research and development group within Roche, which will report directly to Chief Executive Severin Schwan.

Roche also said that William Burns, CEO of the Roche pharmaceutical group, will retire next January 1 and will also be nominated to the company’s board.

In addition, Marc Tessier-Lavigne, currently executive vice president of Genentech research drug discovery, will succeed Scheller as head of research and be appointed as Genentech’s chief scientific officer.

On the commercial side, Roche said Soriot, currently responsible for operations of the pharmaceutical division at Roche, will be appointed as CEO of Genentech, where he will lead all pharma activities in the United States.

Ian Clark, head of commercial operations at Genentech, will take over as head of global marketing and chief marketing officer for Roche’s entire pharmaceutical division.Pat Yang will continue as head of technical operations at Genentech, while Hal Barron, currently head of Genentech development and chief medical officer, will become head of global development for oncology, immunology/tissue growth repair and virology.

Roche said David Ebersman, Genentech’s chief financial officer, and Steve Juelsgaard, chief compliance officer, will leave the company.

]]> http://www.directorship.com/genentech-names-roche-ceo-chairman/feed/ 0 http://www.directorship.com/cf-shareholders-advised-to-block-takeover/ http://www.directorship.com/cf-shareholders-advised-to-block-takeover/#comments Thu, 01 Jan 1970 00:00:00 +0000 Joseph McCafferty http://www.directorship.com/?p=2418

Shareholders of fertilizer maker CF Industries Inc should support CF’s three candidates for its board of directors instead of withholding their votes to support Agrium Inc’s takeover attempt, proxy advisory firm RiskMetrics advised in a report released yesterday, according to Reuters.

CF rejected an unsolicited $3.8 billion takeover offer from Agrium, who said in a letter to CF’s stockholders that withholding votes would “send a clear message to the CF board to engage with Agrium.”

CF is also currently involved in a takeover bid for Terra Industries.

The RiskMetrics report alleges that the Agrium bid is not high enough and is too uncertain to justify withholding votes from the CF board candidates at the company’s annual meeting to be held on April 21.

“Although Agrium has fairly reasonable explanations for each move it has made, looking at the steps on a collective basis, along with the timing of the bid itself, may cause CF shareholders to conclude that the Agrium bid is something less than ‘certain,’” RiskMetrics said.

Michel Demare, CFO of Swiss engineering firm ABB, Ann Godbehere, former CFO of Swiss Re, and Axel P. Lehmann, CRO of Zurich Financial Services, are slated to join the UBS board pending a favorable shareholder vote. The nominees are part of UBS’s efforts to improve its board’s financial and technical prowess.

Recently nominated chairman Kaspar Villiger, the former Swiss Finance Minister, will also be up for vote at the upcoming meeting. Villiger will replace current chairman Peter Kurer if successfully elected.

“I am very excited that we can propose three exceptionally well-qualified candidates,” said Kurer. “They each have specific banking, finance and risk experience, allowing them to contribute to the various committees it is planned they join.”

India’s Company Law Board, which is probing the fraud at Satyam Computer Services, has asked three former directors of the outsourcer to disclose their assets to the board by March 31, a senior board official said on Thursday, according to Reuters.

Company Law Board Chairman S. Balasubramanian told reporters the three former directors were Ram Mynampati, K.G. Palepu, and V.K. Dham.

It should come as no surprise that the number of board meetings has increased over the last few years. Recently, we had a chance to look at just how many board meetings occurred among the top companies sorted by revenue. As we suspected the larger the company (by revenue) the more meetings they conducted. We also noted that not all of these meetings were in person; some were done via video or conference call. The pressure on companies today is intense. And the expectations of accountability among management and the board are high. So it makes sense that in order for a board to stay informed they need to stay in near constant communication.

According to the most recent proxy statements available in 2008, the majority of companies (36 percent) held six board meetings. Companies that conducted seven board meetings accounted for 18 percent. On the high end, there were 3 percent of the companies reviewed that held 12 meetings. ConAgra for instance reported nine total meetings for their board, with five in person and four via video. We found that 65 percent of the companies held between six and eight meetings. Given the various challenges facing businesses today we also took a look at the audit committees for these same companies and found that companies conducting 13 meetings accounted for 11 percent. Nearly half (46 percent) of the companies surveyed held between six and nine audit committee meetings. Archer Daniels Midland reported in their proxy that nine audit meetings were held.

While we all know that board members are busy, it is interesting to put real numbers around the time commitments that a board requires. We anticipate that the board commitments for 2009 will be equal or greater as we continue to navigate through the challenges that are ahead. Having the right mix of qualified executives on your board can make all the difference. We have seen first hand that our clients continually demand that the executives we suggest are not only highly qualified, but have the time commitment available to devote to being an active participants. Do your fellow Board members have the time that 2009 will undoubtedly require?

“The board today during their regular meeting expressed support for Ken Lewis and the management team, noting that their experience in managing through challenging environments and assimilating mergers,” Sloan wrote. In a separate interview, as reported by The Wall Street Journal, Sloan said the issue of Lewis’s job status “is not expected to be reopened. We are going forward.”

Three members from Merrill’s board were also added to the BofA board during the meeting in Charlotte, N.C., where the bank is based. The total number of BofA directors now stands at 19. 

The new directors are: Charles O. Rossotti, Virgis W.Colbert, and J oseph Prueher.

“We are very pleased to add these directors to our board,” Lewis said in a press release. “Their experience managing large,complex organizations and working throughout multiple countries will serveBank of America well as we successfully integrate Merrill Lynch’s globaloperations into our company. These directors will provide strong leadershipand perspectives.”

• Rossotti, 67, is a senior advisor at The Carlyle Group, who began serving on the Merrill board in 2004 and isexpected to serve on both of Bank of America’s corporate governance and compensation and benefits board committees.
• Colbert, 69, the retired executive vice president of Miller BrewingCompany, began serving on the Merrill board in 2006 andis expected to serve on the asset quality board committee.
• Prueher, 66, is a consulting professor at Stanford University’s Instituteof International Studies and senior advisor on The Preventive Defense Project.Admiral Prueher served as Ambassador to the People’s Republic of China from1999 to 2001. He began serving on the Merrill board in 2001and is expected to serve on the audit committee.

]]> http://www.directorship.com/bofa-board-keeps-lewis-in-charge/feed/ 0 http://www.directorship.com/independent-directors-need-independent-counsel/ http://www.directorship.com/independent-directors-need-independent-counsel/#comments Thu, 01 Jan 1970 00:00:00 +0000 Joseph McCafferty http://www.directorship.com/?p=2709

The ongoing crisis now gripping the financial and credit markets undoubtedly will give rise to a multitude of internal investigations as the affected investment and retail banks, brokerages, rating agencies, private equity firms and hedge funds scurry to determine precisely what went so egregiously awry in their trading and underwriting activities to inflict such harm to their respective institutions. The anticipated proliferation of such exercises in corporate self-examination, the inevitable onslaught of all manner of litigation — including shareholder derivative and class action suits — and the unavoidable parallel regulatory and criminal inquiries arising in the wake of this enormous market meltdown prompted a bit of reflection on my part upon the corporate disasters of the past.

Some years ago, while involved in structuring a number of internal corporate investigations arising from some rather widely reported and notorious corporate calamities, I somewhat jokingly suggested that the ultimate shareholder derivative suit might be one fashioned to challenge the massive diversion of corporate assets thrown seemingly indiscriminately at every outside law firm that could be found with no prior substantive relationship with the corporation to assist in some discrete aspect of the investigation. Many is the time I found myself in courtroom galleries in the company of any number of senior partners of the most prominent (read, costly) law firms in the nation, all awaiting the opportunity to report to the court on the status of the still ongoing internal investigation, pursuant to which the corporation theretofore had managed to keep dissident shareholders and unwelcome class and derivative suits at bay pending the conclusion of the (seemingly interminable) investigation at some yet-to-be-determined date far off in the future. As the company’s legal fee meter churned at a brutally rapid rate, given the large assemblage of such highly paid attorneys cooling their heels for extended periods of time, the long-awaited interim report almost invariably was solemnly delivered by a single attorney in the space of just a few seconds.

As a rule, no opportunity was given for the other lawyers in attendance to address the court. Consequently, the richly compensated attorneys representing the outside directors, the management directors, the Board’s litigation committee, senior executives, management and certain employees of the company and the specifically denominated subsidiaries of the corporation involved in the alleged malfeasance all sat silently. The esteemed gathering would disband soon after the brief anti-climactic status report was delivered to the court, with most of the attendees scrambling to the airport for their first-class return flights to their far-flung offices around the country.

Unassailable integrity and utter impartiality of the investigative process at any cost was then the sine qua non insisted upon by the courts in determining whether to accept the final recommendations reached at the conclusion of the internal investigation.

Unquestionably, much has changed in the intervening years; the proverbial pendulum has swung decisively in the opposite direction. True independence, objectivity, impartiality and thoroughness –- all of which once were revered as the talismanic requirements of any internal investigation that was to be accepted and blessed by a court to foreclose shareholder litigation –- have all but disappeared entirely.

By many recent accounts, corporate investigations now regularly are carried out by in-house attorney employees, whose “conclusions” are then presented to the company’s corporate counsel and then in turn to the board for ratification. Plainly, no semblance of objectivity or impartiality possibly can attach to such procedures, yet they appear to gain in popularity as the favored means of addressing all manner of corporate irregularities.

“The proverbial pendulum has swung decisively in the opposite direction. True independence, objectivity, impartiality… have all but disappeared….”

Similarly bewildering and frustrating to adherents to principles of corporate integrity and accountability are those situations in which the company professes to “go the extra mile” by retaining “outside counsel” to conduct the internal inquiry into allegations of improprieties.

In practice, however, this is more likely than not to play out as follows:

(1) the company’s general counsel contacts the company’s most favored outside law firm;

(2) the (most frequently, corporate/transactional) partner of the outside firm with primary responsibility for the client speaks with his (typically, underengaged) counterpart in the firm’s litigation department to formulate a response to the internal problem;

(3) the litigation partner rounds up every available (read, underbilling) associate attorney at the firm to descend T upon the company and disrupt its daily operations by reviewing every available email, document and file, and interviewing every available employee over an implausibly extended time period;

(4) digests and, in turn, summaries the digests of these far-flung and disorganized activities are amassed for repeated summarization and ultimate preparation as a “final report”; and

(5) the report is presented to the board of directors for immediate (read, rubber stamp) ratification.

While such a process is designed to suggest thoroughness –- at an enormous diversion of corporate assets and a staggeringly high price tag for the company and its shareholders –- can it seriously be argued that the findings and recommendations resulting therefrom are the product of any measured and objective analysis by attorneys who are truly independent from the company?

The reasons for skepticism are manifest. While company management may never before have dealt personally with members of the outside firm’s litigation group, the company’s relationship with that firm’s corporate/transactional department is well developed, and it contravenes daily business realities to suggest that such an investigation will not be monitored closely, if not influenced outright, by the corporate partner whose primary objective, of course, is to protect and perpetuate his law firm’s preexisting relationship with the company.

Where then, one might reasonably ask, are the non-management directors as such events unfold? I deliberately choose the word “non-management” to reflect the well-nigh universally held presumption that the objectivity and impartiality of today’s outside directors are dangerously compromised to some degree by, among other things, close personal relationships to management and their cross-memberships on overlapping and interlocking boards of directors.

In common situations, such as those described above, the directors are expected merely passively to await the presentation of a “final report” and then to ratify its findings and recommendations. In the unlikely event that any concerns are raised as to the integrity or objectivity of the investigation, they can be adroitly deflected by pointing to the sheer number of attorneys involved, the fact that the outside litigation attorneys were largely unknown to the company and, of course, the staggeringly high bill for legal fees generated in connection therewith. The steps along the path of convenience and least resistance thus have been carefully choreographed for the convenience of the outside directors, whose acquiescence is only too common.

The critical and heretofore indispensable element wholly absent from these all-too-frequent self-serving corporate exercises in internal fact-finding is, of course, any evidence of truly independent counsel.

Given the recent confluence of reports that procedures similar to those described above are being deployed with alarming frequency in the aftermath of all manner of corporate misdeeds, the time has arrived for a thoughtful re-examination of the most basic tenet of corporate governance and the primary fiduciary responsibility of outside directors -– i.e., ensuring internal financial and operational oversight, integrity and accountability –- and how it is swept aside all too frequently in the context of internal corporate investigations.

Such disregard for this cornerstone of corporate governance appears to be occurring at a particularly perilous juncture for management. Enhanced reporting requirements, more vigorous enforcement activity, heightened expectations of the fiduciary obligations of outside directors, and intensified judicial scrutiny and skepticism of the conclusions reached by such internal investigations have converged to underscore the need to engage truly independent outside counsel. Moreover, the shareholder activists demanding greater management accountability today are more likely to emerge from highly sophisticated and well-financed hedge funds and private equity firms, rather than from the dog-eared Rolodexes of the plaintiffs’ securities bar, who possess both the market savvy and resources aggressively to challenge the integrity and bona fides of the “recommendations” or “conclusions” that result from internal corporate exercises so lacking indicia of actual independence or impartiality.

Within the context of the present dislocation of our financial and credit markets and the myriad interconnecting and overlapping layers of complexity underlying the meltdown, it would appear that the need for objectively independent investigation has never been more pronounced. The putative defendant firm will be under siege from an astonishingly wide array of potential litigants. Disgruntled investors of all stripes, including hedge funds, private equity firms, mutual funds and pension funds, secured and unsecured creditors, underwriters, credit rating agencies, risk insurers, class and derivative shareholders, and all manner of counterparties to the underlying collateralized debt obligations, credit default swaps and investment instruments can be counted on to institute litigation at some point in an attempt to recoup at least some small portion of their losses.

It will be difficult indeed, if not well-nigh impossible, to identify and retain attorneys to conduct and coordinate a credibly objective internal investigation who are not compromised by a prior significant relationship with one or more of the many potential litigants. Yet, I submit that the imperiled firm would be well advised to locate such unencumbered legal counsel if the beleaguered company is to have any hope of emerging from the litigation morass. Challenges to the findings and conclusions of the internal investigation by characterizing it as an impartial corporate “whitewash” can be repelled only by a clear demonstration of the unassailable impartiality of the investigating attorneys and the thoroughness of their work.

It bears emphasis also that in all likelihood the substantive and procedural aspects of the investigation are likely to come under scrutiny. In this respect, the investigating lawyers should draw upon the expert assistance of outside advisers to address and attempt to unravel the highly complex and, in the current circumstances, arcane securitized instruments underlying the company’s losses. (The involvement of such non-lawyer third parties also raises a host of privilege and work-product implications that only a seasoned attorney can navigate so as to best protect the company; such issues, will of critical importance, are beyond the scope of the present writing.) The outer limits of the business judgment rule will be probed with great intensity as the validity of management and the board’s ratification, vel non, of such exotic investments is weighed. This analysis undoubtedly will entail an examination of the extent to which the proper company officials actually fully understood the investment strategies and the volatility of the underlying securitized instruments that led to the company’s involvement in such trading activities. Such an examination, in turn, also necessarily will focus at least in part on whether or not adequate risk exposure analyses were in place and properly observed.

The critical importance of the internal inquiries and the conclusions emerging therefrom can hardly be sufficiently emphasized. The supervising outside attorneys will need to devise an overarching strategy to mount the best defense possible for the company and its shareholders, taking into account all of the anticipated lawsuits as well as the parallel governmental investigations. Beyond the incredibly complex privilege issues to which I already have alluded, the outside lawyers in charge of the internal investigation must also be mindful of the ultimate endgame to position the company most advantageously with respect to possible regulatory and criminal sanctions.

In this regard, the overall integrity, impartiality and credibility of the investigation must be above reproach. The lead investigating attorneys cannot be perceived as having an axe to grind (as in having been in some way involved in advising the company in connection with the trading and investment activities giving rise to the company’s predicament and, consequently, being predisposed to upholding such activities) stemming from a prior relationship with the putative defendant firm. Moreover, I submit that truly independent investigating attorneys will, by definition, lend an air of overarching credibility that may well go a long way toward assuaging the concerns of the regulatory and criminal investigators.

“As a prophylactic measure, I suggest that outside directors should consider retaining counsel with no prior ties to the corporation….”

Outside directors in all instances are looked to as the shareholders’ ultimate arbiters of management’s stewardship of the corporation. Yet, in recent instances of company misdeeds, irregularities and even outright scandals, outside directors appear only too willing to rubber-stamp the (perhaps pre-ordained) findings of internal investigations conducted entirely without the involvement of truly independent counsel. Speaking somewhat topically, it seems inconceivable that any experienced attorney not otherwise entangled with a company’s ongoing operations would think it anything other than insanely inappropriate to subject board members to aggressive electronic surveillance measures. It is worthy of note, if many press accounts are to be believed about this unfortunate incident, that it was not until an outside director sought counsel from his own independent attorney that this situation was properly brought to light and addressed.

Given the increasingly frequency with which outside directors’ oversight of companies where corporate misdeeds have occurred is being examined with heightened scrutiny (and, in some instances, well-deserved outright skepticism) by the courts, as well as by the investing public at large, it seems appropriate at this moment for sober reflection by non-management board members as to whether their fiduciary obligations to the shareholders can fully be satisfied in the absence of truly independent legal counsel.

As a prophylactic measure, I suggest that outside directors should consider retaining counsel with no prior ties to the corporation to provide advice on an ongoing basis, perhaps through the formation of an oversight or litigation committee of outside directors, which then would be formally authorized to retain such independent outside counsel.

At a bare minimum, non-management directors should insist that independent counsel with no prior affiliation with the company be engaged immediately upon the mere suggestion that any significant corporate irregularities may have taken place. In this manner, independent attorneys can survey the situation and perform an initial inquiry as to the purported impropriety and, if found, assume primary responsibility for structuring the procedures pursuant to which whatever necessary internal employee interviews and document review are to be conducted.

I note also that, in light of recent judicial developments, outside directors may no longer expect to enjoy the deferential insulation and protections that heretofore have been routinely afforded them unless they are able to demonstrate active supervision of, and constructive involvement in, a truly independent internal investigation. The mere reflexive ratification of neatly pre-packaged, pre-ordained “final reports” prepared by attorneys affiliated with the company should no longer suffice as evidence of effective corporate oversight or adequate satisfaction of bedrock fiduciary obligations to shareholders.

The procedures prescribed above by no means should be taken to suggest uncontrolled “witch hunts” on massive scales; quite to the contrary, counsel experienced in such internal investigations easily should be able to craft an internal inquiry that is narrowly tailored to meet, and carefully circumscribed to address, the discreet area of concern swiftly and with surgical precision.

Virtually any redirection of company assets away from productive uses to the investigation and the correction of corporate misdeeds should otherwise be unnecessary and is, therefore, wasteful by definition. The perpetrator(s) and origins of such misdeeds and the scope of their impact on company operations can be identified and remedied much more efficiently and cost-effectively through the engagement of experienced attorneys who are truly independent of the company. And, in order to vest the investigation and its resulting conclusions with any presumption of credibility and objectivity in the face of state and federal government criminal and regulatory inquiries, true independence of the supervising attorneys must be established.

In addition, substantial economies can be realized by minimizing (and, in many cases, eliminating outright) the otherwise attendant costs of litigating the issues of the impartiality and objectivity of the investigating attorneys, the overall integrity of the investigative process, and the unimpeachably appropriate conduct of the outside directors if, of course, such prudent measures are employed.

A research paper, titled “Women in the Boardroom and Their Impact on Governance and Performance,” written by Renée B. Adams of the University of Queensland and the European Corporate Governance Institute (ECGI), and Daniel Ferreira of the London School of Economics, ECGI, and the Centre for Economic Policy Research (CEPR), and published in the Journal of Financial Economics, found that:

• Women are also more likely to sit on monitoring-related committees such as audit, nominating, and corporate governance than male directors.

• Directors on gender-diverse boards receive higher equity-based compensation—though there was not a reliable relationship between gender diversity and the amount of CEO pay.

• Women appear to have a significant impact on board governance. Diverse boards are more likely to hold CEOs accountable for poor stock price performance. In fact, CEO turnover is more sensitive to stock-return performance in firms with relatively more women on boards.

• A board that is too diverse actually hurts business. This lends weight to the argument that too much board monitoring can decrease shareholder value.

• Gender diversity may have positive effects in companies with weak shareholder rights, where it is plausible that additional board monitoring can enhance value.

The study was based on a sample of U.S. companies including director-level data for S&P 500, midcaps, and smallcap firms collected by the Investor Responsibility Research Center (IRRC).

Given the current state of the global economy, many companies are evaluating their options for both retrenchment and strategic growth. Accordingly, now is a great time to take a critical look at the makeup of your board and evaluate whether you have the right combination of skills represented. Do your directors have real experience digging into issues such as strategy, compensation, and succession planning? Times like these highlight both the risk averse and those with the courage to step up and chart a course to the future.

Whether you are a small cap or a Fortune 100 company, board evaluation is of paramount importance. And, it is a task that must be done on a consistent and continual basis. A disciplined, rigorous assessment and review of your board makes it possible to identify areas where improvement is needed and ensure it has the experience to not only tackle issues of compliance, but of long-term strategy as well.

The best directors enrich their board with the perspective of someone who has faced some of the same problems the company may face in the future. In tough times it is often hard to think past tomorrow let alone what the long-term goals should be for the company. Challenge yourself and your board and let us know how you are doing. We’d love to hear.

CEO’s are heavily sought after for board positions, especially those in the Fortune 500. But as boards elect new members and address the increased complexity in the marketplace, there are only so many CEO’s to go around. Other C-level executives are also important to a well-balanced board but even so, one can’t help but wonder where the next qualified pool of corporate directors will come from.

There was a time when the chief information officer (CIO) was an important executive to have on your board, especially as we approached the year 2000. Chief financial officer’s (CFOs) have always been a popular choice, and recently there is more interest in the chief risk officer’s (CRO) skill-set. Even General Counsels have been necessary to boards at times. But the days of senior-level executives taking on countless board appointments are numbered and have been for a while.

Each company needs to take this topic on for itself. What type ofexecutive mix is right for your board? Building the right board meansmore than seeking out candidates with fancy titles or an impressiveresumes.

With current demands in the marketplace and the need to be a true collaborator in the boardroom, time is even more limited for C-level executives. So where do we go from here? Are there other senior executives to consider that board have not contemplated in the past? Chief merchandising officer? Senior vice-president of sales? Executives from the non-profit world? What we do know is that retired executives are being sought after more than ever before. And COO’s are being groomed to be that next class of CEO’s, making them attractive candidates for a board.

There is no clear cut answer. Each company needs to take this topic on for itself. What type of executive mix is right for your board? Building the right board means more than seeking out candidates with fancy titles or an impressive resumes. Finding the right cultural match for a board is just as important as the caliber of individuals.

The right board “blend” can determine a successful future for a company. So when thinking about the next move for your board, will it be a CEO, a CRO, or possibly a Chief Merchandising Officer? It all depends of the needs of your board. Just make sure it is the right fit for you.

With regard to Lloyds TSB and HBOS, the government will purchase ordinary and preference shares when the merger is complete (representing about 44 percent of the share capital in the merged bank) and will appoint two independent board members. No board member will receive a cash bonus this year.

In the case of Royal Bank of Scotland, the government will take up to £15 billion of ordinary shares and £5 billion of preference shares. The government’s investment potentially represents a 63 percent interest in RBS. Three independent board members will be appointed by the government and no bonus will be awarded to any board member this year.

What was not clear in the announcement is whether the government-appointed directors will replace existing non-executive directors. It is also unclear what will happen with bank bonuses beneath the board level.

In his remarks, Darling referred  

to “far-sighted leaders” such as Roosevelt and Churchill who after the World War II devised the General Agreement on Tariffs and Trade, or GATT, the United Nations, the World Bank, and the International Monetary Fund. “It is with the same courage and foresight of these founders that we must now reform and renew the international financial system and we should do it around the agreed principals that are shared by every country of transparency, integrity, responsibility, good housekeeping, and cooperation across borders,” Darling said.

Goldman announced that it was going with Lakshmi Mittal, the chairman and CEO of ArcelorMittal S.A., the world’s largest and most global steel producer. “He has a keen understanding of the global economy, having operated in virtually every corner of the world,” said Lloyd C. Blankfein, chairman and CEO of Goldman. As the bank continues to expand worldwide, that keen understanding will be invaluable as the board charts the company’s course.

Goldman’s board selection is just one of the most recent examples of a trend that is reshaping both the composition and the culture of American boards. There is a movement underway to diversify boards that adds a strategic context to the traditional diversification goals of gender and race. Boards are looking to add members with global business experience or, better yet, directors who were raised, educated, and trained outside of the United States.

This trend reflects the idea that the board should be more in touch with the markets where they conduct business and with the customers that live there. Large U.S. companies now generate a greater portion of their revenues from outside the United States than ever before. For example, Jeffrey Immelt, CEO of General Electric, says that the company will derive 60 percent of sales outside the U.S. by 2012, up from about 55 percent expected this year. Moreover, the company’s overseas business is growing at twice the pace of its U.S. operations.

GE’s global ambitions are reflected in the directors it has named to its board. In addition to those directors born or raised outside the United States—such as Claudio X. Gonzalez, who was born in Mexico, Sir William Castell of the United Kingdom, and Andrea Jung who, while born in Canada, is fluent in Mandarin—the company has sought individuals whose business experience and knowledge identifies them as the new class of “globalists.” The board also counts as members A.G. Lafley, CEO of Procter & Gamble, and Sam Nunn, a former Congressman who is considered such an expert on international affairs that Georgia Tech, where he is now a professor, named its School of International Affairs after him. “Companies like General Electric, PepsiCo., Procter & Gamble, Citigroup, State Street, and others understand that they need a board that reflects their business practices,” says George Davis, U.S. co-managing partner at Egon Zehnder International, a global executive search firm. “The more enlightened companies with global businesses are approaching their boards differently, and are looking to put more global expertise and knowledge of international markets on the board.” And it’s not just large companies that are building global boards; medium sized companies are also looking for global diversity, he adds.

Rita Foley, a director at Dresser Rand and PetSmart, says the globalization of the boardroom is imperative. “More and more revenue is coming from outside the U.S. Our role is to poke and steer strategy and that means a key role for globalization. If we are going to be effective global competitors, than it is going to take a global board.”

According to Davis, the S&P 500 now derives 42 percent of its revenues outside the United States, but only six percent of the directors of those companies are from foreign countries. “There is a mismatch here,” he says. More surprising is that some of the largest companies haven’t diversified at all. In fact, nine of the 30 Dow Jones Industrials have all U.S.-born directors. “We have to be sure that we are not myopic with our lens,” says Davis.

Strategic business decisions should determine when and how any board approaches efforts to globalize. “As soon as you have a clear strategic intent to operate beyond your domestic borders, that’s the time to add directors to your board from those geographies where you’re going,” says Richard Hossack, head of the governance practice for Delta Organization & Leadership, a part of Oliver Wyman. “This isn’t really that different than if you were a start-up board: you need to be thinking about [candidates] who can build strategic alliances and who understand financing, manufacturing, government relations…and it’s not enough to parachute in a couple of new directors,” he says. “You have to play a role as a global director, so you need to act like a global director. Hold board meetings in these new territories and make sure you meet local government officials and key customers, tour the facilities, and meet employees.”

Building One BRIC at a Time

Yet adding board members from foreign countries is no easy task. First, there is the practical aspect of having someone from the other side of the globe attend board meetings and correspond from thousands of miles away and over several time zones. Then there are difficulties finding qualified individuals in locales where the board doesn’t have as much knowledge, not to mention the cultural and language barriers that exist. (See “From Brazil to Dubai.”)

The most desirable global directors are from the so-called BRIC emerging markets: Brazil, Russia, India, and China. Some of these countries have a greater supply of potential directors than others. Justus O’Brien, co-managing partner of North American Board Services at Egon Zehnder, says that it can be more difficult to find qualified directors in China, while in India there is a much larger supply of qualified candidates.

“It’s not as mysterious as it may sound to build a global board. It’s not that different than building any great board.” –Justus O’Brien, Egon Zehnder

“It’s not as mysterious as it may sound to build a global board. It’s not that different than building any great board,” O’Brien told directors attending Directorship’s Global Boards Forum in New York in September. “What is needed is simply a clear-eyed assessment of the current and future needs of the business.” Underlying that assessment should be a plan for board transitions, such as the addition of newly promoted inside directors, or the scheduled retirements of current directors. A more diverse board also offers some assurance that “cultural group think” is broken, O’Brien says. Many corporations, including Alcoa, have adopted the Business Roundtable’s “Principles of Corporate Governance,” which includes a plan for the departure and replacement of directors that stipulates a mandatory retirement age and term limits.

The due diligence that must be performed on potential board members from around the world can also be more challenging, since boards typically know less about the individuals or don’t know people who can vouch for them. “The due diligence process needs to include a deep legal and background check,” says O’Brien.

How do you define global experience? In the past, boards might have sought out international experience by putting together an advisory board. If a company was considering moving into two or three large markets, it might have created an advisory board with individuals who had knowledge of these markets, but were not necessarily board-caliber business leaders. That has changed. “Globalism in the board room is at a strategic level. It’s not about marketing,” says Davis.

It’s true that boards are seeking foreign nationals, but that is not the only aspect of building a global board. Companies are adding Americans that have run large divisions in Europe, Asia, or South America. They are also adding individuals who are internationalists. That means they have a keen understanding of the global economy, not just one region of it.

“The reality is that all significant businesses are operating in the global economy,” says William George, a professor at Harvard Business School and a director at Goldman Sachs, ExxonMobil, and Novartis. “It’s extremely important to have people on the board who have a deep understanding of different global cultures and how they do business there.”

One example of the perspective that global members can provide is that the U.S. accounting system is currently in the process of shifting to an international standard. Mary Pat McCarthy, U.S. vice chair at KPMG and director of KPMG’s Audit Committee Institute, says that global members who have been working with the International Financial Reporting System (IFRS) can provide some insight on its positives and negatives. “Creating a global board is an enabler to competing in the worldwide economy,” she says.

The Board Field Trip

Not surprisingly, large foreign companies with businesses in the United States are looking to put Americans on their boards. Harvard’s George was the first person from a non-German speaking country to gain a board seat at Novartis, headquartered in Switzerland. When he joined the board and it listed on the New York Stock Exchange, it also changed its official business language from German to English. “They were making a statement that they wanted to be a global company, and the U.S. is a very important market,” says George. Novartis has since added fellow American Anne Fudge and Marjorie M. Yang of the United Kingdom to its board.

The language shift to English at Novartis shows just how much of an impact going global can have on a board. Not only did the language change, but there were other subtle shifts in cultural aspects of the board as well. For example, George says that when speaking German, the board used a more formal tone. They addressed each other in the German equivalent of mister, professor, or doctor and used last names. With the change to English, they began addressing each other by their first names.

“Creating a global board is an enabler to competing in the worldwide economy.”

–Mary Pat McCarthy, KPMG’s Audit Committee Institute

George admits that logistically it can be tricky to add foreign nationals to the board. Directors have to increase travel time and language remains a real barrier, but he says it is worth overcoming the logistic hurdles to bring board diversity. “That’s part of the commitment,” he says. “We are not talking about part-time board members. And they are not just calling in to the meetings. Board members are really taking the time to attend meetings.” He says that the job of director has expanded enough that board members take their roles and their time commitment very seriously. He also thinks board members should be paid commensurately for this more demanding regimen required of global boards. One technology solution that may also help global boards to communicate through different time zones are board portals, such as Diligent Boardbooks and Nasdaq’s Directors Desk, that facilitate virtual meetings in a secure environment.

Egon Zehnder’s Davis says that boards shouldn’t put too much emphasis on the logistical barriers to creating a global board. “Tactical thinking gets in the way of a global board. They get too worried about the travel, language, and cultural differences. You have to find creative ways around them.”

Occasionally, board meetings are held overseas in the home countries of one of the global members. George says there is also a trend of boards setting up trips as long as a week to visit far-flung operations or to get a better sense of what is happening in a particular country. For example, the Goldman board traveled to the Middle East and visited Saudi Arabia, Dubai, and Israel, where they met with dignitaries and politicians. The board of ExxonMobil traveled to France and Japan in recent years. And Novartis is planning a trip to Singapore. “Don’t think they are boondoggles,” says George. “These companies are very serious about globalization and the time is very well spent. Everyone is there.” He says American companies realize that they have to have a broader perspective on how these countries work. “You can’t view everything through an American lens.”

One of the reasons that the Japanese fell behind in the 1990s is that they didn’t have enough diversity in their management ranks or on the board, according to George. He thinks U.S. companies could face the same fate if they don’t learn from those mistakes. “American global companies are coming around to this way too slowly.”

Egon Zehnder’s O’Brien agrees: “Boards will find that they are lacking real global perspective. They need to diversify their cultural perspective to break the cultural group think.”

At Directorship’s inaugural “Directors to Watch” Forum, hosted by Nasdaq OMX on June 30, Charles Elson quipped “solvency.” The chair of the University of Delaware’s Weinberg Center for Corporate Governance warned the more than 80 attendees that directors should be paying attention to new regulations on executive compensation likely to be included in any Congressional bailout package, and, in particular, severance packages.

Elson, in a panel moderated by PricewaterhouseCoopers’ partner Catherine Bromilow, also said that the Sarbanes-Oxley Act of 2002, passed to restore investor confidence in the aftermath of corporate accounting scandals, may also be subjected to renewed scrutiny.

“SOX and in particular 404 came up with internal controls to mitigate risk…but when highly regulated companies such as banks and insurance companies start to fail, where was SOX? How effective was that?” David Swinford, president and CEO of Pearl Meyer & Partners, an executive compensation consulting, said that the recent collapse or near collapse of so many once venerable firms serves to remind directors that “preserving the corporation” should be their top concern. To do that, he suggested that boards work to avoid “group think.”

The upcoming January through March “pay decision-making season” should also see directors “worried about how to balance pay for non performance,” Swinford said.

Julie Hembrock Daum, an executive recruiter who leads Spencer Stuart’s North American Board Services Practice, said concerns of governance committee members in particular should center on board recruitment and succession planning. Some boards are seeking younger directors while others are pushing the mandatory retirement age for directors up to 75 in an effort to retain their experience.

Daum also noted that one-third of all newly appointed directors have no prior board experience, which underscores the need for boards to understand what makes a good director. She expects boards to become more proactive in succession planning, and said she is being called upon more frequently to help with internal candidate assessment.

Elson pointed out that the level of anger and mistrust being directed at corporate management and boards of directors is nearly unprecedented. “We need to restore confidence in the system,” he said.

These are turbulent times on Wall Street and beyond, and it is difficult for many to understand how such history defining events could not have been prevented or avoided.

Unfortunately we may bear witness in the near future to even more history that will no doubt be studied in years to come by business students around the world. As we look to the future it brings up the age old questions: What are the lessons to be learned from the downfall of some of Wall Street’s oldest and largest companies, and can we prevent history from repeating itself…again?

Making sure that your board is equipped with the right mix of talent, varying expertise, and understanding of the complex intricacies of your industry are now essential elements to corporate success.

There will be, and to some extent already has been, much scrutiny put on the executive management and the board of directors of these companies. An obvious reflection is the necessity of having a strong diverse board.

Companies need directors who will be vocal advisors and strategic consultants, who will ask the difficult questions and play the devil’s advocate at times, and will provide guidance to management with long-term goals and visions in mind. All the while being cognizant of the current situation the company and overall marketplace finds itself operating within and the impact for achieving future goals.

Making sure that your board is equipped with the right mix of talent, varying expertise, and understanding of the complex intricacies of your industry are now essential elements to corporate success.

Companies and their boards are no doubt reminded by current events that their decisions impact not only their employees and shareholders, but – as we have witnessed – the economy and the global marketplace.

Thames Fulton is a principal in the Chicago office of Heidrick & Struggles, who focuses on board-of-director engagements.

While compliance and management succession are the two primary responsibilities of corporate directors, two other important duties include managing conflict and creating consensus on important decisions.

John Thompson, vice chairman of executive search firm Heidrick & Struggles, says he has observed at least two of what he calls “soft factors” that strangle a board’s effectiveness–allowing a board to be ruled by emotion rather than logic and not proactively managing conflict. “In some instances, where you have a longstanding or founding CEO or if the CEO is a significant shareholder, I see boards asking the CEO what he wants: Do you want to step up to chair? Do you want to exit the board? Too often I see the board following the CEO, and the CEO is making a decision on an emotional basis rather and shareholders are not being served.”

Leading a recent Directorship Roundtable at the Nasdaq OMX Market Site in New York on “Building Better Boards,” Thompson said that the litmus test for effective boards is how they manage conflict; ineffective ones fail to do so while effective boards work to manage agreement. In fact, “it’s something that seems counter intuitive,” Thompson said. “Boards often may not know whether they are in agreement on a topic because some directors refuse to speak up,” he said. “In many boardrooms, there is a lack of direct communication or straight talk. I’m not talking about being abrasive or disruptive, but often when there is a very dominant lead director or CEO, people don’t want to tangle with what the boss wants.”

“On a personal basis it is surprising how many times I hear directors say, ‘Gee, I can’t believe that we are thinking about doing this,’” said Thompson. “And it strikes me: why haven’t they spoken up about it?” People may not speak up for a variety of reasons, even on issues that are extraordinarily serious such as succession, or hiring a new CEO or board member. Look at some of the issues around stock-options backdating. Sometimes board members just don’t have the time or fear raising a question will result in endless debate. Newer board members may think they don’t know enough or have enough historical data to speak out. And that’s too bad because they can often bring a framework or a point of view that might propel the board to work more effectively.”

“On a personal basis it is surprising how many times I hear directors say, ‘Gee, I can’t believe that we are thinking about doing this. And it strikes me: why haven’t they spoken up about it?” –John Thompson, Heidrick & Struggles

“Having been a new board member, I do think we have to speak up. There are no stupid questions,” said Pamela J. Sheiffer, a director for New York & Co. “I do think that at times we are rushing off to catch planes, or there is a board member who perhaps sits on too many boards and doesn’t have the time to commit, so that person thinks ‘I’m not going to bring this up because it’s getting towards the end of the meeting and I don’t want to be holding people up.’”

The introduction of a new director can be the perfect time to conduct a full board review. “When you have a new board member that is a great time to review,” sad Thomas J. Clarke Jr., chairman and CEO of TheStreet.com, who was recently appointed to a board where an issue cropped up that resulted in a change of the CEO and chairman.. “I think it was because I wasn’t afraid to ask the questions that needed to be asked,” he said.

Dissonance and Dissidence

Roundtable participants John A. Ward III, chairman MAP Alternative Asset Management, and Raymond S. Troubh, a director who serves on such boards as Gentiva Health Services and Triarc Companies, have at different points in their board service careers been brought into companies in need of drastic change. Success can sometimes breed complacency, Ward noted, and the ability to be a new voice asking critical questions can become a necessary learning experience for the entire board.

Both dissonance and dissidence can be constructive, Troubh suggested. “As you get older and stronger you can speak out more as a brand new director. CEOs shouldn’t always have their way. And directors should have large personal stakes in the company, so when they’re talking about shareholders they’re talking about themselves,” he said. “With respect to succession planning, the chairman can’t pick his own successor. It’s the board that will continue under the new leader who should make that determination. This permeates my view of the independence of the nominating committees as one of the great new developments and will assure that tougher, smarter, more able, more objective people will serve on boards.”

Management of ego is also a key factor in building a constructive board. “The leadership sets the tone for all whether it’s in the boardroom, a surgical room, or on a sports field,” Thompson said. “I think in the boardroom if you’re able to manage egos—and it’s not consensus you’re aiming for—but leading a group of people in which you want intelligent discussions to arrive at the right decision.”

One tactic that Thompson has seen work to diffuse a dissident board member who may be controlling the tenor of a meeting, is to have the courage to say, “I hear people passionate about position A and I’m still having trouble with this. Can anyone help me?” or “I’m having some difficulty following the logic of this assumption. Can you help me with it?” This simple, direct approach is effective particularly for lead directors or independent committee chairs, Thompson said, “because it totally dismantles the emotions and brings it back to the group.”

Holding regularly scheduled board teleconferences, perhaps weekly, also provides “a consistency and momentum without the CEO being part of the conservation,” said Allan Grafman, president of All Media Ventures. “Week after week you begin to ferret out the issues and by the time you come to the quarterly board meeting, much of the thinking and discussion has taken place.”

Spurred by reforms in corporate governance, the number of boards that include the position of lead director, or some variant, has escalated dramatically. So has advice about what the role entails in such key areas as strategy, fiduciary responsibility, and subject matter expertise. But what of the personal attributes that a lead director must have to meet the subtle challenges of the role? A series of conversations with some outstanding lead directors has turned up surprising unanimity about the personal characteristics, as well as the technical qualifications, the role requires.

Among the technical qualifications cited by these lead directors, three stand out:

• CEO-like stature and experience: “I think it’s preferable if the person has had CEO experience,” says Dick Hanselman, Lead Director, Forward Air Corporation. “It gives the lead director a lot of credibility and a very clear understanding of the dynamics that exist between the board and the chief executive and between board members.” Nevertheless, he says it’s not an “absolute” requirement. Echoing the views of most of our interviewees, Jack Chain, General Retired USAF and Lead Director for Reynolds America, calls it “a positive, not a requirement.”
  
• Tenure on the board of approximately two years: Although some boards have attempted to parachute a new lead director in, all of our interviewees agree that it is a bad idea. Les Brun, who is Chair and CEO of Sarr Group, Chairman of the Compensation Committee for ADP, and a director for Merck and Broadridge Financial Solutions, believes that it takes nine months to a year to understand the company, and even longer to develop relationships with other board members. Corbin McNeill, Lead Director of Owens-Illinois, points out that if the board meets frequently enough the ramp-up time for becoming lead director may be as little as 18 months. In any case, he says, the potential lead director should have experienced at least two strategy sessions in order to be fully aligned with the objectives of the company.
  
• Time to devote to the job: An extensive study of board effectiveness, conducted by Heidrick & Struggles in conjunction with the Center for Effective Organizations at the University of Southern California’s Marshall School of Business, found that the average time directors spent on board matters increased from approximately 150 hours in 2001 to more than 200 hours in 2007. For lead directors today, the figure is likely to be as much as 300 hours. Further, says Dick Hanselman, the lead director must be available to the CEO “virtually at a moment’s notice.” Says Hanselman, “The CEO has to feel he can pick up the phone at any time and expect a callback within eight hours – and I have seen two instances in my career where that time was absolutely critical.”

Although “lead director” suggests “leadership,” the word heard repeatedly in our interviews was “diplomat,” which more accurately captures the subtleties of the role. The five personal characteristics that our interviews most often cited as indispensable certainly paint a portrait of the tactful emissary moving easily between the board and the CEO and judiciously helping resolve issues of mutual interest. Those characteristics, say our interviewees, include the ability to:

• Inspire trust: Bill Newlin, currently head of the Nominating Committee for the board of Kennemetal, has in the course of his career served as a non-executive chairman, a lead director, and a presiding director. “The lead director, besides having the qualities of any board member – good judgment, integrity, and the like – must have the personality to encourage trust with the board and trust with the CEO,” he says. Part of that trust, says Les Brun, is the confidence on the part of the other board members and management that the messages delivered by the lead director “won’t be filtered by the biases of the messenger.” It is in that respect, he says, that the position becomes “a diplomatic role.”
  
• Communicate effectively: As a conduit between the board and the CEO, says Rick Hernandez, formerly Lead Director of the Nordstrom board and now its chair, the lead director “must be able to convert strongly held opinions into concrete messages.” He believes that the essence of that ability lies in being a good listener, who can “extract the wisdom from other people’s statements no matter how they are expressed.” The lead director must be especially adept at synthesizing the messages that emerge from executive sessions and accurately communicating them to the CEO in a way that is non-confrontational. Bill Newlin believes that the lead director must have the make-up that allows the CEO to deal with those messages in an open, relaxed manner. “CEOs are usually strong,” he adds, “but most are also highly sensitive to what their boards say through the lead director.”
  
• Build consensus: Acting as an honest broker when it comes to communication doesn’t mean that the lead director remains eternally neutral. A board is not a debating society and at some point issues must be resolved. In many cases, delay is detrimental and the lead director performs a valuable function by building consensus on particular issues and enabling the company to act. Forward Air has made consensus-building skills one of the specifications for the position of lead director in the future. The arena for using those skills might be executive sessions or private conversations. In either case, says Rick Hernandez, “you have to be willing to invest a lot of time talking with all of the individuals involved.” Says General Chain, “The lead director must know how to work one-on-one behind the scenes and gain support for doing what’s right – it could be over the phone or over lunch, but you have to work it out.”
  
• Maintain humility: Humility means resisting the temptation to try to act as a kind of “director of directors,” says Bill Newlin; and, adds Corbin McNeill, it means also knowing where the dividing line is between overseeing and managing, especially in executive sessions. Believing that particularly outspoken people are wrong for the lead director role because they can sometimes intimidate other board members into silence, Rick Hernandez says he is careful not to speak up first with respect to an issue under discussion. McNeill, in his role on the board of Portland General Electric, makes it a point to speak last, because of his position as Chairman and because he is the sole member of the board with utility industry experience. Newlin believes that the lead director should continue to behave as any other board member would when an issue arises for discussion. Despite these differences about when to speak, the aim in each case is to take care not to inadvertently inhibit other members of the board and to elicit their views and to regard those views as equally valuable.
  
• Exhibit courage when necessary – Being humble doesn’t mean being passive, however. “You may have to confront the CEO or management on behalf of the board,” says Corbin McNeill, “and, in extreme circumstances, possibly replace a CEO.” Such courage extends to dealing with other board members, as well. “Having the courage to disagree doesn’t mean the lead director has to pound on the table,” says Dick Hanselman, “but it does mean making your point of view known to the rest of the group and then either changing them to your point of view or changing your own point of view, if that is what is clearly required.”

These five characteristics by no means exhaust the qualities that lead directors need. Our interviewees also cited such attributes as enthusiasm about staying abreast of governance issues, a high degree of self-confidence, and facilitation skills. But, taken together, their observations overwhelming suggest that it is the interpersonal skills of the diplomat that are paramount for helping directors and management find mutually acceptable solutions to common challenges. And because these skills are so subtle and don’t always come with the job description, it is hardly surprising that choosing a lead director can be one of the most difficult decisions a board can make.

Theodore L. Dysart is a managing partner at executive search firm Heidrick & Struggles, where he leads the firm’s board practice in North and South America.