Bloomberg High Frequency Trading
January 19, 2012 – New York, NY

Center for Capital Markets Competitiveness – The Volcker Rule: Measuring the Impact on Business event and a Regulatory Engagement: Corporate Treasurer Fly-in
January 24 – Washington, DC

Bloomberg Sovereign Debt Conference
January 24 – New York, NY

The Conference Board – Diversity and Inclusion New Leaders Academy
January 31-February 1, 2012 – Munich

Bloomberg China Conference
February 1 – New York, NY

Society of Corporate Secretaries & Governance Professionals – Essentials Seminar 2012
February 1-3, 2012 – Orlando, FL

Money Market Fund Reform
February 8, 2012 – Washington, DC

NACD’s Quarterly Environment Update
February 9, 2012 – Online

The Conference Board – Talent Management Strategies Conference
February 9-10, 2012 – New York, NY
February 29-March 1, 2012 – San Diego, CA

NACD – When an Activist Investor Comes Calling
February 15, 2012 – Atlanta, GA

Bloomberg Portfolio Manager Mash-up
February 16, 2012 – New York, NY

The Conference Board – Employee Health Care Conference
March 1-2, 2012 – New York, NY
March 29-30, 2012 – San Diego, CA

NACD Director Professionalism – The Master Class
March 12-13, 2012 – Scottsdale, AZ
April 26-27, 2012 – Charlotte, NC
August 20-12, 2012 – Laguna Beach, CA
December 5-6, 2012 – Naples, FL

NACD – Navigating Challenges Faced By a Private Company Chairman
March 21, 2012 – Atlanta, GA

Bloomberg Sovereign Debt Conference
March 22, 2012 – Frankfurt, Germany

The Conference Board – Executive Coaching Conference
March 27-28, 2012 – New York, NY

6th Annual Capital Markets Summit
March 28, 2012 – Washington, DC

National Association of Manufacturers 2012 Annual Public Affairs Conference
April 1-3, 2012 – Aventura, FL

Council of Institutional Investors – 2012 Spring Meeting
April 1-3, 2012 – Washington, DC

The Conference Board – Diversity & Inclusion Management Seminars
April 4-5, 2012- New York, NY

Bloomberg Doha Conference
April 16-17, 2012 – Doha, Qatar

The Conference Board – Social Media in HR Seminar
April 17-18, 2012 – New York, NY

NACD – The Roles and Challenges of the Lead Director
April 18, 2012 – Atlanta, GA

The Conference Board – Women’s Leadership Conference
April 19-20, 2012 – New York, NY

NACD Director Professionalism
April 23-24, 2012 – Charlotte, NC
August 16-17, 2012 – Dana Point, CA
November 29-30, 2012 – Washington, DC

Bloomberg Latin America Investing Conference
April 26, 2012 – New York, NY

Bloomberg Washington Summit
May 1, 2012 – Washington, DC

The Conference Board – Executive Compensation Conference
May 8-9, 2012 – Chicago, IL
June 5-6, 2012 – New York, NY

Bloomberg Canada Economic Summit
May 8, 2012 – Toronto, Canada

Bloomberg Enterprise Technology Summit
May 10, 2012 – New York, NY

The Conference Board – Corporate Political Spending
May 15, 2012 – Washington, DC

The Conference Board – Business Ethics and Compliance Conference
May 16-17, 2012 – Chicago, IL

The Conference Board – Leadership Development Conference
May 17-18, 2012 – New York, NY
June 7-8, 2012 – San Diego, CA

Bloomberg Ireland Economic Summit
May 17, 2012 – Dublin, Ireland

National Association of Manufacturing Summit
June 6-7, 2012 – Washington, DC

Bloomberg State & Municipal Finance
June 7, 2012 – Chicago, IL

Bloomberg Asset Management Summit
June 14, 2012 – Boston, MA

Stanford Rock Center for Corporate Governance – 18th Annual Directors’ College 2012
June 24-26, 2012 – Stanford Law School

The Conference Board – Corporate Diversity and Inclusion Conference
June 27-28, 2012 – Chicago, IL

Society of Corporate Secretaries & Governance Professionals 2012 National Conference
July 11-14 – Washington, DC

Stanford Rock Center for Corporate Governance – Fiduciary College 2012
July 23-25, 2012 – Stanford Law School

Council of Institutional Investors – 2012 Fall Meeting
October 3-5, 2012 – Seattle, WA

NACD Board Leadership Conference 2012
October 14-16, 2012
National Harbor, MD

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

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

Part I – Opportunities for the Board to Rebuild Trust

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

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

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

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

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

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

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

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

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

Part II – Opportunities for Shareholders to Rebuild Trust

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

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

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

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

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

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

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

The 2010 B. Kenneth West Award Winner Curtis J. Crawford (left), NACD Chair The Honorable Barbara Hackman Franklin, and the 2011 B. Kenneth West Award Winner Jon F. Hanson

Hanson and Britell treated guests to unique insights into the knowledge they have gleaned over their numerous years of corporate leadership experience throughout the two-day forum, along with numerous other C-suite and boardroom experts and advisors.

Joining Hanson onstage was HealthSouth CEO Jay Grinney in a discussion on fostering relationships between executives and directors that best benefit shareholders, moderated by George Davis, Egon Zehnder’s co-managing partner of the Global Board Practice George Davis. Hanson joined HealthSouth mere months before federal regulators began fraud investigations that resulted in five of the company’s previous CFOs pleading guilty and the firing of CEO Richard Scrushy. Today, the company has returned to prominence, benefited by Hanson and Grinney’s commitment to excellence.

“The most important thing a CEO has with a nonexecutive chair is someone who is familiar with the company, but is not a direct report that he can bounce ideas off of,” explained Hanson. The two describe themselves as having a strong chemistry; Hanson noted that Grinney is not much older than his oldest son. “We’ve never had a disagreement, we may have had differing views, but by the time we got off the phone we were on the same page,” he added.

The two have ironed out a process for communications with the full board, as well. Although Hanson is the primary contact for the board between meetings, who summarizes their ideas and concerns for Grinney, individual directors are always welcome to contact Grinney directly. “I am not the gatekeeper, nor do I want to be,” emphasized Hanson.

Grinney noted that an ideal chairman needs to have leadership skills, honesty, integrity and a clear perspective: “You need a nonexecutive chair who truly does not aspire to be CEO, that’s a key prerequisite.”

Michael Kneeland, CEO of United Rentals (left), NACD Chair The Honorable Barbara Hackman Franklin and 2011 NACD Public Company Director of the Year Jenne K. Britell

Director of the Year Britell also faced a dicey situation as a United Rentals board member in 2007, when the Delaware Courts ruled the rental equipment operator could not force Ceberus Capital Management to complete a proposed buyout of the company. The next year, she was named chairman. Britell also led the turnaround of GE Capital Mortgage Services as its CEO from 1996 to 2000.

Britell offered a glimpse into the best practices she learned from these experiences in a panel titled “Turnaround: Dealing with Distress,” one of which being the ability for challenges to unite a board. “Crisis enables faster changes,” she explained. “It forces a board to come together more quickly and more deeply when the only place you can go is up.”

Other panelists, including Levick Strategic Communications President Richard S. Levick and Blockbuster Director Gary Fernandes, noted that the important part of crisis planning is not to develop a plan for specific crises, but rather have a solid leadership structure that works both in good times and bad. “The board and senior management need to share critical values,” Britell said. “The board has a critical role to play but the buck stops with the CEO, even if there is a nonexecutive chair or lead director. They need a consensus on values more than the plan.” (For more on the D100 from the September 2011 issue of NACD Directorship, please click here.)

This year’s keynote was delivered by former U.S. Army General Stanley McChrystal, who now serves on the board of JetBlue, and shared what he learned about leadership as commander of the U.S. Forces and International Security Assistance Force in Afghanistan, and how he uses that knowledge now in the boardroom. He emphasized that a close relationship with allies is necessary for success, noting that situations where many organizations tasked with similar goals created unnecessary roadblocks. “Leadership is not a talent or a gift, it’s a choice,” he said.

Of the 300 forum attendees, a select group were also celebrating the completion of the required educational programs to become an NACD boardroom Leadership Fellow. Prospective NACD Fellows are required to have years of significant board service, and to complete a number of programs to earn the distinction. To learn more about the NACD Fellow program, please click here.

H. Rodgin Cohen, Carol J. Loomis, Edward A. Kangas

“If you have an athlete that all of a sudden performs far above whatever he or she has ever performed, the immediate thought is steroids. Well, risk is the steroid for business, and too often there’s not enough drug testing in the boardroom,” said Cohen, who together with Loomis and Kangas reflected on their years at the top of the business world.

Introducing the Hall of Fame panel was Mark Preisinger, director of corporate governance for the Coca-Cola Company.  “The theme of this year’s forum is the game changers and it’s particularly relevant given all that we in the corporate governance community are dealing with,” Preisinger said, noting that the Dodd-Frank Act and the mid-term elections will result in even more game-changing events for directors who serve public companies.

Loomis, whose articles have informed Fortune readers and in some instances proved transformative for more than 50 years, told an audience of more than 300 that directors need to keep the CEO honest by providing a balance to the chief executive’s power.  “Your biggest job is fingering the CEO who is pleasant and nice and honest but just isn’t any good, and you have to do something about that guy because you just can’t go along in that respect,” said Loomis, accentuating that one duty of boards is to balance the CEO’s power. “Boards must do a much better job than they do about M&A deals. Too often, as far as I can tell, CEOs like nothing better than to do deals, they’re rather obsessive about it, and so the board has to apply the restraint.”

Kangas highlighted the need for boards to work as a respectful and respectable unit, saying, “It’s important to talk straight, play straight, no games. It’s okay to be politically astute in the boardroom; it’s not too good to be political. You learn in time, and it’s something I’ve learned the hard way, that listening is important. I sometimes reflect back on what my mother had to say, she said ‘Eddie, if you press your lips together your ears will work better.’”

“An independent lead director or an independent executive chairman is really important for the effective function of the boardroom,” Kangas continued. “It’s also important if you have a non-executive chairman that they are not chairman of the company. The CEO should be the focal point for every company both inside and outside.”

The Hall of Fame dinner opened the NACD Directorship 100 Forum, which each year convenes to celebrate the Directorship 100, the annual list published in the September issue, of the most influential people in corporate governance.

Let’s be clear from the start, though: metrics do matter. There are certain rules of the game that serve as key benchmarks in creating a uniform understanding of what makes for good governance and good companies. At CalPERS, we have holdings in thousands of companies in dozens of countries. We require a playing field leveled by metric analysis to begin the decision-making process on where to invest. Yet we have only to look at the recent wild financial frontier and the near-collapse of the global economy to know that in so many cases, good governance principles were blindly, even disdainfully, ignored. In these volatile times, governance metrics can help lead the way to safety­—and increased shareowner value.

Take a look at one vitally important area where metrics can help us cut through the dense financial landscape: executive pay. What the statistics show is clear. CEOs now receive nearly 400 times more in compensation than the average employee, sums wholly untethered to any kind of corresponding growth in profitability or creation of wealth. We may not have a metric to tell us how much is too much, but we do have metrics that can tell us if pay has become outrageously detached from performance, if pay is rewarding short-term measures, or if pay has become disturbingly oblivious to risk. Return on invested capital, total shareholder returns, and even share price, as fickle and as imperfect an indicator of performance as it is, can help investors determine whether compensation is anchored to a legitimate long-term strategy or whether it is adrift in a short-term sea of visionless mediocrity.

Still, the clarifying light of good governance metrics can only illuminate so much. This is where critics have rightly challenged proxy voting firms. Not all key corporate operations can be analyzed by marking off columns of boxes during a due diligence review. Not all information yields to metric equations and statements of principle. What’s missing, as Yale’s Jeffrey Sonnenfeld pointed out in his critique of good governance metrics, is “the human side of governance.”

Nowhere can we find a better example of this than the corporate boardroom. To outside observers, for example, an objective laundry list of well-considered metrics detailing the DNA of an independent director may be sufficient, even satisfying, but in reality it’s a two-dimensional document with a defining weakness: It’s an account of what the independent director is not.

The real calculations begin with a list of what the directors are: Competent? Objective? Fearless and energetic? Some proxy ratings firms have constructed good governance blueprints from formulas that neglected to factor in the qualitative aspects of human behavior. Structural issues that follow a uniform, consistent path respond nicely to a nudge from these kinds of metric-based analytics; boardroom actions typically do not.

We’re working with industry colleagues to build a diverse database of potential board candidates, keenly aware that a qualitative metric built around human dynamics is a central component of any serious discussion. Among the core traits we’re looking for are collegiality, the ability to listen and the willingness to be part of a team.

But how do you assess these characteristics? Not easily—and not simply from a cold stare at a matrix of metrics, though the outline of the story might begin there. This is an area where a tale of traits is revealed through hard work, meticulous research…and the simple, uncomplicated act of meeting and talking with a potential candidate. It can’t be done from afar. Do metrics matter? Yes, but…

Anne Simpson is senior portfolio manager for corporate governance at the California Public Employees’ Retirement System (CalPERS).

Too little focus is placed on operational risks. Yet, most publicly traded firms have at least two internal control systems. The Committee of Sponsoring Organizations (COSO), which covers financial reporting, operations and compliance is different from the International Organization for Standardization (ISO), which focuses on operational controls related to quality, the environment and safety. Miscues with operational controls become financial risks that can be easily overlooked. COSO and ISO controls must be coordinated, and reports to the board must contain results from both systems.

Moreover, board members must recognize the value of ISO audit results and demand that management include them.

Advantages of Coordinated Audits
There are numerous advantages for the inclusion of ISO audits in the board’s oversight of risk assessment. In addition to the obvious advantages of more cost-effective audits, elimination of unnecessary audits and more comprehensive risk assessments, boards may be most interested in the regulatory compliance aspects. The new 2010 proxy rules require disclosure of the board’s role, administration and leadership structure as it relates to the oversight of risks. This additional scrutiny of the internal controls process will require boards to increase their knowledge and involvement in this process. Moreover, it will more than likely require boards to enhance the process. Integrating ISO audits in the process can be an effective component to meeting the new disclosure requirements.

In addition, compliance would be improved by meeting the expectations of the Public Company Accounting Oversight Board (PCAOB). The September 2009 PCAOB report titled “Report on the First-Year Implementation of Auditing Standard No. 5, An Audit of Internal Control Over Financial Reporting That Is Integrated With an Audit of Financial Statements,” indicated that registered PCAOB auditors could improve their audits of publicly traded companies in six areas, including “using the work of others” and “entity-level controls.” Audits could be more efficient if reduced testing of controls at the process or entity levels were done by relying more on the work of others (e.g., the ISO audits), the report concluded. It is highly likely that the PCAOB would agree that the inclusion of ISO audits could improve the efficacy and effectiveness of the board’s oversight responsibility.

Where ISO and COSO Overlap
Many publicly traded companies incur the cost of conducting several independent internal controls audits. Granted, the audits are conducted for different reasons and their impetus is from different sources. Companies voluntarily pay independent ISO audit firms (i.e., registrars) to audit their management systems in order to remain viable as competitors in the marketplace. These same companies pay independent PCAOB-registered audit firms to ensure their management systems comply with the Sarbanes-Oxley Act of 2002. Yet, there are many similarities in the two different audits.

The international management system standards (e.g., ISO 9001, ISO 14001 and ISO 18001) were developed under the coordination of the ISO, a worldwide standards-setting body based in Geneva, Switzerland. The standards have become a widely used marketing tool and operational enhancement vehicle. For many industries, certification to these standards has become a requirement to conduct business. These ISO certifications require that a company design and implement internal controls over its operations, then train some of its employees to conduct annual internal audits to ensure compliance. Under the guidelines of these standards, most companies with such internal control systems also engage an outside independent auditor called a registrar to audit and certify their system annually.

The predominant standard for auditing internal controls over financial reporting was developed by COSO, which is comprised of the major financial and accounting organizations. This standard is typically used as the basis for the CEO and CFO certifications that the internal controls are effective when the quarterly financial reports are filed with the Securities and Exchange Commission. COSO defines internal control as “a process designed to provide reasonable assurance regarding the achievement of objectives in effectiveness and efficiency of operations, reliability of financial reporting and compliance with applicable laws and regulations.”

Many boards seem to be aware that the COSO framework is designed to cover some operational areas and that ISO internal controls cover some financial areas. The COSO framework is primarily a tool of the board and its senior executives, while the ISO internal controls are tools of the operational units. Yet, the two systems essentially perform the same functions, just at different levels in the organization. Companies incur significant expense to manage both internal control systems and are likely to increase their expenditures to perform this function as financial regulatory scrutiny increases.

When the tenets of two internal control systems are studied, it becomes clear that there are significant overlaps in the internal controls for the ISO and COSO systems. Boards need to be aware of opportunities to maximize the cost-effectiveness of merging or coordinating the two systems. Many boards do not understand the intricacies of either internal control system, let alone the value that they could provide if properly coordinated. Still, oversight of the internal controls and risks is one of the primary responsibilities of a board of directors.

Both internal control systems cover all three core elements (see related chart below), but there are some distinct differences. ISO covers all operational controls and some financial reporting and regulatory compliance controls. COSO covers all financial reporting controls and some operational and regulatory compliance controls. Another difference is that ISO-managed risks are typically quantitatively expressed (e.g., statistical process control) whereas COSO-managed risks are typically rated in general terms such as high, medium and low.

However, there are more similarities than differences: both internal control systems require certification by independent third parties, both require annual internal management audits (minimally), both are standards developed by recognized standards bodies, both seek to minimize company risks and enhance performance, both apply to all levels of the company and both are geared toward the achievement of established objectives. There are many similarities that, if adequately coordinated, could yield significant advantages for an enterprise-wide risk management system.

Larry Taylor PhD is the CEO of The Creighton Group, a board advisory services firm based in Los Angeles. He serves on the board of OBN Holdings and The CM Diamonds Foundation.

Participants:
1. Catherine L. Bromilow, partner, Corporate Governance Group, PricewaterhouseCoopers
2. Scott R. Cutler, EVP, co-head U.S. Listings and Cash Execution,
NYSE Euronext
3. Thomas J. Neff, chairman, Spencer Stuart U.S.,  director, Ace Ltd., Hewitt Associates
4. John S. Barry, partner, Corporate Governance Group, PricewaterhouseCoopers
5. Stuart R. Levine
Founder and CEO, Stuart Levine & Associates, director, Broadridge Financial Solutions
6. Julie Hembrock Daum, practice co-leader, North American Board and CEO Practice, Spencer Stuart
7. Kenneth P. Kopelman, partner, Kramer Levin Naftalis & Frankel,
director, Liz Claiborne
8. Robin A. Ferracone
Executive chair, Farient Advisors and CEO, RAF Capital

The handbook focuses on both the role of the individual trustee and the role of the board as a united and functioning entity, outlining the specific skill set and focus that are necessary traits of a successful board. Important tax information is also explained, as well as regulatory and compliance issues.

Click here to read the handbook.

There are already a variety of regulatory reform proposals on the table and a broad spectrum of policy actions ready to be implemented by different nations in an effort to address the widespread feeling of discontent flowing from the recent financial crisis. There is an alternative path, however, that may prove to be a more productive and powerful force of change—one that is driven by the corporate sector itself. Progressive companies are taking the opportunity to “lead by example,” promoting the key tenets and principles that will help restore investor confidence. In effect, their day-to-day interactions with all stakeholders demonstrate how to live the right values and ethics.

The starting point for this journey is the board of directors. Collectively, the board has the responsibility for the future direction of the enterprise, its impact on stakeholders and society at large. The board directly influences the critical management actions to drive short-term financial results, incent long-term value creation and develop strategies and plans that will ensure sustainable growth.

After the recent holiday break, a dozen Fortune 500 directors were asked for their thoughts on the biggest changes they see on the horizon and the implications for the boardroom. Common themes included greater globalization pressures, additional regulatory intervention and the potential rise of national protectionism. Many thought the current flashpoint issue of executive compensation must be addressed quickly to begin restoring investor confidence and credibility on Main Street.

The directors shared the view that a possible long-term, slow growth economic environment, combined with the aforementioned external forces, would challenge boards to become more transparent with key stakeholders on the major decisions that affect the enterprise. They see stake- holders continually “raising the bar” on board performance and taking a more proactive role in influencing the board through enhanced proxy access and more targeted advisory votes.

The fundamental issue to be addressed is how best to rapidly propagate the hallmarks of highly effective boards across the broadest group of companies while promoting the right governance principles and values. When one looks back on the prior decade, from Enron at the beginning, to Bear Sterns and Lehman Brothers at the end, it is easy to conclude that the core    enablers of boardroom change are already taking shape—a large pool of engaged, qualified directors; more shareholder-friendly director election processes; and a viral 24/7 communication cycle that ruthlessly disseminates information on any type of misstep or egregious behavior.

What is still needed is a common forum that brings together the best ideas, innovative practices and new approaches in a non-threatening environment that encourages collaboration and action across boardrooms.

One idea currently building momentum involves creating a closely linked global network of corporate chairmen and lead directors to serve as the primary conduit to more rapidly exchange current best practices, practical insights and actionable ideas. Its mission would help accelerate the development of highly effective boards and promote more progressive shareholder relations and corporate responsibility agendas. As one of the survey respondents concluded, “If I could wave a magic wand today, I would create a self-policing entity that would watch over the large public-company boards and help ensure no one went off the tracks, not the Securities and Exchange Commission, not Institutional Shareholder Services, but a group of practicing chairman and other board members who are fighting the good fight every day, with the goal of looking back in ten years to see a continuous improvement in corporate values, ethics, incentive systems, sustainable business growth and the impact on the global community.”

There is a good likelihood that the PCAOB will replicate its prior behavior and adopt (or approve something similar to) the new audit standards, making them applicable to public company audits. Further, major thrusts of the new audit standards are (i) to highlight the role and responsibility of management in the preparation of an entity’s financial statement and (ii) to encourage communication between the auditors of an entity and those charged with corporate governance. It is inevitable that there will be extended, and more meaningful, discussions on myriad  topics that are closely related to the entity’s financial statements. Given this inevitability, it behooves directors to familiarize themselves with the more-interactive environment they are likely to encounter in the near-term future, since it will be interwoven with the question of whether the directors have successfully discharged their fiduciary responsibilities.

The Genesis of Current Accounting Standards
The primary responsibility for generating auditing standards has fallen upon the American Institute of Certified Public Accountants (AICPA), since its predecessor American Institute of Accountants was appointed to that task by the Federal Reserve Board in 1917. Since 1978, that task has been the province of the Auditing Standards Board (ASB), which is the senior technical committee of the AICPA. Over the years, the ASB and its predecessors have generated 120 Statements on Auditing Standards, which are included in the Codification of Statements on Auditing Standards and have come to be known as Generally Accepted Auditing Standards (GAAS).

By virtue of the Sarbanes-Oxley Act of 2002, the PCAOB assumed the responsibility for promulgating auditing standards relating to the financial statements of public companies. With some exceptions, the PCAOB has adopted the pre-existing GAAS as its own.

The Need to Change Auditing Standards
An event that caused the ASB to decide to overhaul its auditing standards was globalization. As entities become more multi-national, their various components became subject to the accounting and auditing rules of different jurisdictions. In an attempt to address this hodge-podge, the International Auditing and Attestations Standards Board (IAASB) began to develop standards that it hoped would be applicable worldwide. The AICPA, however, did not think it appropriate to blindly adopt auditing standards promulgated by an entity that lacked the background to fully understand the development of American audit standards. Thus, the ASB was asked to converge U.S. GAAS with the international standards being developed to the extent possible so the two standards would be more consistent while allowing for divergence where appropriate.

Since a rewrite was necessary, the ASB decided that it should also include the concept of clarity. As 120 standards had been developed over the years by different sets of people, it was felt that an overhaul, including the use of simpler language, would provide a more unified structure that was easier for an auditor to understand.

Also bearing directly on the clarity aspect of the project was the fact that the language used in the standards sometimes obscured the difference between mandatory requirements and applicable guidance.  Thus, the new standards were written in such a way as to clearly distinguish between the two.

By way of example, a comparison of the related parties standard is instructive. The current standard, promulgated in 1983, is 12 paragraphs in length and accompanied by several auditing interpretations generated since. The PCAOB standards are a virtually verbatim adoption. By contrast, the proposed new standard is twenty-seven paragraphs in length, accompanied by 52 more paragraphs of applicable guidance.  As one might imagine, it is both more comprehensive and more specific.

The Roles of Those Charged With Governance
It has always been the auditor’s mantra that an entity’s financial statements are the primary responsibility of corporate management. This makes perfect sense since the management chooses the accounting, develops applicable policies, hires the personnel to implement those policies, establishes and maintains internal controls and then supervises compliance. While management responsibility is the basic premise on which an audit is conducted, mention was only sporadically made in GAAS since the focus was primarily on the auditor.  This has now changed.

The 10 bedrock auditing standards, which have been in existence for more than half-a-century, and which made no mention of management responsibility, will soon be extinct. They are replaced by a Preface to the new Codification which in its second-numbered paragraph has a detailed explanation of why management responsibility is a basic audit premise. Previously, the auditor was encouraged to discuss management responsibility before taking on an audit; now, the management’s acknowledgment of its responsibilities is a mandatory part of an engagement without which an audit cannot be undertaken. The standard auditor’s report, which formerly made a generalized reference to management responsibility, will soon have a detailed explanation for the benefit of recipients.

In addition to this intensification of focus on management responsibilities, the new standards are rife with provisions encouraging a dialogue (and sometimes providing a script) between the auditors and those charged with corporate governance, whenever certain issues arise. Again illustrative is the proposed related party standard.  The basic premise is weaved into one of the application paragraphs, with an explanation as to why the premise is particularly important in the related party context.

How Changes Will Affect Outside Directors
The outside director will approve an audit engagement that acknowledges the role of management in the preparation of financial statements, and will receive an audit report that describes that role at length. It will be impossible for that director to say, with any degree of plausibility, that he/she has no understanding of what that role might be.

Instead, that director would be best served by asking both management and auditor their respective understandings of that role, what policies, procedures, and internal controls are designed to assist in that role, and how well management is meeting those responsibilities. Any unsatisfactory or inconsistent answer should be followed up on, and a concise record should be made of the inquiries and responses to minimize future questions as to whether the directors had fulfilled their fiduciary responsibilities.

Similarly, the increased emphasis on communication between the auditors and those charged with corporate governance will undoubtedly result in more such communications. As the ultimate stewards of the business entity, the directors can only discharge their fiduciary responsibilities by paying close attention to these discussions, resolving any issues that arise, and keeping a careful record of what has transpired.

Of course, one might say that a careful director would do all these things under the present standards, and one would be right. The difference under the new standards is that these circumstances will arise more often. The director should anticipate this development and decide what types of issues should be addressed, after consulting with counsel and consultants as appropriate. The minefield of compliance with fiduciary responsibilities will be tricky and it is best to negotiate it with experienced assistance.

And properly addressing the issues that will be raised is important. Obviously, it is important from a litigation possibility perspective and from the perspective of discharging fiduciary obligations; but it is also important from the perspective of fostering better management performance and more reliable financial statements.
Anthony Costantini is a New York-based partner in the law firm of Duane Morris LLP,.recently completed a three-year term as a public member of the Auditing Standards Board.

It behooves directors to familiarize themselves with the more-interactive environment they are likely to encounter in the near-term future, since it will be interwoven with the question of whether they have successfully discharged their fiduciary responsibilities.

The last sentence of the principle almost reads as an afterthought, but it states that directors should employ “healthy skepticism” in meeting their responsibilities. I never had enough appreciation for this “afterthought” until my experience as the corporate governance expert witness in a major Enron lawsuit. What makes the point interesting is that this is not a statement about numbers, risk management, or complex financial securities, but rather about human behavior and attitude. Indeed, it is possible to be highly intelligent, talented, knowledgeable and successful, but because of human behavior, fail to employ “healthy skepticism” in meeting responsibilities as a director.

So what does this have to do with Enron? By all accounts, in the late 1990s and 2000 Enron was, on the surface, a booming company with an executive management of business superstars. With such a backdrop of success, a natural human instinct might be for a director to reason that “star” management should not be seriously questioned or challenged and that the board should simply ratify management’s proposals. This, however, is contrary to the notion of “healthy skepticism.” Merriam-Webster’s online dictionary defines skepticism as an “attitude of doubt.” It is understandably difficult for a director to have an attitude of doubt when management’s track record is so stellar. However, directors need to understand that each decision they ratify is either one that creates or destroys value, irrespective of the past.

Healthy skepticism is when directors employ confidence in their ability to use common sense and wisdom in their decision-making processes, irrespective of whether the CEO is new to the board or is a known “superstar.” Healthy skepticism does not mean that directors question every facet of every decision, but simply that they employ their ability to discern and recognize when and how to contribute to a richer decision outcome with all eyes on the decision itself, and not to have undue bias towards the one proposing the decision.

What makes the Enron case particularly relevant today is that there may be many boards out there with directors of impeccable qualifications who enjoy a collective boardroom culture of “pedestal-type” respect for management. This is not healthy. Many of these boards might think that this is not their situation since they routinely ask “tough questions” and “challenge” management. However, in all the testimony I read, I did not find a single outside director on the Enron board in the 1997-2001 timeframe who felt he or she did not challenge management or ask tough questions. In short, there is no question in my mind that the Enron directors did challenge management and ask tough questions. On conclusion of such interaction and virtually without exception, however, the board or committee approved the management proposal. One director’s testimony brings the point home in reference to his role in the decisions on accounting policy before the Enron board: “I am not going to second guess on whether that was the right or wrong approach.”

The problem with this logic is that “healthy skepticism” requires that directors do exactly that (second guess), either in the quietness of their own mind, if that is what is “healthy” for the situation, or to speak up, question, and yes, perhaps even reject a management proposal.

So did a very high management proposal approval rate prove that Enron was a rubber stamp board? The answer is no, but it does provide supportive evidence. The nail in the coffin indicative of a rubber stamp board is when you combine a high management proposal approval rate with specific ratification of decisions that by all measures defy common sense. If the Enron board had employed “healthy skepticism” in meeting their responsibilities, they would have had enough trust and confidence in their judgment (in spite of “superstar” management) to reject decisions that defied common sense.

It is easy at this point to “Monday-morning quarterback”, but that does not mean we cannot learn from the past. If you are on a board of directors with talented, successful, personable, and knowledgeable people, and if your executive management team “can do no wrong”, then this message is especially meant for you: “Directors should employ healthy skepticism in meeting their responsibilities.”

James Tompkins is a director of the Corporate Governance Center at Kennesaw State University.

Brazil
-  The agents of governance should be accountable for their actions, undertaking the full consequences of their acts and omissions.

-  The board of directors must ensure that management preemptively identifies and lists the main risks to which the organization is exposed. Management should also calculate the odds of such risks actually occurring.

-  While it is recommended that the CEO should not be a member of the board, the CEO should attend the board meetings as a guest.

China
-  The board of directors shall at least convene two meetings every year.

-  Those who are not permitted to serve on the board include any person who holds a position in the company,  such person’s lineal relatives and major social relations.

-  In case the independent directors fail to perform their duties, they shall bear the relevant responsibilities.

India
-  To prevent unfettered decision-making power with a single individual, the roles and offices of chairman and CEO should be separated, as far as possible, to promote balance of power.

-  An individual may not remain as an independent board director in a company for more than six years.

-  The maximum number of public companies in which an individual may serve as an independent director should be restricted to seven.

Russia
-  Companies should not, as a rule, take part in operations and conclude transactions involving a high risk of losing capital and investments.

-  The law restricts the participation of the director general or members of the managerial board of the company on the board of directors. However, it fails to provide the procedures needed to enforce this restriction.

-  The company should actively exercise its right to claim damages from members of the board of directors to compensate losses suffered.

The Concept of Patient Capital

If we’re going to compete nationally and internationally, we have to focus on what some people have characterized as “patient capital.” We have to develop a framework in which investors can invest for the long term, and allow capital to produce what is typically American–innovative products that impact productivity, generate new ideas, and make our goods marketable across the world. Ultimately, this great engine that is the corporation is designed to enhance wealth for those who invest in it.

We should be careful when we reshape the framework of internal governance in a corporation, and not take our eye off the larger ball. In today’s red-hot politicizing of corporate governance principles, we would do well, I think, to thoughtfully approach changes in those principles, changes that affect the relationship between the directors’ exercise of their authority, and their accountability for the way in which they exercise that authority.

The Limits of Director Responsibility
In Delaware’s chartered corporations, the law empowers directors to manage the corporation. But there are limits, and those limits are well described.  Some of the limits are shareholders’ concurrent power to amend bylaws, shareholders’ required votes to approve certain transactions, shareholders’ power to elect directors, and more importantly, to proscribe the process for electing directors, and effective August 1 in Delaware with a new proxy access law, proxy access with the right to propose a short slate.

It bears emphasis to suggest that 14a-8 still blocks the now liberal proxy access that’s available under the Delaware law. HealthSouth is the first Delaware corporation, to my knowledge, to adopt a proxy access bylaw consistent with our August 1 statute. It goes nowhere unless the SEC allows proxy access. I would say to SEC Chairman [Mary] Schapiro and her colleagues, “Chairman Schapiro, tear down that wall.”

Give us the opportunity at the state level to shape proxy access as it suits each individual corporation and its investors. Don’t mandate proxy access in a way that may work for some but not for others…Let us experiment. Let us see how it works.

The Answer to Our Problems
The answer to most of our problems, if not all of them today, is to enhance the quality of directors, and focus them on their attention to their fiduciary duties. For breach of duty of care in most chartered corporations, there is an exculpatory provision: 102(b)(7), we call it. Other states that have copied it call it something else in their code, obviously.
But basically, it says, in order to encourage directors to take a reasonable risk, that they would not be liable for a breach of the duty of care. They’re only liable for breaches–personally liable for breaches of the duties of loyalty, or a failure to carry out the duties of loyalty and care in good faith…It’s an obligation of directors, I think, to see to it that the full range of fiduciary duty, instruction, and assistance be made available to officers as well as directors, and it’s even more important that that happen sooner rather than later.

The other thing that we are concerned about in Delaware, and should be, is that our law is not applied in such a way that it chills responsible risk taking – that risk taking has been the engine that’s driven the corporation. It’s been the source of wealth enhancement for American corporations for almost 200 years.

On Legislating Governance
The politicizing of corporate governance today is remarkable. We have bills in Congress that are variously styled. They’re all hyperbolic. A bill of rights for shareholders–what American is opposed to a bill of rights?  A shareholder empowerment bill–who can be opposed to power to the people?  Who is opposed to strengthening corporate governance, empowering shareholders, or voting for a bill of rights? No one, until you look at what actually might happen. These corporate governance principles, whether you agree with them individually or not, counter-intuitively could not be better for everyone under every circumstance. Yet, all are mandated under each piece of this legislation.

A Belief In Shareholder Democracy
Now, I use the word change. I do not use the word reform. Until I personally see empirical data that supports in a particular business sector, or for a particular corporation, that separating the chairman and CEO, majority voting, elimination of staggered boards, proxy access with limits, holding periods, and percentage of shares–until something demonstrates that one or more of those will effectively alter the quality of corporate governance in a given situation, then it’s difficult to say, that all, much less each, of these proposed changes are truly reform. Reform implies to me, something better than you have now. Prove it, establish it, and then it may well be accepted by all of us.

But when you think about it, it’s ironic that these measures are styled “shareholder democracy,” because each of them actually limits what shareholders can choose. Under the state systems—at least, under ours—all of these listed principles of corporate governance can be adopted by a Delaware chartered corporation, but they’re not mandated. Why? Because we truly believe in a shareholder democracy. By mandating a set of new corporate governance principles that everyone must swallow, as if it were a pill for a disease you do not have, it seems to me, does not enhance majority voting in a shareholder democracy.

The Mouse That Roars
I recognize that in the wider world of things, Delaware’s role is small. Wags have said that Delaware is the mouse that roared. I don’t suggest to you that my ideas about corporate governance are better than anyone else’s. I’m perfectly convinced that many of these corporate governance principles may well help individual corporations. But common sense also tells me to mandate all of these principles for every corporation on a condition of being listed in our markets is counterproductive at best and foolish, at worst. We will continue in Delaware to try to shape corporate governance on a case-by-case basis, and address, and look for and find hopefully that proper balance between director authority and director accountability.

‘Too Small to Fail’
I hope that what we will see is a thoughtful, considered, incremental development of the future of principles of corporate governance. There is a publicly traded corporation that says, “Progress is our most important product.” In Delaware, what progress and the development of principles of corporate governance means is, incremental change within a known factual context over time. It’s deliberate, thoughtful, predictable, consistent, and clear. That’s the path we will continue to travel, and I can be sure of one thing absolutely. Delaware is too small to fail.

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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.

Against this backdrop, three senior directors discussed the question, “what keeps the chairman up at night?” at a recent NACD New England breakfast meeting. The panel, moderated by Ernest Godshalk, managing director of ELGIN Management Group, and a director of Hittite Microwave Corp., GT Solar International, and Verigy, was attended by:

Amelia Fawcett, chairman of Pensions First Group and Guardian Media Group, which publishes the Guardian and Observer newspapers in the U.K., recently completed a term as a director of the Bank of England, and is a director of State Street Corp.

Bob Posen, chairman of MFS Investment Management (with more than $150 billlion dollars in assets), teaches corporate governance at Harvard Business School, and is author of the upcoming book, Too Big to Save? How to fix the U.S. Financial System.

Mike Reuttgers is lead director of Raytheon, chairman of Wilson Micro-electronics PLC in Scotland, former chair of EMC, and a d irector of NACD New England.

What are the key issues in current Board Governance?

Moderator: I have several lists here of key board issues. They include say on pay, proxy access, and numerous regulatory incursions which are proposed in limitation of the prerogatives of the board. What do you think?

Fawcett: Cash. Balance sheet funding. Scenarios playing around that. Relationship to enterprise risk management. The key issue today is making sure that your company has enough cash. Further, in this crisis, a key issue is “fit for purpose.” Do you have right management and the right board with the necessary skill sets in this current environment? How do you attract and retain? How do you deal with the blurring of boundaries between the roles of directors and management in this environment? Finally, there is of course tremendous reform in compensation and governance;  is it evolution or revolution?

Reuttgers: Cash. Do you have enough? This is especially true in non-profits. But in all organizations, you have to understand cash. “Not all cash is the same.” Who holds it? When and how can you use it? Is it free cash or not? Also budgets; Boards are now rejecting more first budgets than ever before because they are not conservative enough. Revenue projections are too optimistic. It is better to be ahead of budget than behind it. Boards are much more involved in budgets. This involvement impacts long term strategy. This involvement will also impact compensation.

Posen: What does this financial crisis mean for boards and governance? Its impact on boards is negative. Distinguished boards made up of independent directors, at many large institutions, in full compliance with Sarbanes Oxley, none-the-less were clueless. They found that risk assessment, product mix, compensation were all out of whack. This, by the way, proves that Sarbanes Oxley doesn’t get you where you must go. There are more important factors such as:

• Size: Boards are too big, small Boards work better, 5 to 7 directors are optimal.
• Expertise: You may have smart people and you may have independent people, but do you have enough people who really actually understand your industry? Early retirement is a dumb idea; you lose the expertise you need just as it has been fully developed.
• Time: Directors really do not know their companies. They need 2 to 3 full days each month to learn about their companies.

We can tinker with the procedures, but large global company directors cannot be effective with current structures. We should have a small number of directors, each of which is concurrently serving on no more than 2 boards, and their pay should be increased accordingly. This model is needed to monitor effectively everything that needs to be monitored in a modern corporation.

Fawcett: I agree that boards are too large. Forensic examination of company failures shows that large boards may surface the correct issues, but those issues tend to get diluted in discussion when too many people are talking. The key issues are thus not discussed adequately. Another issue is diversity: you need variety of expertises, not variety such as gender. You need “uncomfortable” thinkers.

Posen: We need a cadre of professional directors. Everyone seems to be looking for a sitting CEO; he thinks they should never be directors of other companies. CEOs push for other CEOs but this is not a good reason. The best directors are older and have time to spend; why kick out directors when they are 70? We do that because we are uncomfortable in confronting the small number who “lose it”; but most don’t. Companies should use board evaluations to rid themselves of failing older directors, not throw out the baby with the bathwater.

Moderator: Do the above observations apply to smaller and medium-sized companies?

Posen: Yes, except for proxy access. Say on pay may be a catalyst for internal discussion, but it is “a blunt instrument. Pay is complicated.” There is a problem in communicating information effectively about compensation to shareholders; this is best left to compensation committees.

Corporate committee heads [other panelists suggest all directors] should go out and meet with major investors; this is done sometimes but not often enough. Outside directors generally should talk to major investors about compensation but indeed about other issues also. Major investors are more and more important, since changes in New York Stock Exchange rules prevent brokers from casting discretionary votes for street name shares in director elections. This issue is more important than proxy access.

We can solve the proxy access issue without mandating that companies assist shareholders in soliciting shareholder nominee proxies [this is one element of the proposed new SEC Rules covering proxy solicitation]. For example, a shareholder could nominate, have a right to post the nomination on the company website, and should not be required to solicit all proxies, nor require the company to solicit for them. No need to incur this cost, particularly since brokers can’t vote anymore and retail investors tend not to vote; all shareholders proposing a nominee need do is communicate with a small number of major shareholders in order to mount an inexpensive proxy fight. Company proxy materials need not include information about shareholder nominees, just a statement that there are in fact other candidates (referring shareholders to the company’s website). Proxy access really is a cost issue solved by the age of the Internet. Elections will be controlled by institutions and broad solicitation is no longer necessary.

Reuttgers: If you have corporate authority for a large board, but actually a lesser number of sitting members, you should amend the bylaws to reduce the maximum size of your board to equal the number of sitting directors. Leaving open slots will attract shareholder nominations.

Posen: Research has shown that there is no relationship as to financial statement performance or stock value favoring the division of the chair and the CEO. Additionally, the rise of the “lead director” is creating a group of directors whose functionality comes close to an outside chair.

Fawcett: Split roles (splitting the CEO and the chair) tend to increase communication and educate directors. I expect in 10 years this will be normative here in the United States. It may even be mandated [there is legislation before Congress which would in fact mandate such a division]. In the U.K., nothing is legislatively mandated, we operate under the rule of “comply or explain.” What this means is, if you do not feel your company adopted a particular alleged best practice, you can simply explain in disclosure the reasons for not doing so. This approach in the U.K. has expanded to most governance issues, where “best practices” are not mandated but may be availed of, or not.

Audience high points:

• Whenever management schedules a board meeting at a facility (“on site meetings”), you are wasting your time. It is better to drop in. When the directors are coming, the company people at a given site are prepared, rehearsed, etc. You don’t learn anything.
• One company successfully matched every outside director with one senior manager for purposes of mentoring and education.
• In the U.K., corporate social responsibility will be on the short list of key issues for most boards. Same thing is true in much of the rest of Europe. What is the enterprise doing for schools, for poorer countries, for the ecology? This is not an agenda item identified by the panel, nor appearing on typical lists in current circulation purporting to identify key U.S. board issues. It was speculated that preoccupation with the economy, by U.S. boards, has delayed a growth of corporate social responsibility as a key U.S. board issue.
• In response to a question concerning the role of a board in disaster prevention and management, it was noted that all boards should be asking questions about how to handle swine flu, which may well be an extremely significant factor in company performance this fall and winter. It was suggested that boards have an affirmative obligation to inquire and assure themselves as to the sufficiency of planning in this regard.

Commentary:  There was a marked distinction between the generally circulated lists of key board issues (which tended to focus on governmental and regulatory matters), and the key issues presented by these board chairs of large companies. The board chairs on the panel were far more focused on specific issues that bear upon the substantive performance of the board functions; substance, not procedure.

Equally interesting, although much of the literature in the last six months have dwelt on enterprise risk management (perhaps an expected reaction to how many risks were missed leading up to the recent economic meltdown), ERM was mentioned by the panel only in passing and as an element relating to understanding and insuring liquidity.

Some of the lessons suggested by the panel are applicable to privately held companies, some to non-profits, and almost all in one degree or another to small cap and medium cap public companies. The extent to which the involvement of the Federal government in active corporate management will, in the long term, tend to emphasize procedural and bureaucratic safeguards at the expense of paying attention to global strategy should not be underestimated. Although there is much to be said for the government as a major funding agency having significant say in management, the governmental impulse toward one-size-fits-all procedures could have a grave impact on many US companies. With the Congress and the SEC vying with each other to appear more attuned to the protection of the public and the repair of our economy, there may be substantial formalistic governmental involvement ahead of us notwithstanding the lack of concern expressed by the panel as to those risks.

Stephen M. Honig, a director of the NACD New England, is a partner at Duane Morris in Boston where he practices a wide range of business law.

Today’s corporate education programs have attained a level of diversity and comprehensiveness unimagined by previous generations of executives. The modern global business climate has opened up vast sections of fertile territory for new exploration and interaction. The complexities of modern markets have necessitated a new approach to mastering the ever-expanding requirements of finance, risk, and strategy. Technological innovation presents numerous opportunities for growth and expansion as well as challenges. In short, the business world has changed and continues to change at an impressive rate, and the continual accumulation of new knowledge is and will always be an absolute necessity.

The most important reason to look towards executive education programs, however, may not be entirely based on enhancing the skill set of executives and directors, but rather on the all-important goal of appeasing their bosses: the shareholders.

A significant lasting effect of the financial crisis has been that shareholders have become increasingly concerned about the qualifications and personal character of those board members and executives in whom the well-being of their portfolios is entrusted. Now directors and C-suite executives are being called upon, either directly or indirectly, to prove their worth as leaders, and executive education programs can be a valuable tool in demonstrating to shareholders the development of new and relevant skills necessary in a changing economic landscape.

Making the Grade
In fact, executive education’s new justification may be one that the architects of such programs themselves are just beginning to come to grips with: regulators may require these programs. As shareholders watched resentfully, and sometimes vocally, as their portfolios diminished, the first scapegoats often have been directors and executives. Clearly, directors and executives have to prove themselves in different and more convincing ways than pre-Lehman collapse.

The backlash stemming from the financial crisis is that shareholders and regulators are pushing for increased disclosure of the background and qualifications needed for service in the top ranks of a public company. The Securities and Exchange Commission’s proposed Proxy Disclosure and Solicitation Enhancements would require directors to provide more information on their backgrounds and qualifications on proxy forms. With this in mind, the kind of development offered by executive education programs may be just what directors need to prove their mettle to the company’s owners.

“No one school can teach all that’s required to be a director…If you have a board, and you want to make it work more effectively, we can do that.” —Harvard Professor Jay Lorsch

“The issues facing director accountability are very broad, but [executive education] may be persuasive to some shareholders in establishing a director’s value,” says Stanford University Professor Joseph Grundfest. Though directors may face skepticism from shareholders who doubt a company’s management capabilities, enhancements offered by executive education programs can go a long way in convincing shareholders about the commitment and training of their directors.

Harvard’s Jay Lorsch is more skeptical: “No one school can teach all that’s required to be a director.” Lorsch says that while his school’s programs are invaluable in sharpening the skills needed to serve on a board, there is no replacement for years of on-the-job experience; in fact, he says, shareholders may not take such programs into consideration when evaluating directors. “If you’re on the board of a bank, and you don’t know anything about banking, we can’t fix that,” says Lorsch. “If you have a board and you want to make it work more effectively, we can do that.”

One significant, tangible perk of executive education is that many agencies actually will endorse certain programs by granting higher rankings to boards whose directors have participated in such educational opportunities. In fact, ISS Corporate Governance Services, which administers proxy ratings for RiskMetrics, bases its proxy ratings in part on a board’s completion of approved educational programs. (ISS credits can also be earned by attending programs provided by the National Association of Corporate Directors and by Directorship.)

Peer Exchange
For executives with years of experience in a high-pressure daily working environment, time spent on the job is certainly more valuable than hours spent in a classroom setting. There is no substitute for experience, but the vast possibilities offered by new and innovative means of learning can add a new dimension to experience. One significant advantage to executive education, for example, is the opportunity to connect with new people and ideas. “The peer element is crucial,” says Gordon Armstrong, director of marketing at Duke Corporate Education. “Just engaging these smart people in conversation and giving them new ways of thinking about what they already know is very valuable.” Stanford’s Grundfest agrees: “Directors learn a great deal from talking with other directors, and these interactions are a very important element of the work.” It may simply be a matter of new ways of viewing things, says Assistant Dean Whitney Hischier at the UC Berkeley Center for Executive Education: “Oftentimes, if people have been in a particular industry or company for a while, they may have not been exposed to differing points of view. There is a humbling aspect to realizing we don’t all know everything.”

In addition to the engaging minds found among classroom peers, the range of professors in today’s executive education programs is broad—and doesn’t necessarily follow the traditional mold of yore. Though most schools do rely on a core faculty, more often they are bringing in specialists from a variety of fields. “Our professors come from real-world arenas, including international politics, securities studies, environmental politics, and international law,” says Dean Deborah Nutter of the Fletcher School at Tufts University. “And they all bring with them a vital international perspective.”

Engaging the Globe
The curriculum offered by today’s executive education programs reflects the diverse challenges facing today’s executives, directors, and middle managers in a complex and interwoven business environment. The issues of risk management, regulatory compliance, teamwork, problem solving, audit, crisis management, succession planning, asset allocation, and executive compensation that confront today’s business leaders are those which an educational faculty can help tackle. “The world is changing very rapidly,” says Nutter, “and we’re always staying on top of changes in the world to help shape our curriculum.”

Besides the unique educational and networking opportunities afforded by the collaboration of savvy business minds, today’s director education programs focus intently on the new global business frontier. A majority of these programs display an international character, with faculty and curriculum directed towards the possibilities offered by the worldwide market. “We once led a program for Ericsson,” explains Armstrong, “where the executives were faced with a new market in South Africa that they were not at all familiar with. We had them meet with leaders of South African NGOs (non-governmental organizations) and really gain a new cultural understanding they otherwise wouldn’t have had access to.”

“It’s absolutely valuable to do a little exploring of the unknown,” says Hischier. She describes one program in which executives from a Norwegian petroleum company were taken to Brazil, one of their countries of operation. While there, the executives were taken into the field to meet with local oil suppliers, officials with the energy ministry, and community organizations to better understand the day-to-day life of a country that before had been merely a source of product. The field experience, far removed from the confines of the classroom, allowed company executives to see first-hand the reality of a country that until then had been an abstraction.

“If the world were stable, then our programs wouldn’t do much,” says Grundfest. “But the business world now changes so rapidly that even the most experienced directors have more of a reason to spend time educating themselves about these new developments.” Grundfest likens the new opportunities for directors to those available to an experienced surgeon: new techniques, instruments, and drugs that are constantly being developed make continual education a necessity.

Looking Ahead
While traditional educational pathways focus on the lessons to be learned from the past, executive education programs are very much designed towards the future and its possibilities. With the world in flux thanks to a generation-defining recession, directors, executives, and managers at all rungs on the corporate ladder must acclimate themselves to the unique challenges posed by a global marketplace and a regulatory environment far less forgiving than that which nourished the downturn. “There is a broader scope of content to cover now,” attests Hischier. “Our programs are becoming more multidisciplinary in response to a changing world.”

“The job of a director is dynamic and the obligations are changing rapidly, especially in terms of legal exposures,” says Grundfest. “As a result, our programs are changing. We reinvent them every year in response to what’s changing in the world.” While most program directors are still determining how their curriculum will be updated in response to the changes in the market, the most obvious impact is a greater emphasis on risk and its related disciplines. As director and executive education programs change, tomorrow’s leaders would be wise to consider such programs to stay abreast of new and valuable methods of adaptation, innovation, and success.

What went wrong?  It is far too simple to blame it on individual failure. Who among us thinks that if only he or she had sat on the board of AIG that its collapse could have been prevented?

What we have is the failure of a governance system. We must ask ourselves a set of very tough questions: What are the barriers to effective board governance? How can they be overcome? What would have been required for these well-meaning individuals to have fully exercised the stewardship with which they were entrusted and which they sought to provide? How could they truly have ensured the long-term health of the institution for which they were responsible?

A corporation’s ability to nurture relationships and to build the reservoirs of goodwill that create the resilience to respond and adapt over time depends on its health as a social institution.

It is time to probe beyond the obvious and well-worn barriers. It is too easy to focus, for example, simply on the mismatch of time and expertise in seeking to exercise “lay” oversight of these large, complex institutions.  More fundamental rethinking is required. We do not claim to have all of the answers, but based on our research and experience the outlines are clear.  A more effective governance model will be based on three core characteristics:

• A redefinition of what a ‘healthy’ institution looks like—one that emphasizes sustainable long-term success
• Board insistence on a well articulated purpose and related performance goals, and set of values for the enterprise that provides a fundamental compass to ensure the enterprise stays on track
• Board oversight of how effectively the purpose, goals, and values are being realized throughout the organization, based on governance processes that ensure transparency and voice from deep within the organization

What should board governance be seeking to achieve? What metrics should directors use to know if they are performing their duties properly?

Clearly, it is not just quarterly financial performance.  To effectively steward shareholder interests, boards need to be concerned about long-term value creation and the sustainability of performance. As anyone who has modeled corporate cash flows knows, the first three or even five years typically represent only a modest portion of the total value—the majority is in the terminal value.

David Langstaff, chairman of the advisory board of The Aspen Institute’s Business and Society Program, stresses the pervasive and corrosive impact of “short-termism.” It is even more invidious when it is the investors—those whose interests anchor the legal structure of corporate fiduciary responsibility—who are focused on the short term.  In 2007, even before the recent financial meltdown, The Aspen Institute issued a set of guiding principles for corporations and investors to help refocus on long-term value creation.

Commitment: The Missing Ingredient
Equally fundamental is a shift from a predominant focus on financial performance to a broader definition of health that includes the quality of the corporation’s relations with key stakeholders. Corporations are social systems as well as economic systems: the quality of relationships matter. The consumer trust that is the basis for brand equity, the customer loyalty that shapes future purchasing, the employee loyalty that keeps high performers from leaving, the supplier relationships that differentiate Toyota from General Motors—these are all important predictors of long-term performance.

A corporation’s ability to nurture these relationships and to build the reservoirs of goodwill that create the resilience to respond and adapt over time depends on its health as a social institution; specifically, on its ability to generate high levels of emotional commitment, first and foremost from their employees, and then from customers, suppliers, and other key stakeholders.

The acid test for employee commitment, in the sense that we mean it, is whether the individual is prepared to put the interests of the firm ahead of their personal interests or those of their particular department or unit. If the focus is strictly on performance, then individual interests can increasingly dominate. Without the requisite commitment to the collective good, the firm becomes increasingly self-seeking, bound by the current power balance and entitlements, to the point that a great enterprise like General Motors can inexorably decline over a 30 year period.

At the extreme, without commitment individuals can become increasingly willing to take risks for personal gain that put the institution at risk. It is patently clear this is what happened inside Lehman Brothers, AIG, and so many of our other leading financial institutions, to the point they not only put their own institution at risk, but the entire financial system.

Equally fundamental is a shift from a predominant focus on financial performance to a broader definition of health that includes the quality of the corporation’s relations with key stakeholders.

Thus, corporations that are built to succeed over the long term are characterized not just by high performance, but also by high commitment.

Psychological and Performance Alignment
We describe these types of companies and what it takes to build them in a new book: High Commitment, High Performance: How to Build a Resilient Organization for Sustained Advantage.

High commitment, high performance companies are found in nearly every industry and sell a variety of products, but all achieve three core goals:

• Performance alignment. The company’s strategy is aligned with the requirements of its environment, and the company’s organizing approach, management processes, and culture are aligned to execute the strategy.
• Psychological alignment. Employees and other key stakeholders have a strong emotional commitment to the mission and the values of the firm.
• The capacity to learn and change. Externally, management is alert to the changing requirements for competitive success, while internally it is open to learning what is going right and wrong within company operations and leading the necessary changes.

Langstaff elaborates on the central role of mission and values in psychological alignment: “If people believe they work for a company that is doing something worthwhile and has clear values that they can embrace with no compromises, they will be happier, more energized, and more committed,” he says.

Langstaff also describes how psychological alignment was central to the strategy of Veridian, a government defense contractor (now part of General Dynamics), where he was formerly the CEO. “We wanted to brand ourselves throughout the industry as the employer of the best, most innovative, and customer responsive people,” he says.  “Our goal was to create an extraordinary work environment for our employees. When we lost a contract, I wanted our people to prefer to stay with Veridian, rather than move on with the contract to the winner, as is customarily done.”

Veridian derived competitive benefit from this practice. “I wanted customers to know that if they chose against us, they could not count on having our talent move to the next contractor,” Langstaff says.

He then illustrates the distinction between performance alignment and psychological alignment. A defense contractor purely focused on short-term financial performance, he notes, would pursue any profitable work they could expect to win—and a number of companies have followed exactly this strategy.

But a focus on psychological alignment would lead them to be far choosier in the kind of work they took on out of concern for their implicit contract with employees. “Is having all employees on the same benefit plan important to you?” Langstaff asks.  “Is investing in training and development and giving all employees access important? Is employee retention a core value?  If so, there are some kinds of work that you’d better not get into, because you won’t be able to afford to do all those things and compete cost effectively.”

To achieve psychological alignment is not simply a question of human resources policies. It starts with a compelling corporate purpose that gives meaning to work and a set of values that people identify as consistent with their own personal values. It extends to the fundamental ways the company is operated.

“To deliver this work environment,” Langstaff notes, “we needed to break down internal barriers to collaboration and open lines of communication.  I wanted every employee to feel that they were supported by, and could deliver, the strength and capabilities of the entire corporation.”

What is true for a technology and professional services business like Veridian, also turns out to be true for airlines, steel, or any number of other industries. Companies like Southwest and Nucor that are able to combine psychological alignment, performance alignment, and the capacity to learn and adapt are the ones best able to sustain long-term performance.