The panelists agreed that the risks of litigation arising from issues related to ERISA are as high as they have ever been. And the decline in the value of stocks, pension assets, and 401(k) plans will only increase these risks.

Although directors do not normally select investment options for the retirement plan, they often participate in the appointment of officers or other members of a fiduciary committee who perform this function, which opens directors up to legal risks under ERISA. That means they need to have the proper protection in place.

One of the best legal defenses, according to Fine, is to prevent lawsuits in the first place. This can be done with proper organization and anticipation of legal issues before they arise. Cousin concurred, suggesting that the investment decision component for employee pension plans “be farmed out so that the issue becomes proper delegation.” Good record-keeping begins with having some objective analysis about the selection of an independent fiduciary and a paper trail that establishes the appropriateness of the decision to hire such an advisor. Also useful in thwarting litigation is well-written criteria outlining the strategy the independent fiduciary is to follow in making investment decisions on behalf of the employer. “It’s then a lot harder to raise questions with respect to the company,” suggested McGuinness.

Coverage to Count On
Should a board have a separate insurance policy for independent directors, known as Side A coverage, to address the sometimes-competing insurance needs of directors versus corporate officers? The consensus was that such coverage is up to the discretion of the board and is a full board responsibility. “Directors and officers should take a very personal interest in understanding what protections exist for them, and increasingly, they are insisting on Side A protection,” said Fine.

A question was posed by one panelist about mandatory versus non-mandatory advancement of legal fees. Doesn’t that put the board in a position of being both judge and jury when trying to determine whether money for legal fees should be given to an executive who might be corrupt?

The scope of an individual’s advancement rights is an issue frequently raised only when it is needed the most: when a criminal, regulatory, or internal investigation is underway. The situation gets particularly complicated when a company is concerned about advancing expenses to someone who might be guilty. Cousin noted that Delaware case law dealing with mandatory advancement rights has consistently held that mandatory provisions must be enforced according to their terms.

“What happens to a director’s indemnification when there is a change in control?” asked Allan Grafman, president of All Media Ventures, who serves on the board of Majesco Entertainment. “What should we be looking for?” “Based on my experience,” said Gail Lieberman, managing partner of Rudder Capital, “once a company is sold, the buyer will continue to cover and indemnify the directors for a period of time.”

Leadership consultant Stuart Levine, who like Lieberman has served on multiple public-company boards, suggested a different change-in-control scenario: when a board member retires, does the company continue to indemnify him for a period of time? “This came up on one board and it’s a really important question to ask, because it needs to be written into the bylaws,” he said.

Check your D&O policy, advised AIG’s Fine. “The good news is that most D&O policies have change-in-control [provisions] and continue to indemnify directors for a period of time after such an occurrence,” he said.

Paying for Counsel
“What if independent counsel is sought by a director? Who are those bills submitted to and when do you submit them?” asked Grafman.

Robert Barbanell, a director at Cantel Medical and founder of a financial advisory practice, suggested that if a director chooses to seek independent counsel, that director should bear at least 15 to 20 percent of the cost, “because otherwise, officers and directors will go and find the most well-known, highly rated lawyer and the amount of my money he or she is going to spend could be excessive. It stands to reason that if [any director] wants independent counsel, he has to pay some share of that.” To which McGuinness, the litigator, quipped: “I want to be on record that I’m in favor of anything that gets the lawyers paid.” More seriously, McGuinness advised that the desire for independent counsel is an option that needs to be flagged because “it doesn’t come up all that often and when it does, usually there’s a specific reason for it. You have to be cautious.”

Veteran director Thomas Wajnert recommended building flexibility into the bylaws on the advancement of legal fees. “The board’s determination on advancement of fees may be very different on Day 1 or Day 10 or Day 30. You have to provide staging so that you can pull back that advance. Once the U.S. attorney gets those documents and you now believe the former CEO is a crook, you may want to change your determination based on the new evidence. A lot of times what happens is that shareholders get involved, asking why $10 million of our $15 million profit has been used to pay legal fees.”

Fine advised that a director under investigation might consider having an independent lawyer to serve as a “shadow” counsel, if there is a possible divergence of interest between that individual board member, the rest of the board, and the company. Cousin suggested a simple precaution: “Read the plan document. Get it and read it and if you don’t understand it, get an independent adviser to help you understand it.”

The report, “Weil Briefing: SEC Disclosure and Corporate Governance,” details the challenges facing public companies in light of the recent financial crisis and upcoming proxy season. The report consists of separate sections relating to: risk oversight and shareholder relations; compensation; financial reporting; and general preparations for the annual shareholder meeting.

Included in the briefing is advice for the financial reporting implications of the ongoing recession, such as new risk factors and SEC disclosure. Also included is a lengthy appraisal of developing compensation factors, such as clawbacks, golden parachutes, and structural changes to stock options packages.

Weil, Gotshal & Manges is a global law firm with 20 offices in Europe, Asia, and the Untied States. Its publications can be found here.

The principles, labeled “Key Agreed Principles to Strengthen Corporate Governance for U.S. Publicly Traded Companies,” were released on October 16 and consist of ten maxims that boards should follow for continued success. These include obligations to board responsibility, transparency, and accountability, for example the sixth principle that asserts “Assessment of management performance and integrity are at the heart of effective governance, and should factor into all board decisions.”

In lauding the NACD’s efforts, PGI president and COO Michael J. Ryan, Jr., claimed that the principles encourage boards to think outside the box, and were developed “to help shareholders and boards avoid rote approaches to corporate governance.” In lending his firm’s endorsement, Ryan called on investors and other governance institutions to “implement the Principles, and to treat them as the first step in ongoing corporate governance reform.”

The National Association of Corporate Directors is a non-profit organization built to assist and advise the decision-making of corporate boards and their individual directors. The Association, founded in 1977, has 10,000 members.

In its own timeless way, each work provides useful insights into the logistical, ethical, and emotional complexities of leadership. And if you want to glean insights into the mysteries of human nature, Shakespeare has no equal. For instance, want to know when the Bard predicts the credit crisis will end? “Tomorrow, tomorrow, and tomorrow.” And what the regulators are reminding us of now: “All that glisters is not gold.” Finally, the verdict on boards and management: “Lord, what fools these mortals be!” But there are other works that our editors also deemed to be eminently worthy of consideration.

Reminiscences of a Stock Operator by Edwin Lefevre (1923) is the fictionalized biography of Jesse Livermore, a manipulator who was perhaps the original rogue trader and who operated in the wild days at the turn of the 19th century before regulation. Lefevre was among the first business writers to combine a riveting story with a lifetime of practical business and market lessons.

The Intelligent Investor: A Book of Practical Counsel by Benjamin Graham (1949). Warren Buffett called it “by far the best book on investing ever written.” We can’t do better than that.

The Great Crash of 1929 by John Kenneth Galbraith (1955) is as concise as it is insightful, and has never gone out of print. Why? “Every time it has been about to pass from print,” the late Galbraith himself wrote in 1997, “another speculative bubble…has stirred interest in the history of this, the great modern case of boom and collapse.”

The Effective Executive by Peter Drucker (1966). As Fortune magazine wrote in a 2005 “smartest books” list: “Before you can manage anyone else, you’ve got to learn to manage yourself. In this slim volume, Drucker tells you how.” The original management guru’s lessons are, like most of the works listed here, timeless.

The Go-Go Years: The Drama and Crashing Finale of Wall Street’s Bullish 60s by the late New Yorker writer John Brooks (1973) examines the 1960s mutualfund boom and is, to quote a cover testimonial provided by Galbraith, “a small classic in the history of financial insanity.”

In Search of Excellence by Thomas Peters and Robert H. Waterman (1982) is worth reading for the chance to consider what made some once-great firms disappear (Digital Equipment, Wang Labs) and others (GE, Wal-Mart) carry on.

Barbarians at the Gate: The Fall of RJR Nabisco by Bryan Burrough and John Helyar (1990) reads with all the suspense of a mystery and was praised in its time for having “all the stuff of great business journalism: skullduggery, cigars, trophy wives, and enough greed to sink Wall Street.” Made into a movie, it launched a new genre: the business thriller with CEOs cast as either imbeciles or bad guys.

“A big, hairy, audacious goal,” a phrase coined in Built to Last by James Collins and Jerry I. Porras (1994), also applies to the story. The writers research and find what makes great companies great and tell the success stories of such firms as Boeing, Deloitte & Touche, and Sony. Another nugget they dispense: be a clockmaker, not a timekeeper.

Here’s a question: Why read about Buffett when you can read Buffett? While the sage has never written a book, Lawrence Cunningham compiled the best of Buffett’s annual shareholder letters from 1976 to 1996 into The Essays of Warren Buffett: Lessons for Corporate America (1997). Take notes.

If there is to be just one memoir, make it Katherine Graham’s Personal History (1997). Thrust reluctantly by the death of her husband to the top of The Washington Post Co., she tells the story of how an immensely wealthy but sheltered, naive, shy, stay-at-home mom became the most powerful woman in American journalism. It is profound in the questions it raises about overcoming one’s perceived personal limitations. She’s surrounded by a superb cast of brilliant editors, friends, rogues, business leaders, and politicians.

The “tipping point” is when fads turn to trends. (Today it’s known as viral marketing.) Writer Malcolm Gladwell illustrates the phenomenon by showing us what best-selling novels, crime waves, and yawning have in common in The Tipping Point: How Little Things Can Make a Big Difference (2000).

Roger Lowenstein’s clear writing style serves readers well whether they’re reading his bio of Buffett; his most recent work, “As America Aged;” or his classic: When Genius Failed: The Rise and Fall of Long-Term Capital Management (2000).

Risk managers take note: Hedge-fund manager turned author Nassim Nicholas Taleb claims it’s impossible to understand or predict markets. In Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets he argues that it all comes down to luck. He continued the creed last year with The Black Swan, destined to become another modern classic.

Leading Quietly: An Unorthodox Guide to Doing the Right Thing by Joseph L. Badaracco (2002). “Finally,” one reviewer wrote, “an ethics book for people who live in the real world who want to ‘do the right thing’ and keep their job.

It’s been three years since Freakonomics by Stephen Dubner and Steven D. Levitt (2005) hit the best-seller’s list and drew eye-opening correlations— for instance, comparing the corporate hierarchy of McDonald’s to an inner-city drug gang (in both, the bosses make big money while legions of workers earn minimum wage or less)–while giving the normally staid field of economics some sizzle.

Nowhere is the adage about keeping your friends close and your enemies closer better illustrated than in Doris Kearns Goodwin’s Team of Rivals: The Political Genius of Abraham Lincoln (2005). Although not a business book per se, there is more to be learned about building an effective team from the 16th president than any modern how-to business book.

For pure inspiration: They Made America: Two Centuries of Innovation from the Steam Engine to the Search Engine by Harold Evans (2006) profiles 53 of the top innovators in history.

Even if a tome on corporate governance is something you thought only your nominating chair should read, you may find it well worth the time to read The New Corporate Governance in Theory and Practice by UCLA professor Stephen Bainbridge.

Finally, make time for Harvard professor Bill George, who created a sensation with Authentic Leadership (2003) and True North (2007) and has just published a third book: Finding Your True North: A Personal Guide. See, this isn’t just a book, it’s a program, and George will gladly steer you through.

Have a favorite that we missed? Log on to www.directorship.com/bestbizbooks and weigh in on what should be on every director’s bookshelf.

The latest in the book series titled “Memo to the CEO” from Harvard Business School Press is High Performance with High Integrity by Ben W. Heineman, Jr. Not as high profile as his bosses Jeff Immelt or Jack Welch, Heineman nonetheless learned his lessons well during the 18 years he worked as general counsel at General Electric for both CEOs. He writes that pay for performance is likely to be replaced with “pay for performance with integrity.”

Compensation is the sweet spot for Steven E. Hall, the founder of an eponymous compensation consulting practice, and co-author of Executive Compensation: Best Practices (John Wiley & Sons, 2008). Co-written with Frederick D. Lipman, a senior partner at Blank Rome, the tome reveals instructional lessons and best practices from numerous comp committees. One of many best-practice tips advises comp committees to “avoid the Lake Wobegon effect.” Not all executives, the authors note, are above average so not all deserve to be paid above the 50th percentile.

No proxy season would be complete without thoughtful insight gleaned from shareholder actions. Check out The Board Book: An Insider’s Guide for Directors and Trustees by William G. Bowen (Norton 2008). The former president of Princeton University and the Mellon Foundation sees the role of director from a multitude of richly informed perspectives.

Lively examples of Procter & Gamble’s product innovation provide the bounce in The Game-Changer: How You Can Drive Revenue and Profit Growth with Innovation co-written by A.G. Lafley and management consultant Ram Charan. Lafley has the credibility to take on the expansive topic of innovation. When he was promoted eight years ago to chairman and CEO, he mandated that P&G seek at least 50 percent of its new ideas externally, a revolutionary change for a company long known for it’s “must-be invented” here culture.

Beyond the boardroom: The Post-American World by Fareed Zakaria (W.W. Norton & Co., 2008), describes the current rise of China, India, Brazil, Russia, and others as a tectonic shift on par with the rise of the Western world and the emergence of the United States as a global superpower. Zakaria argues that America’s central role in world politics will inevitably shrink and offers a proactive prescription that includes new rules for a new age.

While Zakaria’s observations skew to the future, long-time Asia watcher Bill Emmott retraces the histories of the vast continent’s three ascending powers. Emmott writes in Rivals (Harcourt, 2008) that while China’s remarkable rise will continue, a “modernizing” India and a “resurgent” Japan could wind up jockeying for supremacy. The shift in power could resemble 19th-century Europe.

For a change of pace, Sports Illustrated writer Leigh Montville recounts the outlandish tale of 1930s amateur golf legend and Hollywood prankster John Montague. The Mysterious Montague: A True Tale of Hollywood, Golf, and Armed Robbery is based on the antics of one man who never played the game professionally but could drive a ball into a bird on a wire 170 feet away or chip it into a glass across the room.

Golf not your game? How about a sail down the French Mediterranean coast? A new translation of Afloat by Guy De Maupassant provides “spontaneity, gaiety, and freshness,” perhaps the best antidote to the heaviness of board books and the brevity of summer.

The Black Swan: The Impact of the Highly Improbable

One day, your black swan will surely come in. That’s the bad news.

The book’s title is visual onomatopoeia, a phrase that resembles the thing it describes. The title’s metaphorical meaning is a reference to very rare occurrences, the kinds which cause intelligent people to seek ways to reassure themselves about events that worked out, shall we say, unhelpfully. The “black swan” syndrome that Nassim Nicholas Taleb describes is when intelligent people, faced with a world-class economic or geopolitical hangover after a really enjoyable evening, reverse engineer all of the parts of the story so it becomes neat, concrete, and predictable. Nice as well if you end up with a scapegoat, and even better if that scapegoat is a CEO or a president. In other words, make it make sense. Please.

Taleb is part proprietary trader, part philosopher, part social critic, and certainly, part world-weary cynic. His book is a provocative look into behavioral science and human nature. As business is again being visited by capricious gods, this time of the credit-market variety, the book makes for core board-director reading, and for some of you may be fully deductible.

The Black Swan blends together a careful and logical world view that suggests theory be weighed against empirical evidence, particularly when the experts claim to have eliminated that great leveler, volatility. Taleb believes the greatest risk is when we have hedged all risk. Once you finish reading this book, try to avoid the tempting tendency to call every calamity a Black Swan, although it may greatly delight your guests at cocktail parties.

‘Wit and Erudition’ in Risk Telling 

As strategic planning was to the 1980s, so risk management will be to this decade—no longer a quantitative backwater for nerds whose aspiration is to serve in internal audit departments. Managing risk is now “Everyone’s Job #1” —the new “it” career.

Proper risk management, to paraphrase Ryan O’Neill in Love Story, means never having to say you’re sorry. That would seem a worthy ambition. However, the thought that everyone is on the same risk-management page can be scary: Once we all begin to take it seriously at the same time, we end up in a maelstrom of correlation. If all risk is managed identically, it’s like placing a bet on both sides of an outcome, and ultimately, making a bet against yourself; so no one wins.

Peter Bernstein’s book also raises the question of whether governments or markets, with their invisible hands, should be the gating factors on who takes on how much risk and when.

Against the Gods blends together a masterful telling of history, philosophy, and wisdom as regards this ineffable thing called risk. He brings the story of risk alive—most risks fortunately start out that way—with wit and erudition about which we cannot know enough.

It was during these sessions that Gates—fueled by Diet Orange Crush, according to a Wall Street Journal reporter who was once invited to join him—hatched plans to introduce a tablet PC, launch an online video-game business, and create more secure software. While his company has more to keep up with than most, and, of course, Gates can afford the extra time off, his idea of a retreat purely for the purpose of a good think is, well, good thinking.

Directorship urges directors and officers to take an annual think week, and if practical, to do so as a full board, complete with afternoon walks, provocative reading, speakers on global issues, and a facilitator like Jeffrey Sonnenfeld or Ram Charan to ensure thoughtful give and take (Directorship’s Events Group can help you put this together, if you are so inclined). While Gates mostly reads papers contributed by Microsoft engineers, we recommend beginning with a cornucopia of books, almost one a day for your own version of think week:

Day 1. Greenspan’s Apologia

The Age of Turbulence, by Alan Greenspan (The Penguin Press)

With little to none of that curious “ambispeak” for which he was so famous, the sage of economics opines on subjects near and far from his usual roost. He takes on the Internet bubble, Black Monday, Asian manifest destiny, political fiascoes, and always, a reservoir of awe for American resilience. A must, must read, Greenspan is perfect for starting the week by getting a solid grounding in economic surveillance.

Day 2. What a Negligible Difference a Hundred Years Makes

The Panic of 1907: Lessons Learned from the Market’s Perfect Storm, by Robert F. Bruner (John Wiley & Sons)

Next, go back in time. It was one of the worst crises of modern history, including system shocks, bank runs, liquidity vacuums, and the intervention of uber-banker J.P. “Jack” Morgan, Jr. The result was that six years later the Federal Reserve was formed. You may not feel better about 2007 after reading this, but you will feel like you have company.

Days 3, 4 and 5. (It’s 893 pages!) All The Raj

India after Ghandi, by Ramachandra Guha (HarperCollins)

One thing you can’t outsource is first-hand knowledge of the greatest economic driver in the world today. India teaches us that beginnings may not look as bright as they may one day be, and that patience with under-developed countries may well work better than force-feeding democratic principles.

Day 6. The Innovator

Prophet of Innovation Joseph Schumpeter and Creative Destruction, by Thomas K. McCraw (The Belknap Press of Harvard University Press)

Although the line he is most famous for sounds like it was coined on Madison Avenue, this seer and thinker was worlds and eons ahead of his time: “All businesses eventually fail,” (and we thought it was only restaurants). But this combustion fuels an engine that drives our capitalist economy, and the flotsam and jetsam is fodder for tomorrow’s innovation.

Day 7. Smart Guys Finish in the Future
The Mystery of 2012 – Predictions, Prophecies, and Possibilities, by Greg Braden, Peter Russell and Daniel Pinchbeck (Sounds True Inc.)

From the Mayan calendar to socially responsible business to Galactic Alignment, this collection of futurist essays opens a narrow window in the great beyond. We like it for its parallel thinking and the fact that when you finish, you will not think about the present in the same way again.

Admittedly, Americans are a competitive breed. From trying to outdo the Joneses to hard charging on the athletic field, few pursuits are greeted with more enthusiasm than trying to be the best. CEOs of large companies are no different: Managing a global enterprise is among the most challenging of all activities, and they like to try to outdo each other. So the question comes down to this: How do we judge who is the best? There is no simple measurement, after all, and timing and luck play a big part. Scoring high on traditional metrics does not guarantee you are the best, as various political, ethical, and environmental issues may also play an important role in the outcome. And then there is the concept of teamwork, which certainly factors into success. In the military sphere, rarely do generals take credit for winning wars, although we can’t very well win without their leadership. So we chatted up an old friend, Cab Woodward, former vice chairman of ITT, and a board member of Newell Rubbermaid, CVS, and Footstar. In his great and impressive career, we asked, who did he feel was the greatest CEO ever? He responded without hesitation: Tom Murphy and Dan Burke (of Capital Cities/ABC fame), interestingly, finding advantage in two business geniuses over one. And then Woodward added, “or John McGillicuddy (of Manufacturers Hanover) and then everyone else.” Not faint praise coming from this titan, and also, a dance card that Warren Buffett would heartily endorse.

Good Advice
Several years ago, I spent a day in Santa Monica talking to Michael Milken about business opportunities in the field of training, education, and healthcare in what eventually became his vehicle for developing all of these opportunities into a major enterprise, Knowledge Universe. During our engaging discussion, he received a phone call, obviously from a close friend, and began asking after the caller’s health and business affairs. The friend had enjoyed immense success, been wonderfully received by kings, politicos, and oil barons. But he was wondering what was next, so Milken offered some advice to his listener along the lines of, “Ken, I think you should stick with your idea of retiring after your illustrious career, and I also think you should consider getting involved in a significant charity that has meaning for you and where you can use your enormous talents to good effect.”

The year was 1998. The caller was Ken Lay.

Conflicts of Interest or Interesting Conflicts

For a number of years I was a protégé and successor to Caspar Weinberger, former Secretary of Defense, at the time he was publisher and then chairman of Forbes magazine. He related a story one day about Adnan Khashoggi, the wealthy Saudi entrepreneur and arms trader. Khashoggi had Weinberger in his offices to talk about a contract with the U.S. Department of Defense. When Weinberger replied that anything done directly to favor him would be a conflict of interest, Khashoggi looked puzzled and asked what that meant. Weinberger, a Harvard Law grad, replied with a crisp, clear definition of a conflict of interest, and Khashoggi furrowed his brow and replied, “In that case, I think a conflict of interest is something that I have no interest in.”

This brought to mind the question of whether service on certain boards might be in conflict with Directorship’s mandate to help illuminate the boardroom to its readers. The boardroom, as all of our readers need no reminder, is not a public forum but a place that shares the characteristics of a “war room” in terms of confidentiality, deliberativeness, and import. So my experience, I believe, tends to enliven and broaden the scope of our magazine, and prevents us from the kind of reporting that tends to portray a boardroom as a black hole in which ideas routinely go in but rarely come out. So as long as you find it illuminating or stimulating, we will continue to write about the boardroom from a board member’s perspective, and we hope you will continue to share your own insights with us. For the record, I am a board member of TheStreet.com and Sapient.

Your thoughts? jc@directorship.com

“Most of my life I have devoted to doing things for investors; it’s a habit I can’t seem to break,” he says. Nor does it appear that he has any intention of stopping now. In Bogle fashion, his new book has more than modest aims. Bogle says he was driven to write it by the ideal that he could help fix the long-term financial security of America’s 100 million investors.

One of the questions Bogle says he is most frequently asked is why the mutual fund industry takes a back seat on governance initiatives. Bogle cites the “long tradition of silence that is partially tradition and partially structural.”

“The same people,” he notes, “manage pension assets for the companies they would be criticizing.” Even so, in his view, significant gains were made under former Securities and Exchange Commission Chairman Harvey Pitt, on whose watch the SEC ruled that mutual funds should disclose votes to shareholders. While rarely neutral on any matter, he expresses ambivalence about “vote selling,” describing it as an unintended consequence of that ruling. His solution? Bogle believes voting rights should be owned by investors, not speculators, and that voting should be limited to those shareholders who have held shares for two or more years. “Short-term decisions have to be in the best interest of shareholders. We have to create shareholder value,” Bogle maintains.

As any man on a mission, Bogle has not been without his share of detractors. His first index mutual fund was derided as “Bogle’s folly,” but like Bogle, it outlived its critics and went on to become the second largest mutual fund in the world. His new book details his no-nonsense approach to investing and is peppered with testimonials from gurus such as Warren Buffett, Peter Lynch, Jim Cramer, and even Forrest Gump.

The Little Book of Common Sense Investing is unlikely to be popular reading among money managers, but for the individual investor, it presents a solid game plan for growing funds over the long haul.