Perhaps more than ever, the passion that today’s public boards bring to their roles intersects with shareholder scrutiny and regulatory reform at the increasingly transparent corner of corporate excellence—clearly seen through the prism of ROI, values and ethics.

Bottom line: This only works with the right board;  success continues by keeping the board’s mission aligned with corporate strategy.

“A board is a great gift on behalf of the shareholders,’’ says Theodore L. Dysart, a managing partner with Heidrick & Struggles, where he is a leader in the Global Board of Directors Practice. “These directors really want the best for the company.”

Sometimes, however, what’s best for the company is for a single director, or several, to step away to ensure the highest performing board possible.

Replacing directors is an evolving art laced with essences of traditional organizational skills, robust team building and effective leadership roles grounded in solid management science. The resulting best practice is the evolution of “relationship” boards into “skills and experience” boards.  This evolution also supports thoughtful, meaningful board-succession planning to support future strategic plans.

This requires a variety of new approaches to board composition, such as “recruiting skill sets versus recruiting names,” says Peter R. Gleason, managing director and CFO of the National Association of Corporate Directors (NACD). Other requirements include reducing experiential overlaps and closing professional gaps. “You have to constantly look at what you need and what you have” both in terms of immediate assessments and the changes and challenges forecast for the next two or three years for the corporation, Gleason says.

Since most boards have some latitude regarding their size, they don’t need to wait for a pending term limit to expire or the looming retirement of a current member to recruit the strategic expertise necessary for critical, long-term success. These boards also don’t need to be bound by a multi-month, if not multi-year, recruitment cycle for new board members.

“By staffing up, say from 12 to 15, a board may increase short term to get the skill sets necessary for the future,” explains Gleason. “Let’s say the corporation wants to expand into India next year. The board is going to want someone with multi-national experience. Planning for that ahead of time means going after a strategic expert in global management, knowing that someone else on the board, like a banker, will be retiring in a year or two.”

As executive compensation both in and out of the C-Suite continues to garner regulatory and shareholder interest, recruiting board members with extensive human-resources expertise is another key area of consideration. Directors who have HR experience “with internal performance metrics are critical moving forward,” Gleason says, especially as the Securities and Exchange Commission spotlights pay-for-performance and other executive compensation risks as mandatory reporting metrics.

With the SEC focusing more on disclosure rather than criteria of public board members, diversity is the hot-button issue when openings for directors occur, according to Edward H. Pendergast, president of Pendergast & Co., board chair of PLC Medical Systems, and an NACD faculty member.

“Diversity in the boardroom is looked at differently than diversity in the public,” where it usually refers to race, gender or ethnic backgrounds, says Pendergast, who serves on several public, private and non-profit boards. “In the boardroom, it is beyond that. It is about not having people from the same background. It used to be there would be seven CEOs on the board. No one from HR. No one from Techno-logy. No one from R&D. We need to look at diversity in every way. The ‘thinking’ boards are spending more time to find a director to fit their needs; someone who is honest, ethical and willing to take a contrarian position.”

This “patience vs. balance approach” gives the organization—whether a $2-million or a $2-billion corporation—the correct corporate governance model, bypassing short-term gain in favor of embedded fiduciary and risk oversight tied to individuals who foster an aggressive, value-driven and performance-oriented culture, and are knowledgeable and responsive to market forces.

So, given the “new normal” of the post-recession recovery, if it’s necessary to replace the entire board of a public company over the next three to four years, is it also possible?

Yes, according to Robert M. Galford, managing partner of the Center for Leading Organizations and chair of the compensation committee of Forrester Research. But it does take time to bring new members up to speed. What Galford suggests is that board chairs exercise a bit of creativity to rejuvenate current members while actively recruiting new members for the future.

“Boards get into patterns and into assigned roles,” Galford said. He urges directors to be bold and brave: “Ask the C-Suite what it would like to see from its board.”

Galford also recommends occasionally ditching the C-Suite to allow board members direct contact with middle managers and other high-potential employees in an informal setting. One way of accomplishing this, he says, is to politely disinvite the C-level—except maybe the chief counsel, as lawyers like to say, out of an abundance of caution—from the dinners that are often held the night before a quarterly board meeting. Then invite the “skip-down” crowd to meet with the board.

“Don’t have the ‘highfalutin’ there. Invite two to five employees per board member so the board sees more of the organization. This way, board members get a great deal of value unfiltered,” Galford says.

He also advocates that even experienced directors should participate in continuing education and executive leadership programs for public-board members.

“It’s very invigorating. [These programs] are surprisingly helpful. First, they calibrate your own point of view. Second, it gives you the ability to gain perspective on what’s on the horizon for boards in general. And, third, it is an opportunity to formally and informally hear from others about the issues that they are grappling with,” says Galford, who has more than a dozen years of public-board experience and is a faculty member for NACD’s customized education programs.

Over those 12 years, Galford says, board service has become “harder work, more work, more serious, more consequential. It may take awhile for board members to re-energize [as a result of educational and leadership programs] but once it works, the results are better returns for stakeholders and shareholders. It’s a fairly high return of investment…[a] tremendous return on costs that provide significant improvements. There’s very high ROI in this.”

This emphasis on board leadership demonstrates that boards are pro-actively refreshing and recruiting by considering individual skills and evaluating experience against corporate strategy. The results of these “skills and experience” boards: directors and managers are working together to achieve “constructive interaction” with a focus on activities that help the company maximize shareholder value.

CombiMatrix announced that its board has appointed Mark McGowan to the role of interim president and CEO, effective July 1, 2010 upon the transition from current president and CEO Amit Kumar.

Geoff Ballotti, CEO of RCI, has been appointed to the board at Christel House International.

CardioNet, a wireless medical technology company, announced that its board has appointed Joseph H. Capper president and CEO, effective immediately. Capper succeeds Randy H. Thurman who remains chairman of the board. Capper was previously president, CEO and member of the board at Home Diagnostics.

Jay Lorsch is the Louis E. Kirstein Professor of Human Relations at Harvard Business School. This post on The Harvard Law School Forum  on Corporate Governance and Financial Regulation blog is based on an article by Professor Lorsch and Professor Rakesh Khurana that first appeared in Harvard Magazine.

Like previous criticisms, the current complaints focus on two issues: executives are paid too much, and current incentive-pay schemes are flawed because the connection between executive pay and company performance is mixed at best—and at worst has led to a series of dysfunctional behaviors.

Whether executives are paid too much is highly contested. Some institutional shareholders, politicians, and the public (as measured by opinion surveys) believe that CEOs are overpaid, while other shareholders, board members, and executives themselves disagree. What cannot be disputed is that American CEOs make more money than CEOs in other countries, largely because of a greater reliance on incentive pay (see the details in the chart above). Further, American CEOs are paid increasingly large amounts relative to the average employee and their immediate subordinates. Finally, it is clear that the rise in executive pay contributes to the skewing of income distribution in the United States.

Less clear is evidence about the link between executive compensation and performance. The most comprehensive survey examining the link between CEO pay and performance found that changes in firm performance account for only 4 percent of the variance in CEO pay. [1] This may in part reflect CEOs’ ability to game the system, or even the perverse effects of incentives that promote dysfunctional behavior.

The solutions offered for the problems of excessive levels of executive pay and the need to strengthen the link between pay and performance often hit on the same themes: strengthen the independence of directors and compensation committees; increase the shareholders’ rights to elect directors and to express their views on compensation plans, to discourage gaming and align incentives more closely with the aims of the owners. It is also tempting to suggest that these problems can be solved by better compensation schemes or improved techniques to link CEO pay to stock performance.

We disagree with the premises underlying these remedies. Instead, we find that the current compensation trouble stems in large part from unexamined assumptions that have fundamentally changed the nature of executive compensation and radically shifted the way that boards, executives, and even the larger society regard the corporation and its broader purpose.

In fact, the problems of executive compensation are symptomatic of larger societal questions. They cannot be resolved without considering the purpose of executive compensation—what behaviors, attitudes, and values we are trying to motivate in our business leaders—and indeed the larger purpose of business in American society. We assert that the current approach to executive compensation is an outgrowth of a pervasive paradigm that boards, senior executives, and indeed even those of us educating future and current business leaders have adopted about the purpose of the corporation, what it means to be a business executive, and to whom and for what executives are responsible.

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Physicians Formula elected Thomas Lynch to its board of directors. Lynch is the founder and senior managing director of Mill Road Capital.

Errol Gillespie was appointed to the board at Estate Coffee Holdings. Gillespie, an expert in farm management and the coffee industry, is a former agronomy extension officer with the Coffee Industry Board in Jamaica.

William C. Mills joined Interleukin Genetics’ board. Mills is currently an independent venture capitalist.

Monster Worldwide named two new directors, Cynthia McCague and Jeffrey Rayport, to its board. McCague has more than 35 years of experience as a human resources professional. Rayport is currently a Partner at Castanea Partners.

AcademixDirect has appointed Karen C. Francis as chairman and CEO. Francis was formerly chairman and CEO of Publicis & Hal Riney.

David H. B. Smith was elected to the board at Northern Trust. Smith is executive vice president of policy and legal affairs and general counsel at the Mutual Fund Directors Forum.

Vermillion named Sandra A. Gardiner vice president and CFO. Gardiner served as CFO of Bend Research.

Adriana Pozzani Lynch, founder of Pozzani & Associates, joined Arbonne International as senior vice president and chief marketing officer.

Urastar Energy has appointed Charles W. Reed to its board. Reed is a registered professional geologist with more than 40 years of work experience in the mining industry.

Now, since I last spoke here two years ago, our country has been through a terrible trial. More than 8 million people have lost their jobs. Countless small businesses have had to shut their doors. Trillions of dollars in savings have been lost — forcing seniors to put off retirement, young people to postpone college, entrepreneurs to give up on the dream of starting a company. And as a nation we were forced to take unprecedented steps to rescue the financial system and the broader economy.

Complete text of President Obama’s speech on Wall Street reform yesterday at Cooper Union College.

And as a result of the decisions we made — some of which, let’s face it, were very unpopular — we are seeing hopeful signs. A little more than one year ago we were losing an average of 750,000 jobs each month. Today, America is adding jobs again. One year ago the economy was shrinking rapidly. Today the economy is growing. In fact, we’ve seen the fastest turnaround in growth in nearly three decades.

But you’re here and I’m here because we’ve got more work to do. Until this progress is felt not just on Wall Street but on Main Street we cannot be satisfied. Until the millions of our neighbors who are looking for work can find a job, and wages are growing at a meaningful pace, we may be able to claim a technical recovery — but we will not have truly recovered. And even as we seek to revive this economy, it’s also incumbent on us to rebuild it stronger than before. We don’t want an economy that has the same weaknesses that led to this crisis. And that means addressing some of the underlying problems that led to this turmoil and devastation in the first place.

Now, one of the most significant contributors to this recession was a financial crisis as dire as any we’ve known in generations — at least since the ’30s. And that crisis was born of a failure of responsibility — from Wall Street all the way to Washington — that brought down many of the world’s largest financial firms and nearly dragged our economy into a second Great Depression.

It was that failure of responsibility that I spoke about when I came to New York more than two years ago — before the worst of the crisis had unfolded. It was back in 2007. And I take no satisfaction in noting that my comments then have largely been borne out by the events that followed. But I repeat what I said then because it is essential that we learn the lessons from this crisis so we don’t doom ourselves to repeat it. And make no mistake, that is exactly what will happen if we allow this moment to pass — and that’s an outcome that is unacceptable to me and it’s unacceptable to you, the American people.

As I said on this stage two years ago, I believe in the power of the free market. I believe in a strong financial sector that helps people to raise capital and get loans and invest their savings. That’s part of what has made America what it is. But a free market was never meant to be a free license to take whatever you can get, however you can get it. That’s what happened too often in the years leading up to this crisis. Some — and let me be clear, not all — but some on Wall Street forgot that behind every dollar traded or leveraged there’s family looking to buy a house, or pay for an education, open a business, save for retirement. What happens on Wall Street has real consequences across the country, across our economy.

I’ve spoken before about the need to build a new foundation for economic growth in the 21st century. And given the importance of the financial sector, Wall Street reform is an absolutely essential part of that foundation. Without it, our house will continue to sit on shifting sands, and our families, businesses, and the global economy will be vulnerable to future crises. That’s why I feel so strongly that we need to enact a set of updated, commonsense rules to ensure accountability on Wall Street and to protect consumers in our financial system.

Now, here’s the good news: A comprehensive plan to achieve these reforms has already passed the House of Representatives.  A Senate version is currently being debated, drawing on ideas from Democrats and Republicans. Both bills represent significant improvement on the flawed rules that we have in place today, despite the furious effort of industry lobbyists to shape this legislation to their special interests.

And for those of you in the financial sector I’m sure that some of these lobbyists work for you and they’re doing what they are being paid to do. But I’m here today specifically — when I speak to the titans of industry here — because I want to urge you to join us, instead of fighting us in this effort.  I’m here because I believe that these reforms are, in the end, not only in the best interest of our country, but in the best interest of the financial sector. And I’m here to explain what reform will look like, and why it matters.

Now, first, the bill being considered in the Senate would create what we did not have before, and that is a way to protect the financial system and the broader economy and American taxpayers in the event that a large financial firm begins to fail. If there’s a Lehmans or an AIG, how can we respond in a way that doesn’t force taxpayers to pick up the tab or, alternatively, could bring down the whole system.

In an ordinary local bank when it approaches insolvency, we’ve got a process, an orderly process through the FDIC, that ensures that depositors are protected, maintains confidence in the banking system, and it works. Customers and taxpayers are protected and owners and management lose their equity. But we don’t have that kind of process designed to contain the failure of a Lehman Brothers or any of the largest and most interconnected financial firms in our country.

That’s why, when this crisis began, crucial decisions about what would happen to some of the world’s biggest companies — companies employing tens of thousands of people and holding hundreds of billions of dollars in assets — had to take place in hurried discussions in the middle of the night. And that’s why, to save the entire economy from an even worse catastrophe, we had to deploy taxpayer dollars. Now, much of that money has now been paid back and my administration has proposed a fee to be paid by large financial firms to recover all the money, every dime, because the American people should never have been put in that position in the first place.

But this is why we need a system to shut these firms down with the least amount of collateral damage to innocent people and innocent businesses. And from the start, I’ve insisted that the financial industry, not taxpayers, shoulder the costs in the event that a large financial company should falter. The goal is to make certain that taxpayers are never again on the hook because a firm is deemed “too big to fail.”

Now, there’s a legitimate debate taking place about how best to ensure taxpayers are held harmless in this process. And that’s a legitimate debate, and I encourage that debate. But what’s not legitimate is to suggest that somehow the legislation being proposed is going to encourage future taxpayer bailouts, as some have claimed. That makes for a good sound bite, but it’s not factually accurate. It is not true. (Applause.) In fact, the system as it stands — the system as it stands is what led to a series of massive, costly taxpayer bailouts. And it’s only with reform that we can avoid a similar outcome in the future. In other words, a vote for reform is a vote to put a stop to taxpayer-funded bailouts. That’s the truth. End of story. And nobody should be fooled in this debate.

By the way, these changes have the added benefit of creating incentives within the industry to ensure that no one company can ever threaten to bring down the whole economy.

To that end, the bill would also enact what’s known as the Volcker Rule — and there’s a tall guy sitting in the front row here, Paul Volcker  — who we named it after. And it does something very simple: It places some limits on the size of banks and the kinds of risks that banking institutions can take. This will not only safeguard our system against crises, this will also make our system stronger and more competitive by instilling confidence here at home and across the globe. Markets depend on that confidence. Part of what led to the turmoil of the past two years was that in the absence of clear rules and sound practices, people didn’t trust that our system was one in which it was safe to invest or lend. As we’ve seen, that harms all of us.

So by enacting these reforms, we’ll help ensure that our financial system — and our economy — continues to be the envy of the world. That’s the first thing, making sure that we can wind down one firm if it gets into trouble without bringing the whole system down or forcing taxpayers to fund a bailout.

Number two, reform would bring new transparency to many financial markets. As you know, part of what led to this crisis was firms like AIG and others who were making huge and risky bets, using derivatives and other complicated financial instruments, in ways that defied accountability, or even common sense. In fact, many practices were so opaque, so confusing, so complex that the people inside the firms didn’t understand them, much less those who were charged with overseeing them. They weren’t fully aware of the massive bets that were being placed. That’s what led Warren Buffett to describe derivatives that were bought and sold with little oversight as “financial weapons of mass destruction.” That’s what he called them. And that’s why reform will rein in excess and help ensure that these kinds of transactions take place in the light of day.

Now, there’s been a great deal of concern about these changes. So I want to reiterate: There is a legitimate role for these financial instruments in our economy. They can help allay risk and spur investment. And there are a lot of companies that use these instruments to that legitimate end — they are managing exposure to fluctuating prices or currencies, fluctuating markets. For example, a business might hedge against rising oil prices by buying a financial product to secure stable fuel costs, so an airlines might have an interest in locking in a decent price. That’s how markets are supposed to work. The problem is these markets operated in the shadows of our economy, invisible to regulators, invisible to the public. So reckless practices were rampant. Risks accrued until they threatened our entire financial system.
And that’s why these reforms are designed to respect legitimate activities but prevent reckless risk taking. That’s why we want to ensure that financial products like standardized derivatives are traded out in the open, in the full view of businesses, investors, and those charged with oversight.

And I was encouraged to see a Republican senator join with Democrats this week in moving forward on this issue. That’s a good sign. That’s a good sign. For without action, we’ll continue to see what amounts to highly-leveraged, loosely monitored gambling in our financial system, putting taxpayers and the economy in jeopardy. And the only people who ought to fear the kind of oversight and transparency that we’re proposing are those whose conduct will fail this scrutiny.

Third, this plan would enact the strongest consumer financial protections ever. And that’s absolutely necessary because this financial crisis wasn’t just the result of decisions made in the executive suites on Wall Street; it was also the result of decisions made around kitchen tables across America, by folks who took on mortgages and credit cards and auto loans. And while it’s true that many Americans took on financial obligations that they knew or should have known they could not have afforded, millions of others were, frankly, duped. They were misled by deceptive terms and conditions, buried deep in the fine print.

And while a few companies made out like bandits by exploiting their customers, our entire economy was made more vulnerable. Millions of people have now lost their homes. Tens of millions more have lost value in their homes. Just about every sector of our economy has felt the pain, whether you’re paving driveways in Arizona, or selling houses in Ohio, or you’re doing home repairs in California, or you’re using your home equity to start a small business in Florida.

That’s why we need to give consumers more protection and more power in our financial system. This is not about stifling competition, stifling innovation; it’s just the opposite. With a dedicated agency setting ground rules and looking out for ordinary people in our financial system, we will empower consumers with clear and concise information when they’re making financial decisions. So instead of competing to offer confusing products, companies will compete the old-fashioned way, by offering better products. And that will mean more choices for consumers, more opportunities for businesses, and more stability in our financial system. And unless your business model depends on bilking people, there is little to fear from these new rules.

Number four, the last key component of reform. These Wall Street reforms will give shareholders new power in the financial system. They will get what we call a say on pay, a voice with respect to the salaries and bonuses awarded to top executives. And the SEC will have the authority to give shareholders more say in corporate elections, so that investors and pension holders have a stronger role in determining who manages the company in which they’ve placed their savings.

Now, Americans don’t begrudge anybody for success when that success is earned. But when we read in the past, and sometimes in the present, about enormous executive bonuses at firms — even as they’re relying on assistance from taxpayers or they’re taking huge risks that threaten the system as a whole or their company is doing badly — it offends our fundamental values.

Not only that, some of the salaries and bonuses that we’ve seen creates perverse incentives to take reckless risks that contributed to the crisis. It’s what helped lead to a relentless focus on a company’s next quarter, to the detriment of its next year or its next decade. And it led to a situation in which folks with the most to lose — stock and pension holders — had the least to say in the process. And that has to change.

Let me close by saying this. I have laid out a set of Wall Street reforms. These are reforms that would put an end to taxpayer bailouts; that would bring complex financial dealings out of the shadows; that would protect consumers; and that would give shareholders more power in the financial system. But let’s face it, we also need reform in Washington.  And the debate — the debate over these changes is a perfect example.

I mean, we have seen battalions of financial industry lobbyists descending on Capitol Hill, firms spending millions to influence the outcome of this debate. We’ve seen misleading arguments and attacks that are designed not to improve the bill but to weaken or to kill it. We’ve seen a bipartisan process buckle under the weight of these withering forces, even as we’ve produced a proposal that by all accounts is a commonsense, reasonable, non-ideological approach to target the root problems that led to the turmoil in our financial sector and ultimately in our entire economy.

So we’ve seen business as usual in Washington, but I believe we can and must put this kind of cynical politics aside. We’ve got to put an end to it. That’s why I’m here today. That’s why I’m here today.

And to those of you who are in the financial sector, let me say this, we will not always see eye to eye. We will not always agree. But that doesn’t mean that we’ve got to choose between two extremes. We do not have to choose between markets that are unfettered by even modest protections against crisis, or markets that are stymied by onerous rules that suppress enterprise and innovation. That is a false choice. And we need no more proof than the crisis that we’ve just been through.

You see, there has always been a tension between the desire to allow markets to function without interference and the absolute necessity of rules to prevent markets from falling out of kilter. But managing that tension, one that we’ve debated since the founding of this nation, is what has allowed our country to keep up with a changing world. For in taking up this debate, in figuring out how to apply well-worn principles with each new age, we ensure that we don’t tip too far one way or the other — that our democracy remains as dynamic and our economy remains as dynamic as it has in the past. So, yes, this debate can be contentious. It can be heated. But in the end it serves only to make our country stronger. It has allowed us to adapt and to thrive.

And I read a report recently that I think fairly illustrates this point. It’s from Time magazine. I’m going to quote: “Through the great banking houses of Manhattan last week ran wild-eyed alarm. Big bankers stared at one another in anger and astonishment. A bill just passed… would rivet upon their institutions what they considered a monstrous system… such a system, they felt, would not only rob them of their pride of profession but would reduce all U.S. banking to its lowest level.” That appeared in Time magazine in June of 1933.  The system that caused so much consternation, so much concern was the Federal Deposit Insurance Corporation, also known as the FDIC, an institution that has successfully secured the deposits of generations of Americans.

In the end, our system only works — our markets are only free — when there are basic safeguards that prevent abuse, that check excesses, that ensure that it is more profitable to play by the rules than to game the system. And that is what the reforms we’ve been proposing are designed to achieve — no more, no less. And because that is how we will ensure that our economy works for consumers, that it works for investors, and that it works for financial institutions — in other words, that it works for all of us — that’s why we’re working so hard to get this stuff passed.

This is the central lesson not only of this crisis but of our history. It’s what I said when I spoke here two years ago. Because ultimately, there is no dividing line between Main Street and Wall Street. We will rise or we will fall together as one nation.  And that is why I urge all of you to join me. I urge all of you to join me, to join those who are seeking to pass these commonsense reforms. And for those of you in the financial industry, I urge you to join me not only because it is in the interest of your industry, but also because it’s in the interest of your country.

What has changed, dramatically, is the steady spotlight on compensation. In the current environment, companies are subjected to intense scrutiny:  by regulators, by the press and of course, by shareholder groups, who will increasingly have input on issues once the business of the board only. Nonetheless, companies must still vie for the best CEOs.

Everyone—candidates for CEO jobs included—realizes that the game has changed significantly when it comes to attracting top talent in a cost-constrained, highly sensitive environment. And no one, on the giving or the receiving end, wants to be in the position of defending a pay package that attracts the wrong kind of    attention. That does not mean, however, that companies will have to recruit less-than-ideal executives for the crucial top spot, nor does it mean the executives who are tapped for these ever-demanding positions will have to settle for less than they deserve. Both sides must recognize that the ground rules have changed and adjust accordingly.

Job one is finding the best possible CEO candidate through a rigorous and systematic search process. This is no time to lower expectations or requirements. As always, the board should start with the strategy of the company and determine the skills, experience and specific competencies required in the next CEO to ensure the success of the strategy.

When closing in on the best candidate for the position, it is advisable to candidly address compensation package-related issues with the individual. A number of features that were previously fixtures in CEO packages, including perks such as chauffeurs, bodyguards, club memberships and personal travel in corporate jets, are no longer acceptable. This will be no surprise even for candidates who may be leaving positions where these features are still in effect.

The board doing the hiring and the CEO being recruited will most likely agree to leave some traditional, commonly accepted practices behind, including many severance provisions which, while not forbidden outright, are now far more difficult to get compensation committees to approve. They represent a “red flag” and may make the company vulnerable to damaging criticism.

Clearly, there is a delicate balance to maintain when constructing a compensation package for a new CEO: one that is generous enough to attract the best candidate, yet is in tune with currently accepted practices and does not raise objections among influential and vocal groups. Given the fact that the board or compensation committee must be able to justify all elements of compensation packages, one increasingly acceptable way to structure compensation is with a strong pay-for-performance orientation. Particularly in the case of a new CEO, this approach is perceived as fair to all sides. Assuming the CEO delivers above-market performance for above-market compensation, there is more likely to be broad understanding and acceptance.

Boards simply cannot afford to be myopic when assembling compensation packages to attract CEOs. Boards have to be acutely aware of how compensation will be viewed from a distance, recognizing what is off the table and what is now considered acceptable. With thought and proper planning, boards will still be able to attract the best CEOs, even in a cost-constrained environment.

Nels Olson is managing director, Eastern Region, for Korn/Ferry International and senior client partner with the Board & CEO Services practice.

So, now it’s time to suit up and show up, right?

Not quite. There’s more. Gone are the days when the annual meeting was a “circus” for grandstanding on pet causes. Today’s shareholders are more sophisticated than ever, and their queries can be illuminating.

If you chair the board or a committee, you need to be ready to answer some challenging questions. Here are some concerns that are likely to surface.

Board chairs (and CEOs): Get ready for questions about anything under the sun ranging from the changing environment to the specifics of governance policies.

Audit committee chairs: Be ready to explain what you do to keep risk on the board’s discussion agenda. NACD’s recent Blue Ribbon Commission report on risk governance can help.

Compensation committee chairs: Be prepared to talk about pay for performance, as well as say on pay, and risk elements in compensation structures, per the SEC’s new disclosure requirements.

Governance committee chairs: Your focus must be on building a strong board. Be sure to get familiar with all the new disclosure enhancements now required—including how you consider “diversity” as you nominate directors. NACD’s reports and surveys support inclusion of diverse personal characteristics (traits such as race and gender) as well as professional background and competencies in building a strong board.

Effective board-shareholder communications is a governance cornerstone. It’s one of our 10 Key Agreed Principles, and the topic of a past Blue Ribbon Commission report. [Visit www.nacdonline.org.] It’s also the subject of an upcoming NACD tool focused on the new proxy disclosure enhancement rules.

Communication begins with you. Your engaged presence at an annual meeting—even if only as an intelligent listener—is a picture worth a thousand words. Suiting up and showing up is an important beginning. The rest is up to you.

Kenneth Daly is president and CEO of the National Association of Corporate Directors.

NACD’s Leading the Way initiative gives voice to the good work boards are doing to strengthen and restore confidence in corporate America. Participating boards agree to review their practices using the NACD Key Agreed Principles and are recognized for their leadership.

Learn more: Download the Principles at www.nacdonline.org/LeadingtheWay.

About NACD
The National Association of Corporate Directors, a nonprofit organization founded in 1977, is the country’s only membership organization devoted exclusively to improving corporate board performance. NACD conducts educational programs and standard-setting research, and provides information and guidance on a variety of board governance issues and practices. Membership comprises board members from U.S. and overseas companies, ranging from large publicly held corporations to small, private, and closely held businesses. With chapters in many major cities, NACD provides education and peer networking forums for members at both a national and local level. NACD offers the Certificate of Director Education, a voluntary development program for directors, and conducts the annual NACD Corporate Governance Conference convening and honoring exemplary directors.

Myth 1:
Widespread coverage about bonuses reflects grave concerns about corporate governance.

Truth:
Widespread coverage about bonuses is driven by resentment over certain people making much more than you or me.

Resentment has been focused on the big banks perceived to be responsible for the financial crisis, but has spread far beyond bankers to every highly paid executive. The root of this resentment is a populist sentiment that nobody can be worth millions of dollars.

Legitimate governance concerns exist regarding executive compensation, such as pay that is divorced from performance, or pay that encourages bad behavior. And taxpayers are certainly entitled to raise a fuss about high pay to individuals whose companies survived by the grace of government assistance. But none of these items, nor all of them together,  explains the number of headlines about executive pay. The outrage about bonuses is not the product of lofty governance concerns; it is the visceral reaction of an angry mob, encouraged by mass media trafficking in voyeurism and fanning envy in the guise of condemning greed. Those “obscene” payouts going to CEOs or bankers are the next best thing to putting pornography on the business pages.

Myth 2:
CEOs are overpaid because they are greedy

Truth:
CEOs are paid what they are because of what they can negotiate.

It’s easy to call someone else’s pursuit of self-interest greed (of course, we are never greedy pursuing our own interests), but that doesn’t provide a useful distinction in the context of compensation. Every one of us gets what we think we can when we are selling something important, whether it is our house, our car or our labor. CEOs happen to have a rare and valuable talent, and companies are bidding for it.

In negotiating their pay, CEOs are not just exercising their own greed; they are playing on the greed of the owners (or shareholders) to use them to get the highest returns possible. As in any other market transaction, greed is tempered by the fear that the deal might not get done, or might go badly.

Myth 3:
These are not market transactions. CEOs are taking advantage of pliant boards.

Truth:
Pliant boards cannot logically be responsible for high CEO pay.

The explosive growth in CEO pay over the last 20 years coincides with a huge shift of power from management to boards—a shift that is acknowledged by even the most vocal critics of CEO pay. Yet, the background assumption in virtually every report about executive compensation is that managerial power is to blame for CEO pay and steps must be taken to reduce or counteract that power.

Managerial power is real enough. Powerful CEOs are able to extract all manner of perks and privileges from their companies. But the fact that managerial power exists does not save it as the reason for high CEO pay. Quite the opposite; the trend in the shift of power towards directors is impossible to reconcile with the upward trend in executive pay. Any theory that assumes directors are systematically lazy, stupid or corrupt is impossible to reconcile with the experience of those of us who work with boards. In fact, directors are quite conscientious about their work. If anything, they are wary about overpaying the boss, and generally—though not always—able to impose whatever judgments they think necessary to keep that from happening.

Myth 4:
CEOs are overpaid.

Truth:
Some CEOs are overpaid, but most are underpaid relative to their contributions to their firms.

If the job is worth billions or tens of billions a year to the owner of the business, and the person they hire can do it just a little better than the next best person, then the owner can easily justify paying the best what would look like a fortune to the rest of us. Such a judgment can only be made by directors with the information and experience to do the job. That doesn’t guarantee that they will do it right, of course, but it is certain that nobody with less experience or information will do it better. Boards don’t have the luxury of their critics’ 20/20 hindsight.

Of course, some people don’t buy that anyone can be worth millions per year. Our society had to get over a similar hang-up about entrepreneurial wealth during the Carnegie and Rockefeller era before we came to accept the fortunes of Warren Buffett and Bill Gates. We got over Michael Jordan and Brad Pitt earning millions for their performances. We will get over it with top management,  too. For now, boards must cut through public cynicism to make difficult judgments about how much their top managers are worth to the company, just as a high-end property broker must judge the value of a prime location, or a master jeweler must appraise a rare gem.

Myth 5:
Perverse incentives in firms are a serious problem that brought our financial system to the verge of collapse.

Truth:
Perverse incentives primarily existed between firms, not within firms.

In 2008, the world discovered the “trader’s option,” i.e., traders make a fortune if they take big risks and win, or leave the shareholders (and, perhaps, taxpayers) holding the bag if they lose. Finance executives have known about the trader’s option for decades and had evolved ways to manage and contain it. What they couldn’t manage or contain, or clearly see, was the degree to which the incentives between firms had been thoroughly distorted by a policy of easy money, politically degraded lending standards and that black hole for questionable securitizations known as Fannie Mae and Freddie Mac. Bankers reacted to these incentives with their usual profit-seeking  behavior, including innovations that then enabled smart people to arbitrage these  politically created opportunities.

Lehman’s Dick Fuld and Bear Stearns’ Jimmy Cayne had no reason to encourage the behaviors that blew up their firms. A careful study of firm-level incentives was conducted by a pair of well-regarded academics from Switzerland and the United States. They compared the variable pay structure (bonus plans, long-term plans, etc.) of firms that got into trouble during the financial crisis with those that didn’t, and found exactly zero evidence that firm-level incentives were to blame.

Myth 6:
Bonus plans should pay out only if the company performs well.

Truth:
Not if “bonuses” are actually commissions, or rewards for managers saving their firms in a dismal market.

Where pay is intended to be largely variable, as it is in many trading, asset management or investment-banking jobs, then “bonus” is kind of a misnomer. Like a salesman who falls far short of his quota, he still deserves to be paid for the little revenue he brought in. His “bonus” could very well represent lower compensation than he could have made being entirely salaried versus commissioned. And how is it fair to deny a bonus to the person whose portfolio did not blow up in a catastrophic year, or to the investment banker who brought in clients under dismal economic conditions, possibly saving their institution from going under altogether?

If a company’s management team strongly outperforms its hapless peers in a down industry, should they get a bonus?  If a mediocre management team in a booming industry sees their profit and stock price jump, do they deserve a bonus?  Reasonable people could argue yes or no to either of these examples, but boards must decide these things all the time. An unforgiving critic can always claim that they got it wrong, even if there is no definitively correct answer.

Myth 7:
Boards should offer bonuses solely to align pay with performance, not as a way to simply get more money into management’s pocket.

Truth:
Boards could use bonuses, in part, as a cost-control measure rather than for pure alignment purposes.
Directors must always balance retention, alignment and cost control. For instance, Code 162(m) excludes pay above $1 million from being deducted from taxes.

“Performance-based pay” is exempted from that limit, with bonuses being the non-dilutive version of such pay. So, let’s say a manager can command a $3 million paycheck. The board could pay this executive $3 million in salary and have the shareholders eat about $700,000 in extra taxes, or they can try to save that tax by offering a $1 million salary and a $2 million bonus. Since this bonus is nominally “performance-based pay” one might reasonably ask, “How demanding is the performance to earn it?”

In the past, it might not have been truly at risk because the board was disguising fixed pay as a “bonus” to save on taxes. If they wished to place the bonus amount truly at risk, they would have to offer a higher target bonus, such as $3 million; investors would not accept additional risk without additional potential reward, and their managers are no different.

Boards will have to give up that ploy. They will either have to explicitly guarantee all $3 million and have shareholders eat the taxes, or they will have to pay a total target compensation of $4 million. Either way, the cost to shareholders will go up because directors, unlike their critics, must deal in trade-offs, and the nature of trade-offs is that you can’t get more of everything—retention, alignment, and lower costs—at the same time.

Don’t Yield, Explain
These myths originate in understandable antipathy toward people appearing to make big bucks, sometimes despite poor performance, especially when so many are experiencing difficult economic times. But corporate boards must use their best judgment to deal with compensation on a more economic and granular level. Of course,  directors can’t ignore what the media is reporting or what the critics are saying. But they should respond by engaging with the truth, instead of bending their pay programs to conform to a distortion of reality merely to throw off  the right “optics.”  Boards  that best balance these competing demands will likely oversee the strongest performing firms.

Marc Hodak is the managing director of Hodak Value Advisors and teaches corporate governance at New York University’s Leonard N. Stern School of Business.

The role of corporate directors will be extremely important to restoring trust and protecting average investors in the post-crisis period. Transparency and accountability are more important than ever before. Board directors must invest a substantial amount of time to discussing and assessing various risks throughout the company. Directors must understand and deliberate on the company’s corporate strategy and medium to long-term goals. Furthermore, directors should be proactive about meeting a diverse group of employees and clients to get a complete understanding of what is going on within the company.

As we reassess aspects of corporate governance, we must emphasize the dangers of an over-reliance on short term profits, which often leads to too much risk-taking. An over-emphasis on producing short-term profits is at least partly responsible for getting us into the crisis. Short-term focus caused many firms to lever themselves to unprecedented levels, play speculatively in complex financial instruments and become less sensitive to risk-taking in general.

Managers and directors must think beyond quarterly earnings and balance the demand for visible short-term success with long-term value creation. A lot of money can be made or lost in an instant in today’s sophisticated financial market place. There is nothing wrong with that in principle: Short-term gains can spur long-term value. The problem occurs when long-term investment decisions are sacrificed in favor of short-term gains. Short-term goals should never loose sight of long-term strategy, and companies and their boards should work together to articulate and communicate their long-term vision.

Also, compensation practices should be aligned with long-term performance. We believe executive compensation is not something that should be legislated but instead is the responsibility of the full board of directors (and more specifically, the board’s independent compensation committees) who have fiduciary duties to represent the interests of shareholders.

There have been many proposals floated in Washington recently with regard to corporate governance reform. We think it is important to keep in mind that the financial crisis was not caused by a failure of corporate governance, and as we strive to learn the lessons of 2008 and fix what failed, we should avoid over-reacting and adopting a one-size-fits-all approach. Federalization of corporate governance is not the answer. Managers need sufficient flexibility to run their companies, and neither investors nor directors want the same set of detailed rules to apply across the board. For instance, a chairman/CEO split does not make sense for all companies and not all companies need a risk committee.

We have found that many of our listed companies are very concerned about federal legislation reaching too far into the boardroom. As a result, we have launched a new advisory commission to demonstrate that there can be private-sector alternatives to federal legislation. Last fall, we announced the formation of an independent commission to examine U.S. corporate governance and the proxy process. This commission is taking a comprehensive look at strengthening U.S. best practices for corporate governance. We will look forward to reporting the results of their hard work.
For directors new to your roles, congratulations, and I hope to meet you at the New Directors’ Summit on June 7th at the Exchange.

To meet Duncan Niederauer, the CEO and a director of NYSE Euronext, at The New Director Summit on June 7th at the NYSE, please email events@directorship.com.

ADDITIONAL COVERAGE IN THE BOARDROOM GUIDE FOR THE NEW DIRECTOR:

• An Orientation for New Directors
• Performance and Pay Alignment: A Top Priority for Compensation Committees
• A Renaissance in Succession Planning and Board Recruiting
• Congratulations, You’re the Audit Commitee Chair. Now What?

The Basic Blocking and Tackling
Understand how the financial reporting works. This includes meeting key individuals in the finance department, understanding critical accounting policies and ensuring that you get an appreciation for the areas requiring the most judgment. Review the company’s key annual and quarterly filings with the SEC. Review recent press releases and listen to a sample of archived analyst calls to get a better sense of what information the company is focusing on when it reports results, and how market observers are viewing the company. Also understand the status of any open issues:  comment letters from the SEC that the company is addressing, the status of any major new accounting standards the company is implementing, and reporting considerations for significant transactions being undertaken. The CFO, controller, chief accounting officer and external audit partner will all play roles in helping you get a deeper appreciation of the financial reports your committee is responsible for overseeing.

Meet with the external audit partner. The external audit partner can be a great resource to you as you transition into your chair role. Get an appreciation for his or her experience, not only with the company, but also within the industry and in dealing with the types of issues the company faces. The audit partner can also provide useful insight into how the company functions, where the reporting risks are and the bench strength of both the finance department and the internal audit function. Additionally, he or she may have perspectives on how the audit committee could be more effective. Understand how the partner ensures that the right team is available to serve the client—particularly important if you have geographically diverse operations.

Use your staff support. Who from the company (corporate secretary, internal audit director, controller or other individual) is assigned to help you with agendas, meeting materials, and general scheduling? Whom can you call with questions? When and where are the meetings, what topics do they typically cover and how long do they usually run? Are there any constraints (such as schedules for other committee meetings) on how long your meetings can run?

Differentiators for Effectiveness
Focus on critical aspects of risk management. This may be the most significant challenge:  How can your audit committee play a central role in risk management without being tagged to oversee all areas of risk within the company? One way is to think of your role as an air traffic controller: knowing what the key risks are and allocating each of them to be overseen by the appropriate committee or the full board. Then you can focus your agendas over the year on overseeing the key risks assigned to the audit committee. Obviously, the audit committee takes the lead in areas such as risk relating to financial reporting. Your committee is also likely to find itself assigned oversight of compliance risks, and perhaps IT and privacy risks, too.

On a related note, you’ll want to think about the best ways for your committee to interact with the compensation committee, as focus grows on the link between risk and compensation. The better the audit committee understands the performance metrics the compensation committee tags to incentive pay, the better the audit committee can monitor the integrity of those metrics—in particular, by focusing on whether the ability to achieve performance targets significantly affects management’s financial reporting judgments. This sharing of information between the two committees is especially critical if there is no cross-committee membership.

Forge strong ties with your internal auditors. Internal audit can be the eyes and ears of the audit committee—giving you an objective view of issues facing the company. But it can do that only if you have the right leadership in the internal audit function and if the audit committee supports internal audit’s effectiveness. Get a sense of how company executives and your external auditors view internal audit.

Also get to know the internal audit director and form your own opinion on his or her effectiveness. Understand how internal audit uses its resources and what additional assurance it could provide if it had more resources. Set aside time for periodic, informal contact with internal audit. Be clear that you are open to hearing about any serious issues, including sensitive ones. Many chairs aim for regular between-meeting contact—a call or coffee—to keep the communication lines open.

Tackle the tough stuff. It’s human nature to focus time and attention on the items we already understand and can grasp easily. It takes discipline to ensure the more challenging issues are included in your agenda.

Identify what these issues are—they may, for example, relate to IT security, derivative transactions, complex technical accounting issues or treasury operations. Ask for more in-depth information on these areas. If they represent major risks, consider relevant training sessions for the entire committee. Insist on getting the information in plain English.

Summing It Up
Don’t go it alone. It’s likely you’re in the chair role because you qualify as an audit committee financial expert. That doesn’t mean you need to have all the answers or that you should ask all the questions. Ensure that all your committee members have a voice. Consider involving them in some of your between-meeting discussions—particularly if there is a reporting issue you’re monitoring. And watch for the dynamics in the meetings themselves, recognizing that it can be difficult to build a cohesive committee when you’re only together five or six times a year in a fairly scripted setting. It might mean privately soliciting views from each director after the meeting, especially if a member has been largely silent during the meeting. It definitely means insisting on time for executive sessions of just the committee members, so that committee members have an alternative venue for sharing what they’re thinking. Consider occasionally visiting one-on-one with committee members between meetings to better understand what issues they are concerned about.

As you work with your committee over time, you’ll develop a better appreciation for the additional information you and your committee members need. You can determine if additional training sessions would be appropriate. You also may identify additional skill sets or experience that would be useful, and that ultimately may dictate a shift in committee composition.

At the end of the day, the committee’s effectiveness is largely up to you. Ensure that you have the relationships, information and members you need to effectively fulfill all the committee’s responsibilities.

The Transition to Chair
If you’re fortunate enough to have been a member of the audit committee before assuming the chair role, your task is easier. You already understand the financial reporting process and the players. And you’ll already have a view on how the meetings should run and whether the materials could be improved. You may also have a perspective on the committee membership.

But you might not have realized just how much the chair did between meetings. You’ll want to schedule time to meet separately with the internal and external auditors and with key members of the finance team, to solidify those relationships. You’ll want to identify areas to dig deeper, and start tailoring the committee’s agenda to reflect your vision.

Catherine L. Bromilow is a partner in the corporate governance group at PricewaterhouseCoopers LLP.

ADDITIONAL COVERAGE IN THE BOARDROOM GUIDE FOR THE NEW DIRECTOR:

• An Orientation for New Directors
• A Message to New Directors
• Performance and Pay Alignment: A Top Priority for Compensation Committees
• A Renaissance in Succession Planning and Board Recruiting

Board members often conduct one interview six or eight different times, instead of conducting six or eight different interviews. As a result, the data and findings coming out of the interviewing cycle are of limited value. The same narrow lines of questioning, duplicative information gathering – by the fourth or fifth interview, the CEO candidate can feel a “Groundhog Day” experience setting in. And without assessing specific behavior patterns and experiences against the required competencies, the board can find it very difficult to accurately determine whether a CEO candidate might ultimately succeed or fail. Devastating consequences for the company can result.

Rather than make the CEO interview process a haphazard series of conversations, we recommend that chairmen, lead directors and/or committee chairs adopt a thoughtful and planned interview process that identifies a role for each of the board members. There are five best practices in particular that can maximize the effectiveness of the information-gathering and assessment. These will bring structure to the process, and will elicit the fullest picture of the candidates – and how well they are likely to handle the job.

Interviewing CEO Candidates

1) Assemble the right team
The make-up of the succession and selection committee is critical. Boards need to recruit people who are “qualified” to interview prospective CEOs – qualified by having been through a similar process in their own companies or by having extensive experience interviewing in a corporate capacity. The chairman of the committee, especially, will need some experience in CEO or other executive succession and selection; this experience can come from being a board member or a corporate officer.  Diversity of experiences on the search committee is also important. A board might include a current or former CEO, CFO, and EVP of Human Resources. These different experiences will improve the collective depth of the group, as each interviewer can take a tack that is based on his or her own knowledge and experience.

2) Ask the right questions
As many board members do not have a lot of practice assessing and/or selecting CEOs, the Chairman should prepare his fellow directors for the CEO selection process. Preparation comes in the form of thinking deeply about the requirements for the next CEO and developing questions that will get beyond superficial programmatic feedback from the candidates. Socratic questioning from the interviewing team can dig into the second and third layers to truly understand the executive’s experiences and capabilities against the needs of the company going forward. There are many examples where boards have recruited the most articulate candidate with the highest profile without focusing on the real core competencies that are required to be successful.

In interviewing the CEO candidate, board members should be looking for key examples of demonstrated behavior – not a high-level overview of their perception of their approach. The key to a great interview is digging in and asking for concrete example after concrete example. We do not really care what they think; we care about what they really did. Whenever an interviewee makes a point, ask them for an example that can illustrate their point. This simple strategy adds massive amounts of data and richness to the process, and you come out of the interview with behaviorally specific examples versus what the person thought the right answer should be. The final element of the interview is to take copious notes and capture the examples so your feedback is specific and not simply your “gut feel” on a candidate.

3) Don’t repeat the same interview
Many board members interview CEOs by simply asking about the candidate’s career history. This can lead to essentially the same interview being done over and over again, becoming redundant and not allowing the board to extract the optimal information.  It also creates a tiring and repetitive environment for the candidates.  It is important to have different directors focus on different core competencies and create a strategy for extracting the right information. For instance, a board member with CEO experience might work to assess operating and managerial ability; a board member with CFO experience might assess financial acumen; and a board member with HR experience might assess the type of workplace cultures the candidate has created.

4) Compare notes
A frequent misstep in interviewing CEO candidates is that, due to the hectic board and C-suite schedules, oftentimes the interviews are isolated. Information may not be shared among board members until after the process is finished.  If board members communicate in between interviews and provide feedback immediately after their meetings, they can give other board members important areas to probe. Areas of potential concern that surface in one interview can then be further explored in subsequent meetings — e.g., if the interviewer suspects that the candidate may not be able to make difficult people decisions or if the candidate appears to be a micromanager, or even perhaps that a candidate’s spouse may not want to relocate. Flagging these issues can alert other board members to spend additional time probing these areas in their drill-down.

5) Verify and fill in the missing pieces with references
The board should take the information obtained from the interviews to develop a referencing strategy. For instance, if a concern in the interviews arises about an ability to replace under-performing executives, this should be a key area probed during the referencing process. You can learn a lot about candidates by interviewing correctly; however, you are always going to get the best information from people who have worked with the candidate for years. The perspectives gained by board members during the interview process should always be verified with references. Also, references allow boards to fill in missing pieces related to prior career changes or times when the candidate was not successful.

The referencing process must be done no matter how well someone on the board knows a candidate. In one board recruiting situation, a number of the directors were familiar with the potential candidate, so little additional interviewing or referencing was completed. The incoming CEO ended up not being a fit with the company because of reasons that would have likely surfaced during detailed references. The referencing process should be standard in all recruiting instances. Trust but verify.

In summary, best practice in determining your company’s next CEO demands careful selection of members of the selection and succession committee, as well as careful attention to the end-to-end process. When done very well, where roles are assigned and communication is flowing, it can be a very rich process that truly examines candidates both inside and outside the company through a detailed lens. And all this planning and preparation will improve the chances of attaining the objective: selecting the best person to be the next CEO.

Stephen A. Miles is a vice chairman of Heidrick & Struggles where he runs Leadership Advisory Services within the Leadership Consulting Practice and co-author of a new book, Your Career Game: How Game Theory Can Help You Achieve Your Professional Goals. Jeffrey S. Sanders is the managing partner of the North American CEO practice for Heidrick & Struggles.

Mark Zoradi, former Walt Disney Studios Motion Picture Group president, was appointed to Rave Cinemas’ board.

Walgreens elected Ginger L. Graham to its board. Graham is currently the president and CEO of Two Trees Consulting.

RES Software appointed Klaus Besier CEO. Besier most recently served as president and CEO of Neoware.

Tran B. Nguyen, former CFO of Metabasis Therapeutics, has joined Somaxon Pharmaceuticals as vice president and CFO.

Charming Shoppes named Bruce J. Klatsky to its board of directors. Klatsky served as CEO for Phillips-Van Heusen.

The Walker Report makes a series of recommendations to improve the governance of British financial institutions, anchored, one may argue, by a dramatically enhanced role for the board chair. While an effective chair is essential to a well functioning board, how much power is appropriate? Does the power shift inherent in these recommendations aggrandise the chair at the expense of the chief executive – and the board itself – by concentrating power in another set of hands?

Walker’s recommendations 7–10 specifically address the chair, dealing with enhanced time commitment to the role, requisite industry experience and business leadership skill, facility in board leadership and administration, and accountability via annual election. The requirements for such skills and experience in the leadership of businesses and boards, while onerous, justified and well articulated, are not novel. Such attributes are rare and immensely valuable and make for appropriate criteria for election to the role.

It is the first of these recommendations that sets the expectation for a fundamentally new understanding of the role of chair – a role that would see a near-singular business focus by the chair on the organization. With such focus, and the effort born of it, the chair would develop an unparalleled opportunity to influence and check the power of management. The assumption is that a strong chair is good for governance insofar as the board will have much greater awareness of what’s going on in the company. This reduces the traditional disadvantage of a board: a vast knowledge gap as compared to management that constrains a board’s ability to assess strategy and evaluate corporate performance.

But are there unforeseen risks in this picture? Several come to mind. First, chair recruitment will be more difficult: will the qualified, potential chairs that corporations need be willing to devote the lion’s share of their time to a single company’s oversight, narrowing the range of active interests from which they may draw credibility?

Second, there is a greater likelihood of confusion between the roles of the chair and the chief executive. Might such an expected commitment appeal instead to those wishing to exercise executive power rather than governance oversight, increasing the chances of putting the chair in conflict with the chief executive and destabilizing relations between the board and management? Third, the independence of the chair could be negated. Will the near full-time involvement of the chair with a company’s management diminish the objectivity of an otherwise outside point of view, and eliminate a critical source of disinterested reflection and feedback?

Finally, it could also see the power of the board skewed toward the chair. Will the influence of directors and their motivation to contribute wane in the face of a much more powerful chair?

Canadian boards, like those in the UK, accept the logic of separating chair and chief executive roles to keep distinct the power to oversee management from the exercise of that power. But the degree of responsibility envisioned by Walker for the chair would not be well received by Canadian directors, as it would re-muddy the distinctions between chair and chief executive and diminish the distributed burden of governance shared by the board as a whole. American boards, already wary of splitting the leadership at the pinnacle of corporate power, tend to interpret Walker’s new model as chair supremacy – and thus as confirmatory evidence of out-of-control boards grabbing power and weakening the very chief executives vital to corporate success.

While there is much to recommend the Walker Report, directors and regulators should revisit the rationale for separating the chair and chief executive roles: to remove the conflict of having someone chair the body that counsels and oversees them and to provide a means for channeling strategic advice to the chief executive via an independent voice. The recommendation to increase the power of the chair in effect begins to reverse that separation by re-conflating the roles and asking the board to counsel, oversee and evaluate an executive largely influenced by its own chair.

David Anderson is president of The Anderson Governance Group, an independent advisory firm dedicated to assisting boards and management teams enhance leadership performance.

This article first appeared in Chartered Secretary.

Originally published in the March issue of Chartered Secretary (the ICSA magazine).

Moody’s released a report on how some large banks have changed their boards to be more effective with strategy. The report reviewed board composition at 20 large  global banks in North America and Europe since the beginning of the crisis in July 2007.

The SEC’s new disclosure rules play an obvious part in the revamping of bank boards. Director nomination standards now require information about the nominee’s experience, qualifications, and attributes and reasons why that person should serve on the company’s board. A new leadership structure rule mandates that a company disclose why it has chosen to either combine or separate the positions of chairman and CEO.

The bank boards included in this report turned over 32 percent of their non-executive directors. This provides boards with an original perspective and new ideas about how to bounce back after the crisis. Author of the report, Christian Plath, said the turnover on bank boards was the most interesting trend post financial-crisis: “The turnover on some of these boards, particularly boards that received extraordinary government assistance, some of those boards saw more than half their board turn over.

Experience in the financial industry is now a much more prominent factor in building bank boards.  Of the 20 banks examined, 46 percent now have outside directors with financial backgrounds. This is up 14 percent from July 2007. Plath said this comes after serious criticism about the quality of board members: “Many of these banks were strongly criticized for not having enough directors with financial backgrounds…All of this points to the criticism that banks were engaged in excessive risk taking…you want some directors on the boards that can know the right questions to ask.”

Banks that received the most government assistance–Bank of America, Citigroup, Lloyds, RBS and UBS–added the most financial experience to their boards, the Moody’s report found.

Several of the banks examined by Moody’s researchers also reduced their board size. Plath said this could be for several reasons concerning the particular bank’s restructuring process. “There are a couple of big advantages of having a smaller board size and one is that it better stimulates discussions at the board level. It enhances the board’s ability to respond in the event of a crisis.” Plath also said that a smaller boardroom means a bigger spotlight for each director: “It also makes it harder for directors to hide in terms of boardroom discussions. It forces all of the directors to speak up.”

The average board size is now 16 members. Bank of America, for example, reduced its board size from 17 to 15. Not every bank downsized the board, however. Four of the 20 banks in the report maintain a board size of 20 or more members. HSBC increased its board size from 18 to 21 members.–Ashley Chaney

Unfortunately, the new generation of 21st century CEOs no longer lead. They have lost public respect and regard—tarnished by the irresponsible governance and compensation practices of a few, as embellished and publicized by the business media.

If we are to again prosper and grow, this leadership vacuum needs to be filled, but now at the board level by outstanding independent directors—people of unquestionable integrity and ability, who can restore faith and confidence in our economy and businesses.

Directors can do this by setting an example—initiating and practicing good governance; communicating directly with shareholders, employees and other stakeholders; representing business to legislators, regulators, the media and the public.

This turnaround effort to restore faith is critical to the future power of our nation and jobs for our people. We need faith in business as we do in our military, government, religious leaders and other institutions on which we rely for well being.

Pearl Meyer is senior managing director at Steven Hall & Partners.

Galena Capital appointed Michael Sweatman to its board. Sweatman currently serves as CFO of Marifil Mines.

Dennis Welch, executive vice president of American Electric Power Co., has joined the board of TRC.

Bristol-Myers Squibb appointed Charles Bancroft CFO. Bancroft joined the company in 1984.

Impax Laboratories has elected Allen Chao, chair of Newport Healthcare Advisors, to its board.

Paul Garry Hines was named to Mexco Energy’s board. He will serve as chairman of the audit committee.

Solera Holdings elected John J. Giamatteo COO. Giamatteo most recently served as COO of RealNetworks.

Kenneth A. Vecchione was named president and COO of Western Alliance. Vecchione previously served as CFO of Apollo Global Management.

Eileen Nelson joined Openwave Systems as senior vice president of human resources. She most recently held the same position at 3Com.

ZIOPHARM Oncology elected George B. Abercrombie to its board. Abercrombie previously served as president and CEO of Hoffmann-La Roche.

Standard Gold named Steve Flechner president of the company. Flechner is the former vice president and general counsel of Gold Fields Mining.

EMC Metals appointed William Harris non-executive chairman of the board of directors. Harris is replacing William M. Sheriff, the company’s current CEO, who will serve as interim president. Sheriff replaces Peter Bosse who recently stepped down.

Nor have directors viewed public relations as a proper management function worthy of their oversight. Yet here in Goldman Sachs we have the incumbent in that function, a partner, being a large part of the problem, not aiding in the solution. The global head of communications, aka public relations, is reportedly abruptly dismissive of the press, combative, smug and condescending feeding tabloids and the blogosphere juicy morsel demeaning the company by his arrogant attitude. For example, its recent charm offensive via multiple philanthropies, was brushed aside as merely obligatory. A graduate of a revered British university, he might have prepared better if he’d majored in English literature rather than economics and perhaps caught the drift of English poet Samuel Butler’s cautionary comment, “For as you sow, ye are likely to reap.”

It’s a pity that any company should be brought to its knees through acute astigmatism. Ignoring the ultimate impact of today’s invasiveness of the media is irresponsible. It’s immaterial whether the barbs are factual or fabricated, the public’s perception is the bottom-line that must be addressed. Boards may honestly feel they’ve addressed every contingency yet leaving open the only unscripted function of management, the matter of public relationships. It is time to separate the policy from the communications process, the former well within the purview of boards.

In a similar vein the widespread criticism of Toyota’s ineptness in crisis communications during the recall of millions of its cars for product fixes will no doubt bring this matter to board attention. Unfortunately the emphasis will be on reaction more than on prevention. The board’s scrutiny should be on the mindset that birthed the issue. Attitude before aptitude is the relevant maxim.

John F. Budd Jr. is chairman and CEO of Omega Group, and editor of Observations. This commentary was originally published in the March 2010 newsletter.

The SEC announced that Kathleen M. Griffin will serve as the agency’s first CCO. Griffin was vice president, senior compliance manager, and deputy code of ethics officer at Putnam Investments.

Edward L. Pagano was elected CEO of ENGlobal. Pagano comes to ENGlobal from WorleyParsons Group.

Pacific Office Properties named James R. Wolford CFO. Wolford is the former CFO of Bixby Land.

Vincent A. Paccapaniccia joined CSS Industries and will serve as the company’s CFO. Paccapaniccia recently served CFO of ICT Group.

InterDigital appointed Jeffrey K. Belk to its board of directors. Belk is the former senior vice president of strategy and market development at Qualcomm.