Michael W. Peregrine

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

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

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

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

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

Richard Steinberg

It’s becoming increasingly clear that the landscape has changed—permanently. That means it won’t go back to the way it was. In other words, ensuring compliance with the letter and spirit of the new requirements will continue to require attention going forward. This is not a case of “done once and forget about it.” Sarbanes-Oxley, stock exchange listing requirements, SEC rules, Dodd-Frank and other rules and expectations of investors—especially institutional investors and other major shareholders—require ongoing diligence.

But experienced directors and senior executives recognize that the requirements, for the most part, deal with issues of form, not function. Yes, they are important because they’re now legal or regulatory mandates, and also can serve as enablers to effective board performance. But as noted, some boards that have always done these things still have not been very effective, while others had few of the now-mandated practices in place yet have been highly effective. What makes a board truly effective is something else entirely. Experienced directors—having spent a disproportionate amount of time on the new mandates that deal for the most part with additional disclosures to and empowering shareholders and imposing checks and balances on management—want to get back to the business of providing the chief executive and senior management team with value-added advice, counsel, and direction on critical issues facing the business.

So where is board attention needed? That will depend on each company, of course. But based on my experience, there are eight principal areas of responsibility where the value-add takes place, outlined here in high-level summary.

1. Strategy. Making sure the company gets strategy right is absolutely critical. Effective boards carefully analyze proposed strategy plans and management’s rationale for its recommendation. These directors bring experience and insight into the constructive debate, focusing on markets, competitors, risks, resources and interdependencies. It is of critical importance that resource allocation, business processes and senior executives’ buy-in all are positioned to drive successful strategy execution.

2. Risk management. The board must be comfortable that management is identifying and appropriately responding to risk, and that the board itself is apprised of the most significant risks facing the company. To reach this comfort level, effective boards ensure that management has in place an effective risk-management process, and the directors assess whether risks are undertaken and managed consistent with the established risk appetite.

3. Tone at the top. Management establishes the corporate culture, but effective boards ensure that the desired integrity and ethical values are present. Of course, that includes a robust code of conduct, a whistleblower channel, feedback protocols and related elements comprising a cohesive program, and also means the board must ensure the culture is driven not only by the words of management, but their actions as well.

4. Measuring and monitoring performance. The board must ensure that performance measures are linked to strategy, tactics and the real value drivers.

Metrics should balance financial performance with forward-looking, nonfinancial information. And performance awards should be aligned with company goals.

5. Transformational transactions. Directors must be truly comfortable with the business justifications for a proposed deal, whether it be a merger, acquisition, alliance partnership or joint venture. Effective directors critically evaluate management’s data, projections and assumptions—particularly when it comes to “synergy” and integration assumptions. The board should apply lessons learned from past transactions, and should have the courage to walk away from a bad deal.

6. Management evaluation, compensation, and succession planning. Effective boards and compensation committees, especially under the current governance spotlight, ensure that performance criteria and targets for management are linked to strategic goals and desired behavior. Compensation should be crafted to retain the best talent while paying for performance. The best boards don’t wait for signs of a departure before having succession plans in place.

7. External communications. Corporate boards— particularly their audit committees—continue to struggle to understand what entails “appropriate oversight” of financial reporting and related processes. Effective audit committees ensure they have requisite information from management and auditors, and the committee members gain sufficient understanding and insight and challenge critical judgments, resulting in the necessary comfort with the reliability of financial reports, internal control and related matters.

8. Board dynamics. This involves the ways in which the board itself operates. The most effective boards forge the right relationships, processes and constructive engagement to carry out the above responsibilities effectively.

Potential Pitfalls
For corporate boards to be well positioned to effectively carry out their responsibilities, directors must bring needed knowledge, skill and experience to the companies they oversee. We see boards of many companies do well, for instance, in selecting a CEO and senior management team, and making sure the right strategy is in place along with organizational, financial and human resources for effective implementation. But too many other boards have struggled to do the job, for any number of reasons.

One underlying cause is devoting insufficient time to dissecting and debating issues requiring the board’s attention. Being inside boardrooms, we see some directors operate on tight schedules, leaving them unable or unwilling to give needed time and attention to board matters—and they go through the motions without proper deliberation of risks, issues and events that drive company success or failure.

Board agendas typically are set far in advance of meetings, based on expected needs and historical patterns. Travel arrangements are made and directors schedule other commitments around the established board schedules. As such, a fixed amount of time is set aside for board business, with discussion time shoe-horned into the predetermined schedule. Of course, in times of crisis directors’ commitments expand significantly, with other commitments adjusted accordingly. But too often the time set aside for board and committee meetings simply isn’t sufficient, especially in light of the current regulatory environment and stakeholders’ heightened expectations. Some boards find it useful to build cushions into meeting schedules to deal with matters requiring additional discussion, but this hasn’t become a common practice.

Exacerbating this circumstance is the fact that demands on directors’ time continue to increase, with data showing that total time devoted annually to board responsibilities has doubled in recent years to about 250 hours. Much of the additional expenditure is due to boards’ expanded monitoring duties emanating from compliance-related requirements. But while the time commitment has surged, attention to critical strategic and related matters that create or destroy shareholder value has not always kept pace.

My experience is that many if not most directors of public companies not only have the requisite expertise, attributes, and characteristics commensurate with their tremendous responsibilities, they also devote the time and energy needed to drive corporate success. They extend themselves as needed to guide, counsel, and when necessary direct the CEO and senior management team toward attaining established growth and return goals. But in truth some directors fall short.

Directors must delve deeply enough into significant issues. By accepting board seats, directors already have put their reputations on the line and accepted responsibility to carry out their fiduciary duties. It behooves every board member to work with sufficient diligence to see that the company succeeds.

With that said, let’s look at a number of pitfalls boards have fallen into. We’ll do this in David Letterman top-10 style, finishing with those most threatening to a company’s success. You’ll note that there’s a natural parallel to some of the eight keyboard responsibilities outlined earlier.

10. Falling prey to governance ratings. Boards are cognizant of scores disseminated by a number of organizations providing some sort of rating. And if the investor community sees these ratings as accurate indicators of future company performance, a good deal more attention will be paid. But such correlation has yet to be proved, and spending undue attention on ratings can be counterproductive. This is because criteria used are, with few exceptions, based on information obtained from publicly available data, rather than knowledge of what goes on inside the boardroom. Yes, some information garnered in the ratings process can in certain cases, as some suggest, serve as a window onto board effectiveness. But how well the board truly operates in carrying out its responsibilities to help grow share value is more important than driving up externally developed scores.

9. Looking at the wrong performance measures. Boards review data provided by management, and in many cases it’s the right information to examine. But when it’s not, performance too often deteriorates long before directors realize it’s too late to fix what needs to be fixed and value has been eroded. Historical financial and share price data are not enough. Measures must be aligned with the company’s strategy and be sufficiently forward looking— including key nonfinancial data—to enable realtime appraisal of how the company is really doing.

8. Insufficient discipline in director selection. Having the same directors sitting in the same board seats for a long time has its benefits, but can also have major shortcomings—board membership that might have been right for a company years ago could be wrong for today and, more importantly, for tomorrow. But haphazard selection of new directors won’t ensure the right mix—the process requires thoughtful needs analysis and skills matching. Directors will want to consider not only process in selecting new board members, but also to look around the boardroom and ask: Is this the group with which I want to work, and when necessary, go to war?

7. Preoccupation with potential liability. Boards and individual directors today are increasingly concerned with personal liability, and justifiably so. Marketplace expectations for directors have risen dramatically, to the point where it may be impossible to satisfy them all. And with the new and still untested federal requirements, our increasingly litigious society and limitations of many directors-and-officers insurance policies, directors should be concerned about liability. But attention must be paid to fundamental board responsibilities—making sure the company has the right strategy and implementation plan; relevant and aligned performance metrics; strategically and economically sound business partners; effective ethics, control and compliance programs; sound financial reporting; sensible and effectively motivational compensation programs; and the like. Frankly, if the board does its job well in carrying out its core responsibilities and the company is successful, there is little likelihood of being sued in the first place.

6. Blatantly ignoring institutional investors. Owners of significant amounts of a company’s stock increasingly want, and expect, to be heard, and boards disregarding these requests are asking for trouble. If the media get involved, the spotlight becomes bright and hot, creating headaches for the board and company that can be intense and long lasting. Boards certainly shouldn’t allow institutional investors to dictate what needs to be done, but allowing major shareowners to raise issues and offer input and suggestions—and ensuring any information provided complies with Reg. FD and other rules—enables those investors to participate in the governance process without voting with their feet.

5. Thinking you’re apprised of critical risks when you’re really told about problems. With all the talk about the importance of being risk-focused, many boards are informed of business issues after the “bad stuff” has already occurred, rather than of where the potential exists for things to go seriously wrong. You want to know—far in advance—where the dangers lie that can derail key initiatives and strategic objectives, and to make sure those risks are being identified early and properly managed.

4. Presuming top management knows what the critical risks are. For the board to have any reasonable chance of being informed by management of key risks facing the company, management itself needs to have processes in place to ensure it can identify newly emerging risks. As such, effective boards ensure the company has an effective risk management process where each level of management identifies, analyzes and manages risk, and communicates upward. Only through such a process and culture can the board be comfortable that the most critical risks and related actions are presented to the board in timely fashion.

3. Focusing too much on rules and not enough on other important responsibilities. A tremendous amount of attention is being given to new legal requirements, the exchanges and the SEC, and ensuring compliance with these requirements is essential. But as noted, those rules tend to deal with matters of form, structure and disclosure, and a board can follow every rule and still be ineffective. Yes, boards must carry out their responsibilities and act as an effective check and balance on management—a basic thrust behind the new rules and compliance requirements. But the board also must operate effectively as a unit, providing the needed advice, counsel and direction to management to grow share value.

2. Signing off on bad strategy. Many boards do the right thing, carefully assessing strategic plans— often at an offsite retreat—reviewing market, competitive and other relevant information before approving the company’s strategy. But too many boards don’t go deep enough. They don’t see management’s plan for implementation of the strategy and ensure that the plan is supported by the needed organizational structure, resource allocations and buy-in of key managers who truly will make it happen—or not.

1. Making bad decisions about the CEO. It’s fair to say that a board’s most important responsibility is choosing the right chief executive. But that can also be the most difficult decision to get right. It’s only after the fact that one truly knows whether the selection was good or bad. Some boards have waited too long to make a change, and some appear to have pulled the trigger too quickly. Boards that do the best jobs know their company, its needs, the environment in which it operates, and its culture and direction. They carefully identify criteria for the person needed to get the company to where it needs to be, cast a wide net internally (preferably with sound succession planning in advance) as well as externally, and—most important—they have the business acumen, instinct and judgment to select the right individual to lead the company. And then the board puts in place the right motivations and measures, and provides the right level of oversight— neither abdication nor micromanagement—to help and allow the CEO to do the job.

Kenneth Daly (photo by David Nicholas/Longview)

Today, everything is new business. Boards are deeply engaged in strategy development and in risk oversight—and both activities look ahead, typically a good three years. So let me ask: Is your board ready for 2012? What about 2015? Whenever I ask directors this question, I usually hear a resounding “yes.”

To be sure, the past matters to directors. After all, it’s the only thing that’s verifiable, as any good accountant can tell you. But increasingly directors see the past as just one part of a vast puzzle that includes an ever-emerging future. As one chapter leader told us recently: “We’re Dodd-Franked out. Help us see what’s around the next corner.”

With this issue of NACD Directorship, we are indeed looking ahead. In her annual State of Corporate Governance address, NACD Chairman Barbara Hackman Franklin cites pay-for-performance, diversity and technology as key issues for boards in 2012.

The importance of these topics becomes clear to me whenever NACD convenes our regular advisory councils in each of the three key committee areas. Our council for compensation committee chairs regularly tackles the challenge of linking pay to performance. The subject of diversity brings out useful insights when we convene nominating/governance committee leaders. Last but not least, technology—especially the shifting risks and rewards of information technology—is always a hot topic for audit committee leaders.

And speaking of IT, check out our website, NACDonline.org. Type in any search term, and you will find literally hundreds of resources—in a nanosecond.

It’s all about the future. See you there!

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

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

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

Part I – Opportunities for the Board to Rebuild Trust

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

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

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

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

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

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

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

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

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

Part II – Opportunities for Shareholders to Rebuild Trust

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

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

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

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

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

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

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

The Act’s prognosis was good; the bill had a strong supporter in the SEC and two branches of the Federal government backing its provisions. But, as always, things change. Within weeks, the U.S. Chamber of Commerce filed a lawsuit challenging proxy access.  Then in November, the Republicans won control of the House of Representatives for the next two years. And finally, the SEC recently announced that they will not be able to fund the whistleblower office, thus hindering the rule. These three incidents amount to a broadside against the Act and could potentially halt its implementation in Corporate America.

On the other hand, the Act is not completely dead. Though the law has strong forces acting against it, all are in flux. The Chamber’s legal challenge is no guarantee and may likely fail in the courts. The House Republicans have made it clear that they plan to attack the Dodd-Frank Act but they have only promised “a significant amount of oversight.” Their attention will mostly be directed at minimizing the health care law. Additionally, amendments and any legislative changes to the bill will almost certainly face Senate rejection and/or a veto by President Obama. As for the SEC, their budget shortfall may only be temporary, and responsibilities for the whistleblower’s office will be carried out by the current SEC staff.

Will some provisions of Dodd-Frank ultimately meet their doom? Short answer: maybe. Two of the most important provisions of the Act—proxy access and whistleblower protections—are in question, but others, such as say-on-pay, will be in place for 2011. Sadly, the lack of certainty on some provisions will directly affect the governance of our public companies and the director community.

Corporate directors cannot relax as they wait and see what provisions will actually become reality. Even if some of these provisions ultimately fail, shareholders will surely not give up on them. Shareholders will still pursue proxy access and the SEC will surely concoct new disclosures for your board to prepare. The only option a board has is to prepare. Preparation means speaking with large shareholders, examining board composition, and reviewing executive compensation structures.

As we wait for the SEC to implement more key provisions of Dodd-Frank, many factors are at play. Whether the provisions thrive or their plugs get pulled, the coming year promises much drama.

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.

This week, the Fortune magazine article “Should CEO be a Team Job?” notes that interim CEOs could be found at companies such as Borders, Sara Lee, and GM, while the boards searched for appropriate replacements. Though an interim CEO may be part of an “emergency” succession plan, boards must prepare to fill leadership roles when needed. Three to five years before a CEO transition is expected, the board should begin to develop long-term succession plans.

According to the 2010 NACD Public Company Governance Survey (available Oct. 2010), most boards have taken the necessary steps to prepare for an abrupt CEO departure:

* 70% include development of internal candidates

* 69% include plans to replace the CEO in an emergency

* 57% include long-term succession planning (three to five years before an expected transition)

* 21% include engagement of an executive search firm to identify external candidates

To continually ensure that the current leadership is meeting the needs of the company, directors should engage in CEO succession planning. Well-timed transitions to new leadership enhance long-term shareholder confidence and value.

For those who have spent the last few days on the Lunar Module, the story goes like this.

CEO Mark Hurd received a letter from the attorney of an HP contractor charging him with sexual harassment. He forwarded this to his legal department that, after an internal investigation, found no basis to the claim. But in their investigation they uncovered a conscious effort to submit expense receipts that disguised the fact he was meeting with this woman repeatedly over a two-year period. The full amount of his cover up was $20,000 vs. HP’s revenues for the past two years of over $240 billion.

Did the board do the right thing: Was HP CEO Mark Hurd’s termination a sign of corporate governance run amok? Or was it a rational and systematic way of dealing with the pressures on the board to investigate management’s misdeeds, and then justify its decisions to a vocal constituency of investors, the media, the public, regulators, politicians and employees?

The answer is both. It appears to be overreaching in terms of the charge vs. the punishment, but given the environment, most likely it was necessary. So let’s look at the logic here. With such a small amount at stake, and the fact that he did not commit harassment, was the decision to terminate appropriate?  Materiality or intent to defraud were not factors in the board’s view of these violations, intent to deceive was. After HP’s fiasco with pretexting and a follow-up investigation by the California Attorney General, the board wanted to assure investors and the public that they had no tolerance for ethical breaches. They felt the risk of moving too precipitously was more acceptable than a charge that once more the board was using bad judgment. It was less about a CEO who fudged (we have seen worse) and more about a company that needed very urgently to show the world that it can manage ethical issues independently and firmly.

The result of the board’s quick action? By the time the business world had seen Mark Hurd’s confessional resignation speech, and may have seen Mark Andreessen’s very impressive responses in a CNBC interview with Maria Bartiromo, the story will have moved in two business days from an office entanglement to who will run HP. Just what HP and the board wanted and needed.

And thereby provides an important case for study for boards at large.

What were the three main things did the HP board do right?

Succession planning, succession planning, succession planning: Although the company appeared to be in brilliant hands with Mark Hurd, and at age 53 there was no urgency to develop an immediate succession plan, the company had a plan in progress–on the shelf ready to go. And this is exactly why such a plan is needed: It is not only the disasters we know about but also the ones in the making. The criticism of HP’s succession plan in the Wall Street Journal leads one to believe that only by appointing a clear number two does a company have a succession plan. But that is just not the case. In technology companies in particular with short life product cycles, it may be more sensible to have a bench of potential successors, and to always keep the option of going outside the internal team. HP moved swiftly to appoint CFO Cathie Lesjak as interim CEO, and she agreed not to be a candidate for the CEO role. This was a smart ploy that both avoids dissension and leaves the company managed in the interim by a smart, popular executive.  The company also left open the possibility of an external candidate, giving the board the widest room to maneuver. Finally, it appointed a well-known board director and technology guru, Mark Andreessen (founder of Netscape) to speak on behalf of the board with Bartiromo, and he did so brilliantly, parrying her questions and getting the points across the board needed the world to know.

Postscript
The care and feeding of the CEO is one of the board’s primary responsibilities. CEOs are susceptible; in other words, they are human. They are depicted by the media as very powerful and indulgent, but off the record their life and schedule are pressured beyond understanding which can lead to strange behavior. Some simple remedies: allow and encourage spousal travel. Invite the CEO to bring family members along on trips, friends even. It sounds like an old fashioned bromide, but the other alternatives available to relieve the constant pressure on these key individuals can be very costly, as we have seen.

Jeffrey M. Cunningham is a frequent speaker and writer on governance topics and the boardroom. He is managing director and senior advisor to NACD and has served on 10 public company boards in all capacities, including as chairman of four.

The views expressed in this column are strictly the author’s and do not necessarily reflect the views of NACD.

This is an excerpt of Surviving and Thriving in Uncertainty, Creating the Risk Intelligent Enterprise by Frederick Funston and Stephen Wagner (Wiley Books, 2010).

Conventional risk management focused on asset protection, typically in the form of insurance. It was also believed that risks could be identified and managed within silos and that risk aversion would maximize shareholder value. Risk was typically seen as a cost, not an opportunity. Risk management programs took “one size fits all” forms. For these and many other reasons, conventional risk management has failed.

In the turbulent and uncertain 21st century, the buffers of space and time no longer exist. Information has become instantly available. It still confers power, but now everyone has it. Communities of interest can form overnight. Centralized control often fails in the face of turbulence. Fixing pieces no longer solves problems. Many assets are now intangible and cannot be protected in traditional ways. Many risk events are unknown and perhaps unknowable.

Surviving and thriving in uncertainty and turbulence requires unconventional thinking and calculated risk taking. The enterprise must be understood holistically and seen as a living organism. Risks must also be understood as opportunities that can be optimized or exploited, not just as costs. Risks must be viewed as interconnected and difficult to contain. Like wildfires, they cross boundaries and must be managed accordingly. If a risk is relevant and potentially life-threatening, be prepared for it.

Everything has changed but human nature. Judgment will always be difficult. The 21st century enterprise must develop a 21st century view of risk and risk management. Nearly all enterprises have certain characteristics in common. They all operate to a large degree in the same macro-economic environment. The “fatal flaws” and corresponding “risk intelligence skills” described in Part II apply almost universally.

That said, every enterprise is also unique and differs from all others in key ways. Every enterprise operates at a different stage of development. It possesses different skills, understanding, awareness, and culture. Each of these distinct characteristics must be considered carefully by leaders trying to improve risk intelligence, along with the unique benefits the enterprise can realize through that improvement.

The benefits of improved risk intelligence
Demonstrating the value of prevention is often difficult. It should be intuitively obvious that the improved ability to protect existing assets while more effectively managing the risks to future growth ought to improve the enterprise’s chances of survival and success. The enterprise that builds risk intelligence into the core ways of running its business can improve its resilience and agility and should realize the following benefits:

• Challenging basic business assumptions can help identify “Black Swans” provide first-mover advantage
• Defining the corporate risk appetite and risk tolerances can help reduce the risk of ruin
• Improving signal detection can provide advance warning and enable more proactive responses
• Identifying mission-critical interdependencies can help establish an appropriate margin of safety
• Anticipating potential causes of failure can improve chances of survival and success through improved preparedness
• Factoring in momentum and velocity can improve speed of response and recovery
• Verifying your sources and corroborating the reliability of information can improve insights for decision making and thus the quality of decisions
• Taking a longer-term perspective can aid in identifying the potential unintended consequences of short-term decisions
• Improving operational discipline helps sustain success
• Understanding the Total Cost of Risk (TCOR) can help demonstrate the value proposition and reduce the Cost of Failure while improving risk intelligent enterprise management

Making the transformation
Once the enterprise understands its current state of risk intelligence and the best opportunities for improvement, it needs a plan to close the gap and transform the way it comprehends and manages risks to value. It takes time and effort to become a risk intelligent enterprise.

Risk intelligence is not a status or designation that can be attained and then enjoyed ever more. Rather, it is a way of making better decisions amid uncertainty and under turbulent conditions. Thus, risk intelligence is not an end in itself but a way of doing business, not a goal but a developmental journey. By the same token, improving risk intelligence must be a deliberate and sustainable enterprise process, rather than a mere project.

Voice of experience
“To be successful, risk management has to be a core process of managing the enterprise, not merely a project. A lot of directors seem to think that because they devise a ‘strategy’ to deal with known risk, they’ve got a good handle on risk. My perception is that they don’t. Too often, all they want to do is identify the top 10 risks based on what people know. It’s a project approach—and that’s not what’s really needed. A systematized approach of understanding the most basic business assumptions has more long-lasting potential.”

—Larry Rittenberg, Professor and Chairman Emeritus, Committee of Sponsoring Organizations of the Treadway Commission (COSO)

Developing and applying the necessary supporting processes, systems, and tools enterprisewide requires a “fractal” approach, in which any part of the whole embodies the properties of the whole. That implies that skills, processes, systems, and tools are common at every organizational level.

To be effective, these processes, systems, and tools must be deployed throughout the enterprise and applied with discipline. Although they will be applied differently at different levels, if the skills, processes, systems, and tools work for senior executives and the board, then directors and executives should have confidence that they will work elsewhere. Also, as with any skills, the more you practice, the better you become—provided you practice properly and maintain discipline.

At its best, risk intelligence informs every area of the business at every level such that the practices become part of every function, strategy, initiative, decision, activity, and job. This entails making risk intelligence an organizational value on the order of practicing true customer focus or achieving high quality through zero defects.

Such values do not come about by themselves or by executive decree or through a one-shot training initiative, a short-term project, or a “check the box” approach. They come about because the board and management view them as worthwhile, practice them publicly, recognize them in compensation programs, and embed them in core processes and systems.

The transformation challenge
In many organizations, despite the number and severity of risk management failures, executives still remain unconvinced of the business case for improved risk intelligence and thus risk management. Given this, there are several possible explanations as to why transformation efforts may fail.

For starters, even though the greatest value of risk management is prevention and preparation, demonstrating its value in advance often proves daunting. People may say, “That can’t happen here,” or “It can’t happen again,” or “We’re too smart to let that happen to us.”

Voice of Experience
“People don’t see the need for prevention until it’s too late. Obviously when a crisis occurs, everyone recognizes the need; it’s self-evident. It ought to be obvious that prevention is less expensive and more effective than response and recovery. I’ve tried to create recognition of the need for prevention in stages by starting with a risk scan. Let’s make sure we understand the risks that we have in the organization and the need to take some actions to mitigate the risk, understand it more, and be more involved in what this looks like.”

–Suzanne Hopgood, director

Prevention, therefore, is much less likely to receive priority, especially when resources are scarce. A clear statement of the TCOR may be required to demonstrate the value of improved prevention and preparation. Even when executives are convinced of the value, those who try to implement a systematic approach may experience flawed or prolonged execution.

Generally, it is best to aim for rapid implementation by building more systematic consideration of risk to value directly into core business processes. Early wins are important to demonstrate value. Nothing succeeds like success, and word of mouth can aid implementation.

Lack of program management such as specific milestones and metrics as well as a failure to recognize the level of effort required can contribute to failed implementation. The implementation may also fail if the implementation team lacks dedicated, credible, and capable resources; if the vision and expectations are poorly communicated; and if the enterprise lacks a common language of risk. Difficulties in reconciling the different perspectives of various specialist silos also can result in a lack of cross-functional alignment and coordination.

Conclusion
The first part of this book addresses the reality that conventional risk management has failed. The 21st century enterprise requires an unconventional approach to the understanding and management of risk to value in times of uncertainty and turbulence. Because turbulence cannot be predicted or modeled, the enterprise needs to improve its vigilance and preparedness.

The second part of the book describes 10 risk intelligence skills that ought to be common to directors, officers, and employees even if the challenges and decisions they must make will be different. The development of these ten skills is, of course, no absolute guarantee of success. However, their absence is likely a harbinger of fatal flaws that could lead to the demise of the enterprise.

The third part of the book describes the characteristics of the risk intelligent enterprise and the responsibilities of directors, officers, and employees. It outlined steps that can be taken to improve risk intelligence. It also discussed some missteps that ought to be avoided.

While all these parts when taken together may seem to be onerous and costly, the reality is that decisions that affect the enterprise’s survival and success are made every day at every level of the enterprise. This is enterprise management.

In this fast-changing world, where directors are asked to defend shareholders and stakeholder interests against all foreseeable risks, they need more than the usual array of products and services to help them. They need help that is customized, relevant, comprehensive and, most important, “just in time.”

This is why by September, NACD will announce a new array of significantly increased benefits exclusively for active directors.

Chairmen, lead directors and key committee chairs will be granted an Exclusive Board Leaders Passport. This is a special package of benefits for board leaders, which invites them to participate in chairman’s knowledge exchanges and committee roundtables and forums; provides access to an exclusive research hotline; and provides just-in-time guidance on current and emerging issues, customizable committee guidance and board succession planning.

In addition, these new benefits—available to all active directors—will include an online searchable NACD content library with access to benchmarking analysis, NACD publications and archives, board leader task forces, on-demand research and much more.

We have listened to your comments and understand your needs, and have developed a valuable portfolio of benefits that will help both you and your board set the standard for exemplary board leadership. These benefits are designed to help you do your job more effectively and efficiently on what can be a perilous terrain. See you on the speedway. And drive safely!

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

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.

Primerica named P. George Benson to its board. Benson has been president of the College of Charleston since February 2007.

Joseph P. Sullivan, former chairman and CEO of Protocare, joined CIGNA’s board. Sullivan currently serves as a director of Amylin Pharmaceuticals. He is also chairman of the board of advisors of RAND Health.

Diana R. Wetmore has been appointed vice president of business development and alliances at Emerald BioStructures. She previously served as vice president of alliance management at Cystic Fibrosis Foundation Therapeutics.

Henry Ruhnke Jr. joined the 1st Capital Bank board of directors. Ruhnke is a registered architect and a principal of Wald, Ruhnke & Dost Architects.

Landen Capital has named James C. Gervais to its board of directors. Gervais retired from the Canadian Forces as a Lieutenant General, the second highest rank in the Canadian military.

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.

Craig Mataczynski has joined Vulcan Power as CEO. Mataczynski is the former CEO of Renewable Energy Systems Americas.

Constellation Brands elected Jerry Fowden to its board . Fowden is CEO of Cott.

Intelligent Communication Enterprise has appointed Nelson Wu to its board as a non-executive director. Wu is the general manager of business development at Hin Leong Trading in Singapore.

Michael J. Somers was elected to the board of directors at Willis. Somers was formerly CEO of the Irish National Treasury Management Agency.

Central Garden & Pet named John Ranelli to its board of directors. Ranelli previously served as CEO and president of Mikasa.

ExpressJet Holdings named Thomas M. Hanley president and CEO. Hanley previously served in various executive positions for Wexford Capital.

William J. Amelio and William E. Mitchell have joined the board of directors at National Semiconductor. Amelio is a member of the Daylight Partners Group of investors; Mitchell is the former chairman and CEO of Arrow Electronics.

TIAA-CREF appointed Connie K. Weaver executive vice president, chief marketing and communications officer. Weaver was senior vice president, marketing and communications,  at The Hartford Financial Services Group.

Nancy Pierce was elected to the board at Zhone Technologies. Pierce currently serves as President and Managing Director of KELD, an investment management and strategic advisory firm.

Michael C. Smiley, CFO of Zebra Technologies, has joined Twin Disc’s board of directors.

Highlights of the SEC Guidance
The SEC guidance highlights four ways in which climate change may trigger disclosure obligations:

1. Impact of international climate change accords; Indirect consequences of climate change regulation or resulting business trends, such as (a) decreased demand for carbon-intensive goods and services related to carbon-based energy sources and a corresponding increased demand for goods and services with a low carbon footprint, (b) increased competition to develop innovative products, and (c) increased demand for alternative energy sources;
2. Physical impacts of climate change, such as (a) property damage and disruption to operations on coastlines as a result of rising sea levels or severe weather, (b) indirect financial and operational impacts from disruptions to operations of major customers or suppliers from severe weather, (c) decreased agricultural production in areas affected by weather-related changes, and (d) increased insurance claims, premiums and deductibles for public companies with facilities in areas subject to severe weather.

If material to a registrant’s business, disclosure of the foregoing potential impacts of climate change may be required under Regulation S-K, specifically Item 101 (description of business), Item 103 (legal proceedings), Item 303 (management discussion and analysis) or Item 503(c) (risk factors).

Implications of the SEC Guidance
Public companies should keep the following issues in mind in preparing their annual reports to shareholders, Form 10-Ks and other public filings.

• Consider both the risks and opportunities of climate change: Companies should not focus solely upon the risks of climate change, but also on the opportunities of climate change (such as sales of allowances in a cap and trade system or increased demand for products with a low carbon footprint).
• Consider both indirect and direct risks and opportunities of climate change: The SEC Guidance provides examples of direct climate change risks (such as potential physical impacts or costs to improve facilities) as well as indirect risks and opportunities (such as changing demand for certain goods and services or reputational harm).
• Resolve doubts concerning the materiality of climate change in favor of disclosure: Although the SEC Guidance does not alter the traditional standard of “materiality” — which requires disclosure if a reasonable investor would view the information as important in making an investment decision — doubts whether information is material should be resolved in favor of disclosure.
• Ensure that adequate disclosure controls and procedures are in place to evaluate the materiality of climate change issues: The SEC Guidance does not require public companies to disclose their carbon footprint, but management needs sufficient information concerning greenhouse gas emissions and related operational matters to evaluate the likelihood of a material effect. Therefore, companies must have adequate controls and procedures to process information potentially subject to disclosure. Such controls and procedures should already be in place for management to make required certifications under Sarbanes-Oxley, but disclosure committees should now add an assessment of the materiality of climate change issues to the company’s business.
• Reconcile voluntary and mandatory disclosure of climate change issues: Many public companies voluntarily disclose information regarding their greenhouse gas emissions and climate change risk in corporate sustainability reports and various greenhouse gas reporting programs, such as the Climate Registry, the Carbon Disclosure Project and the Global Reporting Initiative. Companies should ensure that any mandatory SEC disclosure is consistent with prior voluntary disclosure or be prepared to explain any differences.

Richard M. Schwartz is a litigation partner and head of the environmental practice group in the New York office of Fried, Frank, Harris, Shriver & Jacobson LLP. Donna Mussio is a senior associate in the environmental practice group. Coleman Kennedy, an associate in the environmental practice group, also contributed to the preparation of this article.

Ultralife has named Brigadier General, U.S. Army (Retired) Steven M. Anderson to its board. Anderson has more than 31 years of experience in U.S. Department of Defense operations.

Peter Frank has been named to the board at Viasystems. Frank is currently the president of GSC.

EDA Consortium elected six people to its board. Edmund Cheng, Dane Collins, Aart de Geus, John Kibarian, Alex Shubat and Ravi Subramanian all joined the board.

Weikang Bio-Technology has appointed Yvonne Zhang, Yilun Jin, Allen Zhang and Yan Huang to its board.

Generac elected David Ramon to its board. Ramon, formerly president and CEO of USA.NET, will serve on the audit committee.

ARIAD Pharmaceuticals named Robert Whelan Jr. to its board of directors. Whelan was a Fellow at the Harvard University Advanced Leadership Initiative from 2008-2009.

Julie England, former vice president and general manager of RFID at Texas Instruments, joined the board of directors at Intelleflex.

RailAmerica appointed Ray M. Robinson and John E. Giles to its board. Robinson is a former AT&T executive and Giles is RailAmerica’s president and CEO.

Sheli Z. Rosenberg was recently named to General Growth Properties’ board of directors. Rosenberg is the former president, CEO and vice chair of Equity Group Investments.

Conseco elected David K. Zwiener to its board of directors. Most recently,  Zwiener was CFO at Wachovia.

The sophistication of the perpetrators behind these and similar incidents has propelled the data security issue beyond the IT realm into the boardroom. Directors and officers must now make it their business to understand what information their com-pany holds, where it is located and how it is protected. Boards need to analyze the potential impact a breach could have on the organization, be part of the effort to design and implement a far-reaching program to prevent breaches and prepare the organization to respond properly if one occurs.

Navigating the Regulatory Environment
Responding to regulatory changes can be among the most complex pieces of the puzzle. Numerous federal and state regulations pertaining to data privacy and security have been enacted and more are in the pipeline. For companies that don’t keep pace with the fast-moving regulatory environment, it’s a minefield of rules that could erupt in fines, penalties—and substantial liability for your organization and its management. A sampling of recent regulatory standards follows:

• The Health Information Technology for Economic and Clinical Health Act
  A provision to the economic stimulus bill, the HITECH Act expands the privacy and security regulations of the Health Insurance Portability and Accountability Act (HIPAA) beyond the healthcare industry and health insurers to any business performing activities involving Protected Healthcare Information

• Payment Card Industry Data Security Standard
  Created by credit card associations to combat fraud, PCI-DSS requires all those in a card transaction stream, including merchants, processors, and acquiring banks, to implement controls to protect credit card data.

• The Federal Trade Commission (FTC) Red Flags Rule
  This rule requires creditors to implement a program that identifies and detects warning signs of identity theft before extending credit to customers.

• Massachusetts 201 CMR 17
  Some 45 states currently require companies to notify those affected by a data breach as soon as practicable. Massachusetts enacted the most sweeping state mandate to date, requiring any businesses handling personal information of state residents to proactively develop, execute and maintain a program to protect this information.

More than a Policy
Since traditional insurance typically does not respond to data security and privacy events, boards need to be proactive in ensuring that a comprehensive approach to mitigating breach exposures includes insurance.

Privacy and security liability insurance should expressly address both first-party and third-party costs associated with a breach incident. It should be underwritten by a carrier with relevant experience in the line and in-house IT specialists who speak the language of your company’s own data security team. Other important facets to look for in coverage include:

• A broad definition of “covered information,” including not only the personal and private information of individuals but confidential corporate data;

• Coverage for legal liability damages and defense costs, as well as regulatory actions, fines and penalties (as permissible by law); and

• Coverage for the myriad costs a company will incur to manage an incident. Also ask about coverage to notify victims in those few states that do not currently have breach notification laws; while not required, the gesture can create goodwill and keep incidents from escalating.

Once a proper plan and insurance are in place, sound corporate governance requires that you stay closely attuned to data security risk. If the data security issue is not handled properly, the stakes can be high, including directors, officers and corporate liability, exorbitant fines and penalties and damage to your company’s reputation. With policies and procedures to prevent and respond to incidents, broad-based insurance and ongoing monitoring of the risk and regulatory environment, your board can be confident that this governance duty is prudently addressed.

Mark Camillo is vice president of professional liability at Chartis. The views and opinions expressed herein are those of the author and do not necessarily reflect those of Chartis Inc. or its subsidiaries, business units or affiliates.