“RiskMetrics’ uniquely transparent policy formulation process lays the groundwork for the broad range of proxy voting policies employed by our clients,” said Stephen Harvey, head of RiskMetrics’ governance business. “Investors are faced with ever more complex voting issues and we are pleased to provide them with expert guidance on critical issues plus unbiased analysis on thousands of company meetings.”

The 2010 policy updates address issues as a result of investor frustration and a changing regulatory landscape.

“Around the world, investors are focusing on increased accountability, improved transparency and more effective engagement,” said Martha Carter, head of governance research and chair of the global policy board at RiskMetrics. “This year’s policy updates are driven by a recognition that investors and boards share responsibility for value creation.”

Forty-three percent of investors who participated in the survey view non-approved shareholder rights plans as the most highly problematic takeover defense. Fifty-two percent of investors that participated in the survey indicated management say on pay proposals should be the primary vehicle to initially address problematic pay practices.

“Executive compensation is still a hot button issue for shareholders, and the global financial crisis raised new concerns about incentives that influence executive behavior,” added Carter. “To better align with investors’ needs, we will evaluate additional factors such as aligning long-term pay-for-performance and risk-motivating incentive practices as part of overall executive compensation practices.”

The nearly 60-minute question-and-answer session conducted by Jeffrey M. Cunningham, chairman, CEO, and editorial director of Directorship, began with Blankfein clarifying how Goldman was able to tread the turbulent waters during the fall of Wall Street: “We didn’t delegate risk assessment to ratings agencies…[companies need to] mark your positions to market so when things start dropping–you’re aware early.” Blankfein noted that everyone on all sides of the issue managed to “miss the signs.”

“If you would have asked me at the beginning of 2006/2007 that mortgage rates would go down,” Blankfein acknowledged. “I had no idea.”

Even in the most ideal circumstances, risk is always a factor. “You can take away all risk but you’ll really curtail growth,” he said. “In a risk-oriented world, where there’s so many cross-currents. I never want to build in a threshold…for fear that people will stop telling me [what's on their minds].”

On Goldman’s revered corporate culture which emphasizes partnership over hierarchy, Blankfein said he relies daily on the talent of Goldman’s management and board: “I think of my subordinates as such on the letterhead but…[it's a] partnership.

“We have a pretty flat organization–I don’t have to invite people into my office–they feel like they have the right–I’ll get suggestions from everybody on the organization chart.”

Goldman plans to continue to expand globally and when asked how Goldman integrated into places such as China, he stressed the importance of being open to the world. “There’s no doubt [there is a] different texture…look at what they’ve [China] accomplished…dealing with social forces at work…[they had to] to bring them [people] into the city just to feed them–that’s very different than what would be needed here [in the U.S.].”

When asked how he felt about the separation of CEO and chair positions, Blankfein noted that having an independent lead director helped him immensely, as that position takes on some of the chair role. He emphasized that he has a strong relationship with all members of the board, noting that: “If I’m looking for a particular locus point of a problem–the lead director tells me.”

When asked by a conference attendee how he and others could have missed such an enormous downfall in the economy, Blankfein referred to points he made earlier, emphasizing that it was missed across the board on Wall Street. He added that he would have loved to have known what was to come but added, “In three years time, I’ll know exactly what I should have done today.”

To view a webcast of the Directorship interview with Blankfein, click HERE.

The institute will provide guidance on such topics as director evaluations, compensation, risk management, and shareholder relations. “Addressing the best way to conduct and search for new directors, increase diversity on your board, and what are appropiate director compensation levels, are among some of the difficult challenges many directors face,” adds Wallenstein. “It’s through an examination of these topical issues that [the Directors' Institute]…in small focused sections, in addition to larger group sessions, allow directors the opportunity to dig down deeply into topics and find out what their fellow directors are doing around the country.”

Adjusting to the corporate environment, the Directors’ Institute, taking place April 7-9, 2010, has added a panel called “Corporate Government Involvement and Corporate Governance,” as the government continues to monitor and regulate boardrooms across the country. “As Wall Street moves to K Street, our program is held at the Reagan building in the heart of Washington, D.C.,” notes Wallenstein. “Discuss the boardroom’s toughest challenges with fellow directors and experts in the financial services, accounting, and legal fields.”

A so-called “poison put” is a “change-of-control” provision that allows lenders or bondholders to declare a default under the debt agreement and accelerate (or “put”) the debt back to the company at its principal value. The poison put emerged following the famed RJR Nabisco and other leveraged buyouts of the 1980s that left stunned, risk-averse bondholders holding “junk bonds” overnight without any recourse. These provisions came back in force most recently following the wave of large leveraged buyouts (LBO) in 2006 and 2007, which again stung many unprotected bondholders. Following this LBO resurgence, the Credit Roundtable, an association of fixed income investors, issued a white paper in December 2007 (updated in July 2008) recommending that bond indentures include “change of control” covenants (i.e., poison puts). The purpose of such a change-of-control covenant is to provide the bondholders with an opportunity to rethink their original investment decisions if the company is acquired by new owners.

Though the definition of a change of control initially contemplated equity control changing hands (particularly to buyout funds that tended to significantly increase a target company’s leverage), the definition of change of control has since expanded to include an event where a company’s board of directors no longer includes the majority of directors present at the time the debt was issued or were approved by those incumbent directors. This provision is commonly referred to as a Continuing Directors provision. Bondholders are risk assessors and therefore corporate governance, control, and capital structure are each material to the pricing and valuation of bond issues. Bondholders would suggest this protection is also necessary because boards do not owe any fiduciary duty to bondholders (outside of insolvency at least), and bondholders’ only protections are the covenants they are able to negotiate and the company’s duty of good faith and fair dealing. It is not surprising, therefore, that bondholders need to be comfortable with a company’s existing board and management.

Though clearly not intended or approved by issuers as “takeover defenses” like the better known “poison pill,” the poison put has recently gained attention (or notoriety) from stockholder activists and hostile suitors in connection with proxy fights and takeover attempts – being cast as a tool for board and management “entrenchment.” This is in response to issuers publicly appealing to stockholders and the dissidents to withdraw or reduce their nominees to avoid triggering such a provision. This could obviously have disastrous consequences for an issuer, especially given the limited access to refinancing in the current economic environment or when the debt is impaired. Not surprisingly, these dissidents or hostile suitors have demanded that issuers “approve” their nominees or seek a waiver from the lenders to avoid triggering this default – actions which would likely be viewed as irresponsible if triggered by the dissidents or hostile suitors.

Delaware Chancery Court Vice Chancellor Stephen P. Lamb interpreted a Continuing Directors provision in this context in Amylin. In the Amylin case, Amylin was facing competing dissident slates, each of who had requested that the company approve the dissidents’ slates for purposes of the Continuing Directors provisions in the Amylin debt agreements in order for the stockholders to be able to fully exercise their franchise without triggering the poison put. Ultimately, in partial settlement of related litigation by the dissidents, Amylin approved each of the dissident slates solely for purposes of negating a default under the Continuing Directors provision but continued to oppose their election publicly and in their proxy materials. Not surprisingly, the bondholders were not receptive to such “approvals” given that the point of such provisions – from the bondholders’ perspective – was to allow them the unilateral ability to waive such provision in connection with a potential change in control (including, or maybe especially, in the form of a proxy contest). Bondholders clearly want an opportunity to assess the long-term platform of the dissidents and the independence and qualifications of their nominees to confirm their willingness to maintain their investment. Accordingly, the indenture trustee litigated the proper definitional interpretation of the Continuing Directors provision.

Relying on a strict textual interpretation of the Continuing Directors provision, the court ruled that the Continuing Directors provision as drafted did not prevent the Amylin board from “approving” the nomination of the dissident slate while nevertheless opposing their actual election. In particular, the provision did not expressly prohibit board “approval” after the commencement of a proxy fight, and the court was concerned that an interpretation that it effectively did prohibit such approval could severely limit the stockholder franchise (by coercing stockholders into only voting for directors supported by the existing directors).

Though not formally ruled on, the court suggested the right or “power” to approve dissident directors in this context (i.e., while opposing them in the actual election) was subject to the implied covenant of good faith and fair dealing under the indenture – which required that the board must make this approval in the good faith belief that the “election of one or more of the dissident nominees would not be materially adverse to the interests of the corporation or its stockholders.”

Finally, the court also ruled that the Amylin board did not breach its duty of due care (citing a “gross negligence” standard) in failing to learn of and specifically consider and approve the poison put provision – in particular noting the highly-qualified outside legal and financial advisors and the fact that directors did not have an obligation to know every term of the indenture. However, given the magnitude of the effect of a default under a debt agreement, the court expressed the fact that boards should request that their advisors inform them of the default provisions, even if “customary,” including those which could impair the shareholder franchise so that the board will be able to exercise its fully informed business judgment.

The court also informally suggested that boards that actually and intentionally limit the stockholder franchise in this context (i.e., by agreeing that the board cannot approve dissident nominees after commencement of a proxy fight) could face a tough burden in demonstrating the “extraordinarily valuable economic benefits for the corporation that would not otherwise be available to it” in order to satisfy the board’s fiduciary duties.

Given that lenders will likely continue to insist on including these provisions in a typical debt agreement or indenture, directors may feel they are between a rock and hard place. Directors can take comfort from the court’s application and discussion of the applicable gross negligence and duty of care standards in Amylin, but need to be aware of the issues this case presents and heed the helpful warnings offered by the court as follows:

Advanced preparation needed: Companies should review their existing debt (and other material) agreements now to identify the change in control provisions and their potential impact in a proxy contest or hostile takeover – particularly companies who may be currently vulnerable to stockholder activism or takeover attempts. Such provisions can also restrict the ability of a board or stockholders to pursue a friendly takeover offer. The contractual, fiduciary and strategic issues that companies and boards may face are potentially daunting, so advanced and careful planning and preparation will help facilitate a successful result.

Be fully informed: Poison puts are no longer a dirty little secret, and the Amylin case made clear that boards have a continuing duty to protect their stockholders’ interests notwithstanding a need to incur indebtedness and the fact that such provisions are customary and typically required by the debt holders. To ensure compliance with their fiduciary duties, directors should be informed of and attentive to all change of control provisions in new debt and other material agreements going forward – particularly those which may impair the stockholder franchise. Boards should not be passive in these approvals and should ask questions of their advisors to their satisfaction. Future courts may not be as forgiving after the warnings set forth in Amylin. Bondholders are unlikely to drop these provisions for new issues and will likely seek ways to close the loophole identified in the Amylin case.

Boards need to fully understand the impact (financial, business and otherwise) of the company’s refusal to accept the poison put. Each situation will be different and a company’s financing options may be particularly limited in this economic environment or if otherwise in distress, but care should be taken to negotiate these provisions carefully (particularly Continuing Director provisions) and to ensure the Company is receiving commensurate economic and other benefits by accepting these provisions – even if advised that they are “customary.”

A poison put is not a poison pill: Boards should be well advised prior to using the poison put as an affirmative takeover defense (i.e., by a decision not to “approve” a dissident slate under) or giving the appearance of doing so (i.e., by publicly using this provision as leverage against the dissident), as this may draw undesired public criticism and litigation – which could undermine the company’s other efforts to purport to represent the best interests of the stockholders in connection with the proxy fight or takeover response. While not addressed by the Amylin court, boards should also be mindful that using a poison put as a takeover defense may trigger heightened scrutiny of the board’s actions beyond the “gross negligence” and business judgment rule standard – similar to a court’s analysis of the adoption and use of the better known “poison pill.” Although the implied duty of good faith and fair dealing to the lenders may provide a board some flexibility to not approve a dissident slate, the intent, circumstances and manner in which the approval is denied would nonetheless be scrutinized. Similar scrutiny may apply to a board that agrees to such a provision for a new issue when “in play” or otherwise engaged in a proxy or takeover battle.

No carte blanche: Boards do not have the unfettered right to grant an “approval” to circumvent a Continuing Directors provision as a result of the implied covenant of good faith and fair dealing applicable to commercial agreements. In particular, boards are required to make a “good faith” decision that the election of one or more of the dissident nominees would not be materially adverse, or pose danger, to the interests of the corporation or its stockholders. Companies should take care that their public opposition to the dissident nominees does not go beyond “election puffery” to avoid potentially undermining the credibility of a board’s “good faith” decision to approve the nomination by the dissidents. Perhaps more importantly, the failure to meet this standard could also indicate a duty of loyalty breach – for which directors may be personally monetarily liable (and without D&O coverage).

Expect scrutiny in hindsight: Courts will likely apply greater hindsight scrutiny in future cases and may expect to see “evidence” of fully informed and good faith decision-making. Boards should take care to get expert legal and, as appropriate, financial advice and should exercise their business judgment in good faith and on a fully informed basis. Boards and their advisors should create a good “record” of the decision making process.

Be well advised: Directors and officers are entitled to reasonably rely on expert advisors selected with due care. The need to observe proper process and decision-making will likely necessitate the early involvement of experienced outside legal and, in some cases, financial advisors.

Ryan D. Thomas is a partner in the Corporate and Securities Practice Area at Bass, Berry & Sims PLC, and counsels boards and companies on corporate governance, shareholder activism, mergers and acquisitions, and securities matters. Thomas K. Wedeles is an associate in the Corporate and Securities Practice Area at Bass, Berry & Sims PLC.

Appropriately planned taxes can enhance a company’s overall value by improving corporate earnings, strengthening the PE ratio of company shares, and influencing the way analysts perceive and cover the enterprise. Tax issues are also closely tied to risk. When companies engage in tax planning, they are interpreting laws, an activity made risky by the possibility of disagreement between the company and tax authorities. If not property controlled, tax issues can lead to a finding of material weakness by auditors. Tax planning is therefore a crucial part of risk management.

To understand the impact that tax matters may have on value and risk, boards should be familiar with five main areas: tax cash management, international taxation, tax-efficient supply chain management, transfer pricing and inbound investment.

Tax cash management
Prudent tax planning can unlock one-time or annuity cash flows trapped inside a company. Although tax is one of the largest expenses on the income statement, companies often fail to consider tax issues when trying to improve their overall cash management. This year, Ernst & Young surveyed more than 500 executives from major companies. Only one in four respondents said that their firms considered taxes when reviewing cash management practices.

One of the first things a company should consider is whether it is making the maximum appropriate use of available tax credits. For example, in an emerging area such as climate change, many firms have not yet looked into available offsets for their existing or planned investments in clean technology. Most companies know about the federal research and development (R&D) credit, but they overlook eligible expenses such as investment in plant and equipment designed minimize the environmental impact of R&D. Numerous government programs supply tax credits, deductions and abatements to companies that conduct environment “scrubs” of their business.

Many states and cities offer incentives comparable to those at the federal level, such as credits and grants for companies that provide employee training and development programs. Opportunities in this area are growing now that a number of states have launched their own economic stimulus programs.

Companies may also be able to free up cash by reviewing their transcripts and accounts at the federal, state and local levels. Many companies fail to recognize that interest and penalty miscalculations pose a serious problem for corporate taxpayers. The rules for calculating interest are highly complex, and governments may lack the resources needed to make such calculations accurately every time. If a review does reveal overpayments, these can be kept as cash or applied to another tax liability.

Reviews of transcripts and accounts typically focus on income tax, but can also include sales and use tax, property tax and state employment tax. Concerns about overpayment have led many companies to look especially hard at indirect taxes. For example, opportunities exist to review property taxes and examine whether the plant and equipment on a piece of land can be appropriately depreciated to lower a company’s tax burden.

With many states facing budget problems, state and local governments are concerned about revenue shortfalls. Legislatures have raised taxes and closed loopholes, increasing the complexity of filing returns and preventing some companies from meeting their compliance requirements. In response, some firms are considering whether to outsource the compliance function related to sales and use tax, a step that can lower costs substantially.

In addition to federal, state and local taxes, companies are seeking to manage cash flows linked to foreign taxes. Among the questions board members should be asking in this area:

• How can companies ensure that they are effectively reducing their foreign tax without triggering US tax?

• How will proposed international legislative changes affect the company, particularly its cash flow, effective tax rate and business objectives?

• Has the company taken full advantage of opportunities to access foreign tax credits, cash held offshore, or both from its international operations?

International taxation
The international arena presents companies with a distinct series of tax challenges. First, there has been a marked increase in information-sharing by global authorities. Agreements to exchange tax information between countries have existed for decades, but recently the cooperation has intensified: more countries are using the agreements, and doing so more frequently. Governments worldwide want to lower deficits and stimulate their economies, and they are looking for uncollected revenue from corporate taxpayers. Companies must prepare for increased tax controversy, assembling a defense before it is needed. All planning should be amply and contemporaneously documented, something not always done in the past but now considered a best practice.

Second, the Obama Administration is weighing plans to reform deferral of overseas income earned by US multinational corporations. It’s still unclear what shape such reform might take, but significant change is possible, with the likely result that US multinationals will pay higher taxes on income earned abroad. Certain planning approaches can secure companies’ tax position regardless of how the law may change, and more firms are investigating these approaches as a possible hedge against future uncertainty.

Supply chain management
Tough times have prompted multinational corporations to scrutinize nearly every aspect of their supply chain in an effort to lower costs. Companies are seeking ways to rationalize their supplier base, rethinking the locations where they manufacture goods, and considering whether to outsource (or insource) manufacturing and distribution.

Although greater operational efficiency can reduce costs, high taxes will erode the savings. For that reason, firms are looking to make their supply chains more tax-efficient. They are asking where their most valuable intellectual property is located, a consideration relevant even for companies that are not manufacturers. Services companies, for example, can enter into global contracts in a variety of locations.

Taking a comprehensive approach to tax-efficient supply chain management raises its own operational challenges. Companies must decide whether qualified staff will be willing to move to the chosen location, whether exit taxes will be due when facilities are relocated, and what information technology costs will be incurred in integrating disparate operations.

Transfer pricing
Used correctly, knowledge of transfer pricing can serve as a risk management tool, a means of reducing taxes and a hedge against uncertainty. Annual surveys conducted by Ernst & Young show that transfer pricing consistently tops the list of international tax issues facing multinational companies. Transfer pricing has grown more complex as regulations and audit practices have evolved, and closer collaboration among worldwide tax authorities virtually guarantees that it will continue to be a concern. Two of the main issues uncovered in our surveys relate to permanent establishments and tax controversies.

Permanent establishments are taxable presences formed (often inadvertently) when personnel or property are located in a new country where a company has not set up a formal place of business. They can stem from something as simple as having salespeople repeatedly attend trade shows or exhibit products overseas, even for brief periods. Income tax treaties may afford some protection from this risk, but often a taxable presence is created anyway. If so, the best approach usually is to admit that a taxable presence exists and establish an agreement to treat it favorably. Companies that wish to avoid creating a permanent establishment must understand thoroughly any income tax treaties relevant to its overseas business.

Tax controversies related to transfer pricing are common, and can be expected to become more so. Usually they involve two governments fighting about which one gets to tax the same dollar of corporate income. These disputes speak directly to the issue of where value is created in a company’s global supply chain. Government A might believe, for example, that a foreign-owned factory located inside its borders contributes more value than the company’s other supply chain components. Government A therefore maintains that it should get the largest share of tax remuneration. But another country may play a role in that supply chain as well, leading Government B to argue that it, too, deserves a cut. Companies caught in the middle of such disputes may be subject to double or even triple taxation, an undesirable outcome.

Techniques exist to help companies anticipate and avert tax controversies. Firms can establish an Advance Pricing Arrangement (APA), an agreement between a tax authority and a multinational enterprise that determines the appropriate transfer pricing method used for intercompany transactions. Because APAs deliver a high level of confidence in the correctness of a company’s transfer pricing methods, they can save time and reduce risk by shielding taxpayers from litigation.

APAs can be unilateral, bilateral or multilateral. Under a unilateral APA, a company may negotiate an appropriate transfer pricing method with a single tax authority for use in a single country. Bilateral or multilateral APAs are agreements between a corporate taxpayer and one or more foreign tax administrations allowing multiple governments to pre-agree that a specified amount of profit will be allocated to one jurisdiction rather than another. APAs are complex to set up in some jurisdictions, but they can be extremely helpful under the right circumstances.

Inbound investment
Today’s international business environment provides companies with unprecedented opportunities to invest in the Americas. The global trend currently involves foreign multinationals buying US corporations. This has forced US firms to become familiar with matters they may not have dealt with before, such as tax rules governing payments to a foreign parent.

Companies contemplating their first investment in the Americas, or seeking to supplement their acquisitions in the region, may find approaches that were cost-prohibitive in the past are now attractive options. Recent shifts in profitability and asset valuation, for example, may have lowered the cost of tax-effective supply chain management. By working together more closely, different parts of the organization may be able to reduce the cost of cross-border cash movements and better manage overall financial risk. Inbound acquisitions may also create tax-inefficient structures that could, in turn, present opportunities for the company to rationalize its international tax structure.

Staying on top of legislative changes
All of these issues must be viewed in the context of the rapid and broad-scale changes taking place in Washington. Board members have a responsibility to ensure that management remains up to date on legislative initiatives, particularly those involving healthcare reform and energy. The details are complex and change almost daily, but the stakes are high, so companies must spend the time needed to understand these matters adequately. In particular, boards should ensure that the corporate tax department stays current on legislative developments. One step companies can take in this direction is to require tax directors to give the audit committee quarterly briefings on any new developments. In fact, this is now considered a best practice.

Board members who stay abreast of the five tax issues outlined above will be doing their companies a service. In the process, they may also find themselves acquiring a more holistic view of the enterprise. Taxation may be the purview of accountants and attorneys, but it touches so many parts of the business that boards must pay attention to it as well.

Kate Barton is Americas vice chair of tax services at Ernst & Young, LLP.

The views expressed herein are those of the author and do not necessarily reflect the views of Ernst & Young LLP.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

According to Reuters, Daly recalled the NACD’s 2009 Public Company Governance Survey, an inventory of Fortune 500 actions, and NACD member participation, including its efforts to strengthen corporate governance.

An inventory of board actions found:

• NACD’s 2009 Public Company Governance Survey of 632 found that directors are focusing on issues more critical to recovery: strategic planning, risk oversight, financial oversight and corporate performance, and that they are responding to shareholder concerns.

• Nearly 50 percent of boards separate the positions of board chair and CEO, continuing that growth trend. When asked what board leadership structure they prefer, 63 percent say they prefer a structure where the CEO and Non Executive Chair were separate.

• Declassified boards are now the norm in large cap public companies, with 72.2 percent conducting annual elections and only 27.8 percent with staggered terms. There is still a strong shareholder desire to declassify boards.

• The use of director evaluations specifically to replace and renew board membership is on the rise is the most prevalent method of director replacement. All methods saw an increase this year, indicating that directors consider board composition critical in this environment.

• A separate poll of 90 Fortune 500 directors highlighted that the majority of boards have stepped up self-assessment measures to ensure efficient and effective performance.

“Many corporate boards have recognized the critical issues and adjusted their practices to perform in these unprecedented times, but this inventory of activity tells us that our work has only begun and more must be done,” said Daly. “Directors must continue taking the necessary steps to restore public and investor confidence, an important ingredient of economic recovery.”

Nearly 3,000 individuals have downloaded the NACD’s Key Agreed Principles as part of efforts to strengthen corporate governance.

Target is  the latest company to agree to reduce directors’ term limits to one year. The move follows a heated proxy battle with activist investor William Ackman’s Pershing Square Capital Management, which ended during the company’s annual meeting in May when Ackman’s attempt to capture five director seats was unsuccessful. “I think the change in term limits is a result of Ackman’s proxy fight,” says Ken Squire, founder and president of 13D Monitor, a research and advisory service specializing in shareholder activism.

Governance experts say it’s not uncommon for companies to revamp governance practices after activist investors attempt to take over board seats. “The timing might seem atypical,” says Patrick McGurn of RiskMetrics. “But it’s not unusual to see companies make over their governance practices after they go through a proxy fight.”

Yet Target’s recent decision is not expected to touch off an increase in the trend toward eliminating staggered board terms. “Companies aren’t going to unilaterally make this decision,” says Squire. “I think Target did this for [its] shareholders because shareholders pushed for it.” Target’s high approval rating from investors, who re-elected Target’s entire slate, provided a stable foundation for the company’s decision.

Switching to a yearly director election can make takeovers easier. And, with the change in how broker votes will be cast and the potential for proxy access to become a reality, more directors could find themselves at risk of losing their board seats. Timothy Smith of Walden Asset Management cautions that while the term limit may ignite concern, companies with yearly term limits often hold elections without incident. “Directors could argue that yearly elections make them vulnerable, but you can’t receive 51 percent of the vote against you unless you’re doing a really bad job.”

Kevin Martin joined Xtera Communication’s board. Martin served as chairman of the U.S. Federal Communications Commission from 2005 to 2009.

Cisco appointed Arun Sarin to its board. Arun previously served as CEO of Vodafone Group. Sarin also served on Cisco’s board from 1998-2003. He currently sits on the board of Safeway.

William C. Kunkler, executive vice president of CC Industries, was elected to Sears Holdings’ board. Kunkler also sits on the boards of Envestnet Asset Management, a financial services company, and NIBCO, a manufacturer of valves and fittings.

Roger D. Williams, former president of Bob Evans Farms, has been elected to the board at LecereTM, a developer of restaurant-management tools.

Coldwater Creek’s co-founder Dennis Pence will replace Daniel Griesemer, who has stepped down from his role as CEO after two years.

Iron Mountain named Per-Kristian Halvorsen, senior vice president and chief  innovation officer at  Intuit, to its board, bringing the number of directors of the company from nine to ten.

MSCI, a global provider of investment decision support tools, named Catherine R. Kinney to its board. Kinney retired from NYSE Euronext in March 2009 after 35 years in a variety of managerial positions with the company.

Richard Markee has been appointed CEO of Vitamin Shoppe. Markee has served as non-executive chairman of the board since 2007. He previously served as president of Babies “R” Us.

Shutterfly elected Brian Swette to its board. Swette, former chief operating officer at eBay, serves as non-executive chairman of Burger King and on several other boards.

David Ebersman, CFO of Facebook, has been appointed to Ironwood Pharmaceutical’s board. Ebersman previously was with Genentech from 1994-2009.

Bringing a wide range of experience from positions at DuPont Chemicals, UniRoyal, Applied Digital Solutions, and The Bay Group, Garrett Sullivan was recently named to EGPI Firecreek’s board. He is also the past president of Granada Hospital Group.

Steven Holtzman has joined Satori Pharmaceutical’s board. Holtzman is CEO and co-founder of Infinity Pharmaceuticals.

Premera Blue Cross elected Robert C. Wallace to its board. Wallace is CEO of Wallace Properties, a full-service commercial real estate company.

ZAGG, a publicly traded mobile and electronics company, has elected Ed Ekstrom to its board. Ekstrom is a founding partner of vSpringCapital. Prior to his work at vSpringCapital, he served as vice president of Intel Communications Products Group.

Fiona Dias, executive vice president, partner strategy and marketing for GSI Commerce, has been appointed to Advance Auto Parts’ board.

American Shared Hospital Services elected Ray Stachowiak to its board. Stachowiak is founder, president, and CEO of Shared Imaging, a provider of fixed-site and mobile magnetic resonance imaging systems.

UTi Worldwide has appointed Donald W. Slager to its board. Slager, who is CEO of Republic Services, will join the company’s compensation, nominations and corporate governance committees, and the recently established risk committee. UTi Worldwide is an international non-asset-based supply chain company that provides air and ocean freight forwarding.

MGM Mirage named Joseph H. Sugerman to its board. Sugerman is an otolaryngologist and an attending physician at Cedars-Sinai Medical Center in California.

Timothy R. Franson was elected to Myriad Pharmaceutical’s board. Franson was with Eli Lilly for more than 20 years and most recently served as vice president of global regulatory affairs.

BJ’s Restaurants appointed William L. Hyde to its board. Hyde is a 35-year veteran of the national restaurant business and has managed both private and publicly held restaurant companies during his career.

North Arrow Minerals appointed Blair Murdoch to its board, increasing the number of directors to five. Murdoch is chairman of Option-NFA.

Walter Energy has named Victor Patrick CEO. Patrick most recently served as vice chairman, CFO, and general counsel. George Richmond, formerly CEO of the company’s Jim Walter Resources subsidiary, has been named president and chief operating office of Walter Energy. Richmond has been with the company since 1978.

Acucela has appointed Glen Y. Sato to its board. Sato is a partner in the life sciences and corporate practice groups of law firm Cooley Godward Kronish LLP. Acucela is a clinical-stage biotechnology company that focuses on developing new treatments for blinding eye diseases.

Marc N. Casper has been appointed president, CEO, and a director of Thermo Fisher Scientific. Casper has been with the company in a variety of senior management capacities since 2001, most recently as executive vice president and COO. He succeeds Marijn E. Dekkers, who resigned to become CEO of Bayer AG, based in Germany.

Richard M. Smith, president and COO of BioScrip, has been named to the company’s board.

BackOffice Associates elected David Peterschmidt to its board. Peterschmidt was most recently CEO of Openwave Systems. He also serves on the boards of Savvis and LimeLight Networks.

Innospec, an international specialty chemicals company, has appointed Robert I. Paller to its board. He will serve on the nominating and governance commitee. Paller is currently of counsel to the law firm of Smith, Gambrell & Russell.

The answer is yes, and the reason is that serving as a fiduciary is one of the most important causes an individual can take on in a lifetime. By building corporate wealth, directors contribute to the prosperity of our nation and of the world. And, at this time of economic stress, the guidance provided by directors is more important than ever before.

I am reminded of John F. Kennedy’s 1961 inaugural address in which he said that America “would bear any burden…to assure the survival and success of liberty.” Certainly the directors I know are bearing many burdens to assure the survival and success of the companies they serve as fiduciaries.

By pledging a duty of care, directors promise to be vigilant on behalf of an enterprise. (When people ask directors, “What risks keep you up at night?” they mean that literally!) By pledging a duty of loyalty, directors in essence say that they will put their own interests behind those of the corporation and its stakeholders.

But rest assured, although directors give, give, give, they also receive—yes, in the form of compensation, but also in the form of intellectual satisfaction as they work with corporate leaders to solve thorny issues in strategy, risk management, and corporate growth, among other activities. For people who like a challenge, no job could be more attractive. The good director can help heal a stressed enterprise, guide it through difficult times, fight fires of crisis, help eliminate fraud and waste, mentor leaders, and help develop thriving organizations, among many other contributions.

The board members listed in this issue’s Directorship 100 do all this and more.

NACD exists to help directors and boards do their work well. We are proud of our calling, and prouder still of the dedicated professionals we serve.

It is telling that for the second year in a row we have given top billing to a regulator. This year’s most influential person in the boardroom is U.S. President Barack Obama. (Last year, it was Congressman Barney Frank, chairman of the House Committee on Financial Services.) Obama and his team have moved quickly, in FDR fashion, to stabilize the markets, shore up the financial system, and inject stimulus into the economy. For now, these measures seem to be working. It is likely that Obama’s team of financial minds will set their sights on putting measures into place to discourage the malevolent behavior that led to crisis. Most executives and directors favor some form of common-sense reform. In fact, many CEOs, such as Goldman Sachs’ Lloyd Blankfein, have been proactive in calling for sensible reforms on executive pay practices and in other areas.

Finally, I want to thank you, our readers, for your input on the list through the numerous polls and online surveys we issued. The Directorship 100 is meant to begin the dialogue, not to end it. So, please join the discussion online at www.directorship.com/D100-2009.

What’s changed for board directors in light of the financial crisis?
I’ve learned as much in the last two years as I have in the last 20. We should be required to write Counterparty and Risk on our agendas in bold, capital letters. Previously, the board discussed risk on an annual basis. And it was something managed by the compliance department. I sat on a board as all this began to unfold. When we stepped up our discussions with the risk management officer, we were surprised by the number of areas we would ask about and he would say, “That’s not under my purview.”

Is there a potential boards could get too risk averse?
We may have the equivalent of Depression babies in the boardroom. If we run our companies like the last two years were the norm, then definitely there’s going to be too much focus on risk. But certainly there wasn’t enough in the past.

How does a board get its arms around risk?
Old fashioned sensitivity analysis. The analysis that was usually presented to the board for a given transaction was one-dimensional or the sensitivities were tested in too narrow of a band and failed to take into account enough of the exogenous events in the real world. Part of this, of course, can be attributed to management selling their initiatives and part of it is just a process to which we fell victim. Once you properly illuminate the risks, then you can intelligently think about “go or no go,” mitigation, and offsetting actions.

Concentration intensifies risk. Should we all become more diversified?
Diversification can be a bit of a mirage. In the mortgage market, if you look at some of the hybrid instruments that we now call toxic—they took groups of BBB-rated credits, put them into structures with diversity of regions and industries and called them AAAs, but they were still just a bunch of BBBs. And when things hit the fan, unsurprisingly, they behaved like BBBs and collapsed. If you go back to some of the old-timers who did work in the banking industry back in the 1940s and 1950s, using basic risk-management concepts, they found effective ways of managing risk within otherwise homogenous product lines. Plainly, they were better at underwriting. They had no choice, because they couldn’t count on passing the risk off through some exotic securitization.

If you are going to be obsessive about market share does that lead to additional risk?
Obsessive pursuit of market share often relies on lower prices and increased subsidies. This is particularly true in mature or commoditized industries. We see this happening today in the wireless telecom sector and we saw it with the mortgage bull market. In these industries, the only way you materially increase market share is by taking more risk or accepting lower returns and it usually requires both. You hear “We’re better at servicing or we’re better at sourcing,” but at the end of the day, it’s a commodity. So anyone growing significantly faster than the pack is, by definition, taking more risk.

There’s a fixation on compensation these days. What’s your take?
You know this is one area that has been a colossal failure on the part of boards. Can we all agree that you simply should not leave the determination of compensation to a process dominated by those being compensated? Reform has to start with a vigorous attitude by the compensation committee. Human nature is a constant; what changed over the years were the perverse incentives compensation committees allowed to creep into our system. We hear a lot of talk about short-termism these days, but it starts with executive compensation that is heavily weighted toward annual cash bonuses and equity incentives that essentially get reset once a year. It’s no wonder our financial sector became so amazingly creative and skillful at trading short-term cash for long-term tail risk while dressing it all up as growth. This is exactly how their incentives were set. For decades, Alfred Sloan enforced a system at General Motors where management received a nice base salary and then ten percent of the profits over a return of six percent. By the mid-1970s, the concept of requiring a return on investment before paying incentive compensation disappeared. It may sound simplistic, but both the financial crash and the demise of our auto industry were really all about perverse incentives.

What types of investment opportunities do you look for, companies you think have poor governance?
We invest in companies that we think are underperforming against their potential in terms of their stock price value. That usually means there is a problem in their operations or capital allocation or some fundamental area of performance. Poor governance, more specifically poor board dynamics, invariably accompanies that underperformance. We leave it to the academics to decide whether there’s a causal effect there.

How about some of the proposed regulatory changes for boards, things like proxy access?
That will be very powerful—less so for activist investors and more so for mainstream investors. It will spur a massive self-help movement in corporate boardrooms. If we weren’t already convinced that the model of the modern corporation is broken, if not bankrupt, then the events of the past few years had to tell us that, if not those from earlier in the decade when the most admired companies in the world collapsed before our eyes. As we struggle to think about how to improve our corporate governance regime, I can’t find a better answer than to foster more involvement from the owners.

Should CEOs and boards focus on the broadest possible group of stakeholders?
I think they should stay focused on the long-term investors. If they get confused or try to make it too complex or think that they’re serving multiple constituencies of their shareholder base, they will be led astray. What they really should focus on is the stock certificate. It’s a very simple contract. When the owners are confident in the future, then everything else falls in place.

How should directors view their role today, if any differently than before?
I think guidance is as much a part of their role as oversight and risk management. To the extent that you’re out there looking for directors, you do have to look for people who listen and are still willing to learn and willing to serve an apprenticeship regardless of their age. I was on a board where we were having a discussion about the spec we wanted for a new director search. The CEO said he would like to have a CEO on the board: “I could really benefit from that,” he said. And I said, “Gee, we’ve got four CEOs on this board already. You’ve just proposed an entire reorganization of the management structure. Did you consult any of them on what they thought about it?” He said, “No” and I said, “Let’s start using the CEOs we’ve got.” That’s sounds a little confrontational, but it was an issue that was in the boardroom and we were having a frank conversation. It’s interesting that almost by their nature, the “Type A’s” we hire for CEOs don’t readily reach out and seek advice, because they’re driven and they’re confident. So board members have to be willing to engage and give their views, at times confront, and make certain that management hears their input.

What we also discovered in putting the list together was that in some instances, it became impossible to separate the captain from the team. This year’s D100 is a case in point: Our editors and board of advisors were nearly unanimous in our selection of President Barack Obama as this year’s most powerful corporate governance influence. And yet, to do justice to the seismic shift his policies have brought about in the boardroom, we also had to recognize the many other  “New Voices” in the Administration who are now leading the greatest financial reform of American business since the 1930s.

So, we ask that in the pages ahead you pay more attention to who counts, and less to how we count, in arriving at our final selection of individuals and institutions that have met the requirement to be “most influential.” We think you’ll agree it’s an intricate and impressive mosaic where the whole equals much more than the sum of its parts, which may or may not be greater than 100.

Regulators & Rulemakers

Team Obama
It is often written that reasonable people may disagree, and with Americans and their Presidents, it is practically a way of life. But even an unreasonable person could only conclude that this President and his Administration are having a profound and lasting influence over the boardroom. President Barack Obama has demonstrated an enormous capacity for calm in uncertain times. His relative youth leads to frequent comparisons to John F. Kennedy and his communications skills to those of Ronald Reagan. But it is his aggressive response to the unparalleled economic challenges that greeted him at the dawn of his young presidency that harkens back to an earlier figure of towering influence,  Franklin D. Roosevelt.

FDR’s massive social and financial reform programs—the creation of Social Security as part of the New Deal, the establishment of the Securities and Exchange Commission (SEC) and the Federal Deposit Insurance Company (FDIC)—helped restore confidence in the nation’s banking system coming out of the Great Depression. One could plausibly take major portions of FDR’s New Deal and substitute his name with President Obama’s.  The implementation of the $787-billion American Economic Recovery Act one month after Obama took office, coupled with his handling of the Troubled Asset Relief Program (TARP), which sought to strengthen the financial sector by buying up the assets and equity from troubled banks, has clearly helped the nation avoid further financial disaster and put the economy on the path to recovery.

And finally, turning again to the FDR playbook, Obama assembled a team of wise men and women, formidable economic and business minds, whose decisions are having a lasting effect on the role of the corporate director. Preeminent among them was the choice of Rahm Emanuel as chief of staff. Described as a veritable “influence machine,” within the Administration and Congress, the former Congressman from Obama’s home state of Illinois is known as a hard-charging, brutally candid, sometimes combative, acutely intelligent man who can get things done and knows the ways of the Capitol and the boardroom.

The Enforcers
Perhaps second only to Obama in terms of her influence on boards and corporate governance, career regulator Mary Schapiro heads up the 75-year-old SEC. Before the crisis, the agency’s very existence was in question: “Obsolete,” “out of touch,” and “behind the times” were just some of the many terms uttered by detractors. The Commission, under former chairman Christopher Cox, was pilloried for missing the Madoff scandal.

As former SEC chairman and Directorship 100 Hall of Famer, Arthur Levitt described her: “She has the skills, the intellect, and the character to be a superb SEC chair.” But Schapiro will face a new kind of challenge in the role, not just that of proving her own qualifications, but also instituting a significant remodeling of the SEC itself, as she works to bring it into the new regulatory era.

Moving swiftly to address regulatory concerns in the wake of the financial crisis, the SEC has rolled out a series of proposals that could embody the biggest change to the rules of the game for directors in some time. Schapiro, who is no stranger to the boardroom, having served on the boards of Duke Energy and Kraft Foods, has overseen proposed rule changes on proxy access, broker voting, say on pay, and new requirements for disclosure on executive compensation and director qualifications. It’s now up to her and fellow commissioners Kathleen Casey, Elisse Walter, Luis Aguilar, and Troy Paredes to determine the final regulations that emerge from the proposals.

Other key players Schapiro has brought into the SEC include Senior Advisor Kayla Gillan, Chief Accountant James Kroeker, and Director of Enforcement Robert Khuzami. Gillan was a founding board member of the Public Company Accounting Oversight Board (PCAOB) and former general counsel to CalPERS. Kroeker joined the SEC as deputy chief accountant in 2007 from Deloitte and Touche where he had been a partner in the firm’s national accounting services group. Kroeker recently said that the proposed road map for the convergence of International Financial Reporting Standards,pushed to the back burner amid the larger issues of market reform, would be restored as another top priority. Khuzami is a former federal prosecutor, has pledged to improve the SEC’s enforcement performance by creating specialized units to provide “structure and resources for staff to ‘get smart’ about certain products, markets, regulatory regimes, practices and transactions.”

TARP Overseers
Another example of Obama’s preference for brains over politics was his reappointment of Sheila Bair to chair the FDIC. Another fiscally conservative Republican, on Bair’s watch alone this year, 94 banks have failed, creating a new challenge:  how to replenish the fund. Bair has also been an integral part of the team overseeing TARP. Neil Barofsky is a former New York assistant attorney general confirmed by the Senate in December as special inspector general. Dubbed the “TARP Cop,” his job is to figure out how and where the $700-billion TARP funds are spent, reporting directly to the President and providing updates to the Congressional Oversight Panel chaired by bankruptcy expert and Harvard Law School professor, Elizabeth Warren. COP’s first report, released in February, casti-  gated then-Treasury Secretary Henry Paulson for his performance and lack of transparency, reporting that the Treasury Department  had overpaid by $78 billion for the assets it bought from banks.

Interestingly, while Obama sponsored and was a strong proponent of  “say on pay” legislation while a senator, since appointing Kenneth Feinberg special master of compensation, he has appeared unwilling to make the issue a top priority. Feinberg, who has immersed himself in some of the country’s most troublesome and high-profile cases, is considered a superb choice, both in terms of skill and temperament, by Capitol Hill insiders. His most noteworthy case was the 33 months of pro-bono work he did following the 2001 terrorist attacks to determine how much each victim would receive from the federal government’s September 11th Victim Compensation Fund.

Feinberg may in fact be perfectly suited for a job that most compensation specialists see as thankless, and possibly as a “no win” situation. As the Obama Administration’s comp expert, Feinberg was called on to monitor the compensation of executives in what were once some of America’s most prestigious corporations, now TARP recipients, including American International Group (AIG), Bank of America, Citibank, Chrysler, GMAC, and General Motors.

Fed to the Rescue
To prevent American capitalism from spiraling deeper into the abyss, nine months after President Obama made his first Cabinet announcement, he re-nominated Ben Bernanke as Federal Reserve chairman. The former Princeton economics professor was selected by Bush in 2005 to succeed Alan Greenspan. In 2008 after the market crashed, Bernanke invoked emergency powers, slashed interest rates, and spent trillions of dollars to right the financial system. Just last month, he declared the recession “likely over.” Though he seldom gives interviews, Bernanke is never far from the public eye and has been a stalwart in the transition between presidential administrations and in the effort to stem the economic slide.

When then President-elect Obama named his economics team, it included players who, like Bernanke, were already steeped in the crisis details, demonstrated a studied understanding of Depression-era economics, or some combination of both. Enter Treasury Secretary Timothy Geithner and Chief White House Economic Advisor Lawrence H. Summers. Geithner, who is currently pushing legislation to provide more systematic regulation of financial institutions, including new limits on executive compensation, recently told one interviewer that he is optimistic major reforms will be passed.

Prior to his appointment replacing Henry Paulson, Geithner was president of the Federal Reserve Bank of New York and part of the team central to the critical negotiations that resulted in Bear Stearns being tucked into JPMorgan Chase, Merrill Lynch going to Bank of America, Lehman Bros. disappearing, and Citigroup and other struggling banks getting a lifeline.

Summers, the former Harvard University economist who became its president following his tenure as Treasury Secretary to President Clinton, is director of the Cabinet’s National Economic Council. The group was established in 1993 to coordinate and ensure that the President’s economic policy agenda is carried out.

Rounding out the team, Paul Volcker, the former Fed chief under Clinton, was selected to chair the president’s economic recovery advisory board. And Christina Romer, a former UC Berkeley economist, who administration sources suggest is well- regarded by both parties, chairs the Council of Economic Advisers. Her appointment was seen as a further triumph of brain over politics in Obama’s approach to talent recruitment.

While regulators and investors deserve to be reassured, I grow concerned that loud, public cries to better manage risk, will effectively diminish our capacity to take risks.  Ironically, this potential pendulum-swing of reaction becomes a new risk in and of itself.  An overly conservative approach will tamp down innovation and growth.  Too much board time focused on risk will draw directors’ attention away from other issues more important to long-term value creation.  And perhaps most importantly, if directors slip into an operational risk management role, it will undermine the CEO’s authority to lead his or her company.  Put simply, with reward requires risk and the oversight for those risk profiles must be reasonable. Corporate leaders have to get this balance right.

It’s time to move beyond risk modeling, which clearly has its place.  To get this right, we need a practical process that will add insight and quality judgment to the mathematical models.  As with all results-focused processes, it must be built on specific expectations, clear roles and responsibilities, and accountability.

There’s no one-size-fits-all approach, but here’s my take on the major components.

Define your tolerance for risk and how you’ll gauge it. The board establishes risk parameters and defines a dashboard of metrics that demonstrate adherence to the policy.  Directors must understand all of the material risks to the corporation and they need it all in one report so oversight quality is clear.  At a minimum, the view should include reputational risk, operational risk, and human capital risk.  This type of report will enable appropriate discussions on risk / reward correlation with a sharp focus on mitigating risk.

Put the CEO in charge. Performing within the parameters of the risk policy needs an owner and in my view, that should be the CEO.   There is a role for a Chief Risk Officer going forward, but without clear ownership, there is no accountability.  The CEO owns this issue.

Hire a Chief Risk Officer. The CRO reports to the CEO, but the board should have a role in selecting this person and ensuring this role’s incentives are in line with its primary responsibility which is to identify significant threats to long-term growth and value creation.

Connect the risk officer to the board, but not in a way that weakens the CEO. By creating a separate reporting link for the Chief Risk Officer to the board, you strengthen his or her internal position and make it easier for the CRO to get needed data and insight.  But nothing should be put in place to weaken the CEO’s authority.  Some will say that a CRO should report directly to the board to “keep the CEO honest.”   For me, if you don’t trust the CEO, that is a separate issue.  Discuss replacing the CEO with other directors.  If you find you’re alone in your assessment, resign from the board.  Your own reputational risk is too great.

Establish a risk committee. Many are calling for board-level risk committees, but I believe this is a senior management committee.  The CEO chairs this committee which reviews risk data, makes recommendations to the board on the most effective ways to balance the potential risk and reward of specific strategies, and provides the requested dashboard data.  Working with this Committee, the CRO defines ERM program objectives, assessment framework, and a common “risk” language for the organization.  The board will define the risk profile, but determining how to execute risk management initiatives within the organization is the Risk Committee’s job.

Ensure the full Board is engaged in this discussion. All directors should receive and evaluate this data.  If this conversation gets delegated to a board-level committee, director accountability will be diminished.  Effective enterprise management is a vital and shared responsibility.  It’s too tempting for directors to think it’s “handled” if it’s taken up by a board committee.  This is a full board issue.

Hold the CEO accountable. Unjustified variance from the risk parameters must have consequences.  At a minimum, the compensation committee should imbed adherence to the risk policy into the CEO’s compensation structure.   If a CEO cannot get results within reasonable risk parameters, then it’s the board’s responsibility to replace him or her.

In the end, moving forward requires risk.  Every time we get in a car, there’s risk.  But we mitigate risk by having a clear destination, getting input if we need it, reading the dashboard data, and making judgments.  That enables us to move forward with confidence.   A clear process, with the right roles, will focus corporations on what shareholders truly care about — long-term value creation.  It would be a mistake for us as corporate leaders to participate in a discussion about throwing away the keys to the car.

Stuart R. Levine, the founder, chairman and CEO of Stuart Levine & Associates, is a director of Broadridge Financial Solutions, and chairman of the governance and nominating committee and lead director for D’Addario & Company.