Doug Oberhelman

A lot has been written and discussed about the role of the board in strategy, especially in this time of economic uncertainty, changing customer dynamics and increased governmental and regulatory scrutiny. Oberhelman shared his perspectives during a recent NACD Chicago chapter meeting before a distinguished group of directors and governance professionals, including Theodore L. (Ted) Dysart, vice chairman of Heidrick & Struggles, and NACD Chapter President Michele J. Hooper. Oberhelman both spoke and responded to questions about the challenges of operating in today’s public policy environment; the importance of focusing on the customer, particularly in the current global environment; and the value that boards can and do bring to the strategy process.

Oberhelman is a director for the boards of Eli Lilly and Co. and The Nature Conservancy’s Illinois chapter. He is a member of the boards of directors of the National Association of Manufacturers, the Manufacturing Institute and the Wetlands American Trust. In addition, he is a member of the Business Roundtable and The Business Council. He is a former director for the board of Ameren Corp.

I. Succession Planning
I want to discuss several things, starting with succession planning and Caterpillar’s leadership development philosophy of promoting from within. We’ve never had an outside CEO or chairman in the history of our company; we’ve been public since 1929. Sometimes that brings great things, and sometimes that can bring an inward focus. But we’ve always done it that way, and I would say that CEO succession at Caterpillar is an outflow of the way we do succession planning throughout the year and over a long period of time. We really have a solid succession planning process, both internally and with our board.

We spend time throughout the year on succession planning, leading up to a session with the board in October of every year. But the way it starts is from the bottom up. Every one of our officers sits down at least once a year with their management teams, and then as a group, and talks through all of their people and assesses their long-term potential. That’s an active process—a minimum of once a year. We follow a similar process in the executive office. And that process takes most of the year to work its way through. We just finished that this summer, and by the time we get to the board in October, we—the six of us in the executive office at Caterpillar—have a good understanding of the highest-potential candidates out of the top 3,000 positions within our company. And over a period of years we get to develop the people who are in these positions—whether they’re in China, Russia, the United States or anywhere—we prepare them to be senior leaders. By the time we get to the board in October, we spend time mostly on our officer level, which would be about 35 people—who’s going to retire, what’s our succession plan for each of those jobs, who are our functional experts, who are the best high-performers to serve in that leadership role. We talk a lot about developing diverse candidates to fill these roles, and I will tell you, that’s a challenge for our company at the officer level and across the board in all facets of having a diverse and inclusive leadership team, but we really work hard on it. We brought together a process that I think will help us down the road, but it’s a continuing challenge—and by that I mean developing and placing Asian leaders in Asia, European leaders in Europe, U.S. minorities and females for positions everywhere we do business, and on and on.

I give a great deal of credit to our board for managing this over the years, for the most part very quietly. My predecessor, Jim Owens, is a great guy. I worked for him off and on for 15 years, and between Jim and our board, they devised a succession plan for me that resulted in my ascension to the CEO position that was very quiet, very orderly, and over a year’s period of time. Every one of our executive officers that was there before the transition is here today. We operate as a team, and I give the board and Jim great credit in making sure that was the case so that we did not hit The Wall Street Journal for things that a lot of companies go through on CEO and succession transition, which I think is very unhealthy for an organization. It essentially allowed me to hit the ground running.

Now I’ll take my CEO hat off and cross the table as an outside board member of some experience—to make sure that when management is working on succession planning for the CEO, that it’s a much deeper process, something along the lines of what I just described. I don’t think enough companies really spend enough time on that. I think many companies do, but if you don’t start from the bottom up and work it all the way through, it’s going to be very difficult to do that at the CEO level as well. I think that’s where a lot of companies get into trouble. Certainly one where the candidate can come from within—if it works within that organization—and sometimes it doesn’t—can be healthy; sometimes change is needed.

II. Setting the Strategic Goals
Switching gears a little bit to strategy. We’ve had a good CEO tradition at Caterpillar that the first few months or year of a new CEO is a time to think about strategy. No surprise—everyone probably does it that way. But in my succession, Jim provided me with six months to head the strategy group, which I did. He continued being CEO and chairman of the company and held off all the other things that come at a new CEO from day one, and I think that was great. Jim’s predecessor had done that when he came in as CEO; it was fabulous, and to the extent that you can get that done, it works, and it sure worked for us.

We appointed a group of 16 to our strategy group, six of whom were in the executive office that I mentioned, our group presidents that report to me, and myself, and then 10 others from around the world—the most diverse group we had ever put together. We sat down in November of 2009 and wanted to be finished by May of 2010. We asked, “What do we want to do with our company?” We had fairly modest expectations to begin with, and as we sat down and looked at all of the things we were doing and needed to do, we quickly realized we needed to make some fairly deep cultural changes. Caterpillar has a culture that is very, very deep and very, very strong, but very hard to change. And while we did a lot of things very well—and always had—and were performing relatively well, we were just in the thick of the recession, which provided a great sense of urgency and a great burning platform to really attack the way we looked at what we were going to be when we grew up—this team. Our strategy-planning group met for about six months, two weeks a month, and really dissected the company. We hired two outside advisors, one a professional consulting firm we had worked with and knew us very well, and one from HR to help us on the culture change and where we drive the company. I would do this again, and if I went to another company, I would do it there because this process was really effective and top-notch.

The other thing that helps get strategy right is to take what I call a board-level view. I firmly believe the words have to be direct and as plain-language as possible. If you can’t explain it at a board level that makes sense, you aren’t going to be able to explain it to your own people. That was very helpful to us, and that’s the lesson I learned out of that process. You’ve all been on both sides of the table of management and a board—you’ve got to put it in a way that members who meet every 60 days for a board meeting can get enough into it without too much detail and without being too high-level. And that’s really an art to get that right.

When we wrapped up that strategy, we put it all on an 8 1/2- by-11 card. We’ve explained that now, for almost two years, what it is we want everybody to do. And one of the key communication pieces by management is communicate, communicate and communicate that strategy, whatever it is.

In our case, it’s back to the basics of Caterpillar: make greatquality products; get everyone to want your brand, to be associated with it because they love your brand; make sure it offers the lowest owning and operating costs; if you’re a contractor, make sure he or she has the lowest owning and operating costs he or she can get; and when it comes time to resell that product, make sure it has the highest resale value. And when it comes time for service, it happens instantly. We basically refurbished that strategy and realigned all kinds of things to do that. It’s no different than the strategy that whoever it was back in the ’40s and ’50s made for Caterpillar. It wasn’t all that far off from “back to the basics.” In fact, we talked about naming it that, but we didn’t.

III. Changing the Culture
As part of that, we decided that the culture had to be changed. And we decided we were going to shock the culture. And one of the great cultural strengths of Caterpillar is it was a promote-from-within company. And one of the great cultural weaknesses it brought was a sense of job entitlement until retirement. And it had gotten more and more ingrained with time, so we said, in order to get everyone’s attention, we are going to realign the company. We formed business units—we already had business units, but we formed them at a higher level and were careful they were “in charge” of all levels, end to end. We put the P&L leader in the executive office, and we essentially reduced 20 percent of the officer ranks in one fell swoop. And that got everybody’s attention, because we hadn’t done that, ever. Once that group was in place, we replaced another 17 percent of the next level down, and that really emphasized we were serious. Those two single moves got everybody sitting up in their chair, and then we started talking about a key piece of our new strategy, which was accountability and personal ownership for results. That has really helped, and we communicated that.

Then we got into strategy implementation, and this is where we had more help from the board. I would say this led up to our acquisitions of last year—we have spent almost $11 billion. But that puts pressure on a board. And that was a big, big change for us, because we had not typically been an acquirer; the biggest deal we had ever done prior to that was for about one and a quarter billion for an engine company 13 years ago.

But part of what we did with our strategy was to identify key industries where our customers make a lot of money, where we think we can make a lot of money and add value, and where people appreciate the Cat brand and what we can bring to it, and that are growing. So we identified oil and gas, mining and rail, electric power and a couple of others, but the big three as key to our future long term. So our first moves with this new team last summer and fall were right in those sweet spots—our rail, mining and gas-engine acquisitions. And we committed to the board and our people that we were going to grow where it made sense with our strategy, and we really worked hard on that. As a result, when it came time to take these acquisitions to the board, they could connect the dots back to what we talked about, almost two years ago now, when we originally took them through our strategy build-up.

But having said that, the few key things—again, board-level communication— we tried to do all the way through. We were in the throes of the Bucyrus acquisition last fall, and our board, to their credit, put us through the paces: “Why do you think coal mining is going to be so good when everybody hates coal mining?” All we saw was everybody burning coal and electricity and so on. And it forced us to really dig in to coal mining and also what we’re going to have to do around clean coal. And that single piece to me more than paid for the board’s salaries for many years, because it forced us into deep thinking. We went back to customers, we went back to think tanks, we went back to NGOs to talk about coal, the whole thing. And that single question really helped us with this, because we understood now where coal mining was going, what we have to do to address this going forward and the risks that come from that. It’s also made us a believer in clean coal and helping to find ways to improve its use. So that’s just a one example where I thought our board was very helpful as we pushed through an $8.8 billion acquisition.

IV. The Role of the Board
Just a note about our board: we have, I think, one of the strongest and have had a reputation for a strong board for years. Six of our board members have been with us over 10 years, and we typically have long-standing, deep expertise on our board—not unlike what we do in our company—and we really work on that as well. It takes a while to get to know a company our size, with nearly 150,000 in our workforce. Like any global business, we’ve had ongoing challenges in certain areas. Our board helps us with those, and, in our case, I’m a big fan of that outside perspective coming in to help us.

If you have a strong, diverse board, and we do—we have a member from Mexico, the U.K., we have retired CEOs, active CEOs, just nobody close to our business—and if you listen carefully, you’ll get lots of input and won’t become internally focused. And I have found that’s very helpful. Of course, I’ve been associated with the audit committee of Caterpillar since I was CFO, so I’m a little partial to that one, but that one is the wake-up call you can get, and as an audit committee member you should give, because that’s really the most responsible place for financial reporting, integrity, values and, really, the core backbone of your company. So I had some good training in that for a long period of time, and that’s one that I view at the top. You really have to be sure when you assign audit committee members that they can really stand up and have the gravitas to get into it, especially at a big company like ours where things can get really complicated.

A couple of things I’ll throw in that I’ve learned the last year and a half or so on leading the board, and we’ve kind of waded our way through this a little bit. We try to listen to what everybody likes to do—and I do this at Eli Lilly as well—and tell management what we like to hear and not hear on both sides of the table. But we’ve really stepped up our board attention at Caterpillar. Our process for how we deal with the board—their advance material, how we get them to our meetings, how we manage a meeting and so on— was kind of splintered at Caterpillar. So we immediately, under our general counsel, set up a very focused board group. I now have one person, the assistant general counsel, who I go to for everything about the board. And it’s his responsibility to make sure the advance material is complete. That has been a tremendous help to me as chairman of the board and CEO, because in the past we had three or four people helping, and now it’s—I would hope like everything else at Caterpillar—one accountable person for that. I think that’s important, and I think our board would tell you that’s helping them as well. That means we can focus on the things that are most important.

We’ve also gone to more private sessions, with the board and myself and with the board alone. And I think that’s important because typically at Caterpillar, we had invited, which I think is also very good and it needs to happen, the executive office to participate as liaison to the committees, the dinner and the board meeting with very little time of private discussion among the board. One of the pieces of feedback I got early on from the board was, “Let us have more time with you,” and, “Let us have more time by ourselves.”

That didn’t scare me a bit; in fact, it’s helped us. Now we start with an hour-long executive session with me before the board meeting, where I review what I’ve been doing, the challenges I’ve worried about, the things we’re thinking about, maybe tee up a couple of subjects that are going to be tough for the board meeting. Then at the end of the board meeting, I go in with the board for a few minutes; they get to shoot and pick, then I leave them alone, and then our presiding director will talk to me afterwards about anything that would have come out of that. I think that’s a great process—it’s essentially a Lilly process that they use as well—and we’ve had good feedback on that. Again, that was a change. It does compress the board session a bit, and you have to be crisp because the number of hours you have to get through the big stuff is short. It has helped the board to feel like, so far, they’re more tuned in and know what’s going on.

VERBATIM

Jeffrey M. Cunningham: In a company as dynamic as Caterpillar, the expectations for board performance are equally great. How do you assess board candidates?

Doug Oberhelman: We have just added four new members to our board, and we went through a formal process. I think the most important piece of selecting new board candidates is having some connection to that person by someone you know or trust. The other nice thing about a strong, diverse, well-placed board that we have is that they know a lot of people, and that network can really help you when it comes time for that.

JC: Let’s turn to one of your favorite subjects, strategy. How did you discover you needed more emphasis on strategy?

DO: When we asked 300 of our leaders what the Caterpillar business model was, we had 301 answers. I thought, Wow, we’ve really got an issue here. We went through some union negotiations last year, and I grabbed one of our visitor tour guides who takes our customers through our plants, and I said, “Let’s walk in the back door and tour a plant and just walk down the assembly line. And that had never happened—well, I’m sure it happened back in the ’50s, but it hadn’t happened in a long, long time. And I learned more from that experience of walking up to a guy on the line, and stopping and saying, “I’m Doug Oberhelman, the new CEO of the company. What do you want to tell me?” Two reactions: one was “You’re kidding me, man,” and the second was a 20-minute download on everything we’d ever done in the factory that was bad. But it was great.

JC: How difficult is it to assess strategic ability at the board level?

DO: It’s a tough call to make both on our board and at Eli Lilly. Frankly, there’s never enough strategy discussion. But yet, on the flipside, you can go overboard with details that don’t help. And that’s a fine line. It’s an art, not a science.

JC: Are you surprised by people’s understanding of strategy?

DO: It’s surprising to me how many senior leaders struggle with strategy. In my own case, I never looked at myself as a trained strategic thinker. And as I entered the strategy-planning process, we made sure we had what I thought was the best outside consultant in strategic thinking and that two or three of our people on the committee had some strategic accomplishment or strategy planning in their background, and I found that experience invaluable.

JC: How is government involvement, whether through regulation or politics, affecting competitiveness and a CEO’s ability to run a global business?

DO: This is one of the things about being CEO and chairman that I am surprised about—that is, the amount of time required to influence public policy. Now, is that an indication of the current administration’s attitude or where we are, or timing, or place in the world? I don’t know. I have been amazed, frankly, with the amount of time I’ve had to spend on government policy.

JC: You went from CEO designate to CEO and president, and from there to CEO, president and chairman. How has the combined role made a difference?

DO: I was CEO for four months while Jim Owens was chairman for those four months at the end of the transition period. And we both agreed at the end of that, there is no way ever that we should split those roles. And the reason was that he was getting questions as chairman that he couldn’t answer about the day-to-day operations of the company, and I was getting questions about governance and things he had responsibility for as chairman that I couldn’t answer. For our company, the way we’re managed, the way we have come down through the ages, I am an opponent, for us, of separating chairman and CEO. It’s not too big of a job; we’ve got a very strong presiding director. He’s very independent and that job will always be. I listen to him, I talk to him. It works very, very well for us.

JC: How do you stay in touch with the rank and file, who are at the heart of Caterpillar’s culture?

DO: One of our big, big customers gave me a little plaque about my second month in and said, “Doug, you know I read about what you’re trying to do, and I thought about this for you.” This plaque said, “A desk is a dangerous place from which to view the world.” I made that into a sign, which I put right outside our executive office door that you have to pass on your way in. I’m going to have it there as long as I’m CEO. So one of the commitments I made to our management team was that I would visit a customer face-to-face, once a week, since the first of 2010— which, at the time, I thought, Boy, that will be easy. Those of you that have tried it, it’s hard. It is really hard. I also spend as much time as I can visiting Caterpillar facilities and just talking to our people. It’s amazing how smart they are!

JC: Your passion is running Caterpillar, but you also have a passion for nature. Are people surprised when they learn this?

DO: Jim Owens, my predecessor, called me Caterpillar’s tree hugger at one point. My real hobby is restoring a coal mine in central Illinois that my wife and I bought a number of years ago. It was reclaimed by the coal company to some degree, and I’m trying to get it to zero erosion. It will be my retirement project, and I love it.

JC: What difference has it made that your company is headquartered in our nation’s heartland in Peoria, Illinois?

DO: Actually quite a few companies are headquartered in small towns—John Deere over in Moline and Cummins down in Columbus, Indiana. I’d say there’s a great benefit and a great distraction. The real challenge and distraction we have is—and we get accused of it all the time—of being Peoria, Illinois, Midwest, U.S.-centric. And with almost three-fourths of our sales offshore, that’s a challenge. What we’ve tried to do and what we’re doing every day are twofold. Of the six of us in the executive office, two are offshore—one is in Hong Kong and just moved over, and one is in Geneva, where we’ve had a presence for a long time. Almost 20 percent of our officer group resides in Asia, so we’re really working to establish regional headquarters almost around the world, and we’re having good luck with that. And then we’ve also brought in more mid-level hires in the last three years than we ever have, and a lot of these are automotive people, to help us with manufacturing, and they’re really good. But we still have this balance of what’s too much Midwest and what isn’t. I think we’ll continue that migration, which I think will be healthy. But American, Midwest values aren’t all bad either.

Corporate Governance Highlights

1974 Code of Worldwide Business Conduct first published to establish a high standard for honesty and ethical behavior by every employee.

1992 Caterpillar board adopts a confidential voting policy for shareholders. While not required by law, Caterpillar established share ownership guidelines in connection with stock option grants for corporate officers and directors more than a decade ago. All of Caterpillar’s equity-based compensation plans have been approved by shareholders. Furthermore, the company has never offered golden parachutes to any officer and has never repriced stock option grants.

1993 Caterpillar’s board adopts written charters for each of its committees, in advance of a mandate by the Sarbanes- Oxley Act of 2002.

1999 Caterpillar board publishes guidelines on corporate governance, which include establishment of an independent board of directors, with sole exception of chairman, and a fully independent compensation committee.

1999 In advance of NACD Blue Ribbon Committee on Audit Committee Effectiveness, Caterpillar implements many of its recommendations, including a fully independent audit committee with a financial expert as chairman.

2005 Caterpillar executes a fourth amended and restated version of its Shareholder Rights Plan with Mellon Investor Services. The modified agreement moves the final termination date of the Shareholder Rights Plan from December 11, 2006, to June 30, 2005, ending the Shareholder Rights Plan approximately 17 months earlier than the original agreement and subsequent amendments had specified. Company policy requires former senior manager-level (or higher) employees of outside auditor to wait three years before being eligible for certain management-level positions at the company, and requires rotation of outside auditor partners in compliance with the requirements of SOX. 2010 Amends Code of Worldwide Business Conduct.

Caterpillar’s Board of Directors

David L. Calhoun, CEO (since May 2010) and executive director (since January 2011) of Nielsen and chairman of the executive board and CEO of The Nielsen Co.; former vice chairman of General Electric and president/CEO of GE Infrastructure. Other current directorships: Medtronic, The Boeing Co. and Nielsen Holdings. Calhoun became a director effective June 8, 2011.

Daniel M. Dickinson, managing partner of HCI Equity Partners, former co-head of global M&A at Merrill Lynch. Other current directorships: IESI-BFC, Mistras Group and HCI Equity Partners. Dickinson has been a director since 2006.

Eugene V. Fife, managing principal of Vawter Capital, and former interim CEO and president of Eclipsys Corp. and non-executive chairman (2001– 2010) when Eclipsys merged with Allscripts Healthcare Solutions; former partner of Goldman Sachs & Co. Other current directorships: Allscripts Healthcare Solutions. Fife, a director since 2002, chairs the governance committee.

Juan Gallardo, chairman of Grupo Embotelladoras Unidas; formerly chairman and CEO (1986–2007). Other current directorships: Lafarge SA. Other directorships within the last five years: Grupo Mexico. Gallardo has been a director since 1998.

David R. Goode, former chairman (1992–2006), president (1992–2004) and CEO (1992–2004) of Norfolk Southern Corp. Other current directorships: Delta Air Lines and Texas Instruments. Other directorships within the last five years: Norfolk Southern and Georgia-Pacific. Goode, a director since 1993, chairs the compensation committee.

Jesse J. Greene Jr., former vice president of financial management and chief financial risk officer (2009– 2010) and vice president and treasurer (2002–2007), IBM. Greene became a director effective Jan. 1, 2011.

Peter A. Magowan, former president and managing general partner (1993–2008) of the San Francisco Giants and chairman (1980–1998) and CEO (1980–1993) of Safeway. Directorships within the last five years: DaimlerChrysler AG, Safeway and Spring Group. Magowan has been a director since 1993.

Dennis A. Muilenberg, executive vice president of The Boeing Co. and president and CEO of Boeing Defense, Space & Security since September 2009. Muilenburg became a director effective June 8, 2011.

William A. Osborn, retired chairman (1995–2009) and CEO (1995–2008) of Northern Trust Corp. and The Northern Trust Co. Other current directorships: Abbott and General Dynamics. Other directorships within the last five years: Nicor, Tribune Co. and Northern Trust Corp. Osborn, a director since 2000, chairs the audit committee.

Charles D. Powell, chairman of Capital Generation Partners, LVMH and Magna Holdings. Other current directorships: LVMH Moët- Hennessy Louis Vuitton and Textron. Powell, a director since 2001, chairs the public policy committee.

Edward B. Rust Jr., chairman, CEO and president of State Farm Mutual Automobile Insurance Co. Other current directorships: Helmerich & Payne and The McGraw-Hill Companies. Rust has been a director since 2003.

Susan C. Schwab, professor, University of Maryland School of Public Policy, and strategic advisor, Mayer Brown. Former U.S. Trade Representative (2006–2009) (member of the President’s cabinet) and Deputy U.S. Trade Representative (2005–2006). Other current directorships: FedEx and The Boeing Co. Schwab has been a director since 2009.

Joshua I. Smith, chairman and managing partner of the Coaching Group. Other current directorships: Comprehensive Care Corp., FedEx and The Allstate Corp. Smith has been a director since 1993.

Miles D. White, chairman and CEO of Abbott Laboratories. Other current directorships: McDonald’s Corp. Other directorships within the last five years: Motorola and Tribune Co. White became a director effective Jan. 1, 2011.

Source: Caterpillar website

“Women and men have differing points of view as to the reason why there are fewer women – both nominated and sitting on active corporate boards today,” said Bonnie Gwin, vice chairman and managing partner of Heidrick & Struggles’ North American Board of Directors Practice. “About one third of women directors globally believe that closed off traditional networks are the primary reason women aren’t considered for director positions, whereas men believe there are fewer women currently in executive leadership roles, creating a smaller talent pipeline for entrance into the board room.”

The study, now in its second year, includes responses from 721 male and female board members in 26 countries and provides insight into how women and men view board composition worldwide. “Not only do women and men disagree about the reasons why fewer women serve on boards and if quotas are effective, but they also hold disparate views on whether increasing the number of women in the boardroom will actually improve overall board performance,” Dr. Groysberg said.

Additional study findings are available for review upon request. A topline overview of key 2011 board findings includes the following:

Diversity on Boards

• (41 percent) of women vs. (13 percent) of men personally supported quotas.
• (53 percent) of women vs. (18 percent) of men thought quotas are effective for increasing board diversity.

Overall Board Effectiveness

• (55 percent) of female directors vs. (16 percent) of male directors agreed three or more women on any board make it a more effective board.
• (59 percent) of women vs. (74 percent) of men said their board had an effective CEO succession plan.
• (40 percent) of women vs. (54 percent) of men said their board had an effective director succession plan.
• (72 percent) of women vs. (85 percent) of men agreed that their board effectively evaluates the CEO.
• (48 percent) of women vs. (60 percent) of men agreed that their board provides effective training for new directors.

Board Governance & Trust

• There is low confidence among both female and male directors (25 percent) and (17 percent) respectively, that the Dodd-Frank bill will create better corporate governance.
• Women and men agreed – risk management is imperative, with women  at 74 percent and men at 75 percent in 2011. An increase from 2010, women (40 percent) and men at (1 percent).
• Slightly more than three quarters (76 percent) of women believe ncreased board diversity will be effective in rebuilding trust in boards, compared with less than half (42 percent) of men surveyed.
• (70 percent) outside U.S. directors vs. (39 percent) U.S. directors agreed that professional directors would be an effective way to rebuild trust in corporate boards.

Ted Dysart

There are numerous issues that have come to light over the last couple of years (and some which have been raised for decades) with regard to Corporate Governance and an overall feeling of hurry up and wait. Proxy access seems to be on the minds of many especially with the court ruling against the SEC, and the SEC deciding not to appeal. But this is not the end of the road for proxy access debate; in fact, the debate is on-going. SEC Chairman Mary Schapiro has made it clear that her intent is to find a way for shareholders to have an equal say in director nominations and will not be backing away from the issue. The arguments are passionate on both sides and there doesn’t seem to be an easy resolution. Regardless of the official regulations, companies need to take a look at their own practices and make sure they are working toward an amicable balance between what is right for the company and what the shareholders are demanding. We are seeing many companies enacting their own best in practice regulations with regard to this issue which clearly lay out who can have access, what the protocol is for submitting material to be included in the proxy and what type of communication shareholders can expect with regard to submissions. The reality of today is this: Shareholders want to be heard and boards had better (at the very least) listen.

Another topic that gets a lot of press is say on pay, which remains a divisive topic. It seems to be a subject that is always put in the spotlight when the economy is not as strong as investors and the public at large would like it to be. It is also a favorite topic in the media, especially when there is a shakeup at a company. Investors always want their money to be used wisely, and having a say on pay is part of that equation. Should top executives get flat rate pay with a predictable bonus structure based on performance, or is there room to reward and penalize based on performance and health of a company? And what about change-in-control compensation? More importantly who decides? Do you trust your board to make the right decision for the company and put personal feelings aside when it comes to appropriate pay decisions? And how often should votes take place for both say-on pay itself and the frequency of those votes which the SEC says should be revisited every six years. Will we lose great leaders to companies overseas that can and will pay more without the intrusion of the government and shareholders?

It is important to note that Dodd-Frank was almost 850 pages and requires more than 240 rule makings and nearly 70 studies. By comparison, Sarbanes-Oxley was 66 pages long and mandated 16 rule makings and just 6 studies. It should go without saying that there is still a lot of legal red tape and issues to be sorted out which will take years and billions of dollars. While the major impact of Dodd-Frank has yet to be felt we can look and wonder about those issues that have surfaced. Will the whistleblower protection remain unchanged? Will there be more reform with regard to background disclosures for board nominations? Whatever side you find yourself supporting on the various legislative issues, it is clear that companies need to keep a close eye on the issues and continue to organize their board to fit the needs of all interested parties— government, shareholders, executives and employees.

Theodore L. Dysart is a vice chairman with Heidrick & Struggles where he is a leader in the global Board of Directors Practice.

Chris Clark

Chris Clark: In general, where do retiring partners of accounting firms rank amongst all board candidates in terms of priority/desirability?

Arun Dhingra, Co-leader, U.S. CFO practice, Egon Zehnder International: When seeking board candidates, nominating committees consider a mix of factors. Given the expanded responsibilities of audit committees, retired accounting firm partners, with their financial expertise, are much sought after. Combine that with vertical industry experience and they are highly desirable board candidates.

Clark: Does the demand differ greatly when looking at a Big Four firm partner versus non-Big Four partner?

Dhingra: While Big Four partners may have greater name recognition, when it comes down to it, it’s really the expertise and the clients served that are most seriously considered by the nominating committee.

Clark: In either case, what qualities or career achievements would put an accounting firm partner significantly ahead of his/her peers?

Dhingra: Personal reputation in the market always comes first. Then it’s finding the right match between what a particular board is seeking in experience and skills and what an individual candidate has to offer. But some big accounting firm partners, who have honed their expertise on accounting committees, such as the FASB, may be even more desirable as candidates for the audit committee.

To learn more about becoming a better director candidate, take NACD’s multimedia How to Be(come) A Director course.

Clark: Do you believe writing articles for well-known media platforms, networking at director conferences, contacting a major recruiting firm, or directly approaching chief executives and directors within one’s own network is most effective in their quest to become a public company director?

Dhingra: Making one’s name known in the marketplace can certainly help but, at the end of the day, it’s the specific skills sets that will both get the attention of the nominating committee and make one an effective director.

In turn, I posed the same basic questions to Nels Olson, vice chairman and co-leader, Board & CEO Services, Korn Ferry International…and his answers differ a bit from those of his peers.

Olson: Accountants have a unique skillset that gives them unprecedented access to multiple aspects of the workings of a public company’s board – including regulatory issues, governance, risk and strategy. Generally, the most desirable candidates from the accounting firms tend to be among the top four or five senior partners at a firm. These senior professionals usually have an excellent track record and board-level experience that is invaluable for board effectiveness. And, of course, SEC regulations require that the chairman of the Audit Committee have accounting or related financial management expertise. At least one member of the audit committee is expected to be an “audit committee financial expert” as defined by the Commission. So, it makes sense when you look at the leading multinational public companies that the majority have at least one accountant on the board.

Partners from the larger accounting firms are more desirable candidates for board positions because they typically have a high level of visibility with boards through their work and have likely worked with multinational companies, directly with the most senior executives in many cases. The Big Four partners are also more likely to have international business experience – an area of experience that many public company boards now consider critical.

The key areas to develop in order to enhance the chances of successfully being recruited for a board position are practical experience and developing a strong network of contacts. Ultimately, boards are looking for new directors who are, a) proven in a given sector with experience of the latest issues, and, b) familiar with the company, its history of decision-making and strategy and its particular governance and risk issues. Other qualities include experience of working with large, multinational companies on critical issues, such as governance, risk and strategy; and specific sector expertise.

Yes, it is essential that an accounting partner employ as many of these tactics as possible in order to introduce his or her skills to a broader universe potential public company board directors. Accountants have a significant advantage in preparing for a directorship position, when compared to other professionals, in that they have a mandatory retirement age of 62. This allows them to hone their profile and skills in the run up to retirement and then join boards at a relatively young age – which can be very desirable for some companies.

Thought leadership positioning is an effective way to showcase a candidate’s point of view on critical board-related issues and display an understanding of the current business tactics related to public company accounting. Developing one’s own network of supporters and advocates is as vital as ever. Boards still to this day first ask their own contacts for recommendations for board members before casting a wider net. By leveraging relationships with industry-specific publications and general business publications – accounting partners can “manage their brand” as it relates to their expertise. A well-written article can serve as a calling card that could open doors to future opportunities. Working with a leading recruiting firm will help broaden a candidate’s universe of opportunities and also provides consulting services, such as leadership assessment and training, which can help candidates recognize their value and understand where their skills will be best served.

Successful board members are the ones that can advise on the regulatory issues and other risk factors critical to business operations. In an ever-changing business environment, it is important that accounting partners have broad experience of the issues affecting the marketplace – whether it’s regulatory or governance issues, risk management or strategy development. Developing these skills with existing clients is a useful exercise.

And finally, seeking board positions on non-conflicting organizations such as non-profits, alumni associations at prestigious business schools, can all help gain valuable board-related experience prior to retirement, as well as building a network of other directors.

Last, but certainly not least, Michele Heid, managing partner at Heidrick & Struggles, cuts to the chase.

Heid: When it comes to securing financial expertise, boards can examine several routes. Certainly one path to securing a board member with strong financial fundamentals and acumen is to seek a retired accounting partner. However, if the company seeking a board member is audited by the same public accounting firm where this individual retired, this individual must have had a three year hiatus to be considered independent.

In general, there is a slight preference to those from a Big Four firm due to exposure and size of their client base and the experience gained from that. If the partner comes from a large regional firm, they would have some of same experience. However, Big Four experience generally provides more specialization with regard to industry, as opposed to a generalist coming from a non Big 4 background. Someone with this in-depth knowledge of industry provides more perspective and is considered more desirable.

With regard to qualities, certainly, leadership and integrity are a given. Beyond that, with regard to career achievements, I would say a couple of things. One is they have managed some of the large, global accounts so have had exposure to the boards of those companies, as well as significant exposure to the senior management team. Also, any experiences where they have been involved beyond just audit advisory services is heavily considered. Experience with M&A, deal structuring, and exposure to capital market transactions bring a perspective beyond just a pure advisory audit partner.

Networking obviously makes it known that you would like to join a board. Most board searches are initiated by the Nominating and Governance Committee, so familiarity with existing board members is helpful. In addition, all major recruiting firms, including Heidrick & Struggles, have a board practice, so connecting through those contacts is also useful.

Staying active, even if retired from a public accounting firm. Make sure you are current on the regulations and up-to-date on your field of expertise. With regulations constantly changing, a retired partner needs to remain current to add the value a board seeks.

Well, there you have it. Personal reputation, sector expertise, and multinational company/global experience are the key threads.

Good luck my friends, stay hungry for that first directorship.

The overall NACD Board Confidence Index dropped slightly to 63.1 in Q2 2011, a decline from last quarter’s peak of 64.9. This drop in confidence is not surprising, however. Since the last BCI was calculated, numerous events have affected the markets, including the natural disasters in Japan, rising costs of food and gas, and fears of inflation. While directors remain on the side of optimism, the overall Index drop was largely influenced by their view on progress made over the past year. When asked to characterize the current state of the economy compared to one year ago, directors registered a confidence index of 68, a decrease of five full points since the last quarter.

The Index is a composite score; respondents are asked a series of questions pinpointing boardroom sentiment focusing on the long and short term, past and future. Over the last several quarters, directors have shown a more restrained view of the progress made and outlook for the short run. Looking at changes in conditions over the past quarter, confidence dropped to 59 from 61 in Q1 2011.

In the first quarter, boards faced the start of proxy season as well as uncertainty over proposed rules from the Securities and Exchange Commission on proxy access and new whistleblower incentive programs. As of this writing, proxy season was winding down, but the SEC had yet to issue final rules. This uncertainty around future regulations is reflected in Q2 2011 boardroom index data—boardroom expectations for the third quarter stood at a moderate 58. Expectations for the next year have shown a steady decline, dropping to 67 in Q2 2011 from 71 in Q4 2010.

The survey also asked directors several questions regarding the hiring practices of their primary company. Given the choices of “resulted in a net gain,” “remained the same” or “resulted in a net loss,” 48 percent of the respondents indicated that their hiring resulted in a net gain. Slightly more than a third responded that their hiring remained the same. This marks a significant shift from the last quarter, in which 39 percent indicated that their hiring resulted in a net gain, and 48 percent of hiring practices remained the same. By market cap, large companies ($2 billion to $10 billion) were most likely to hire last quarter with 61 percent responding affirmatively. Seventeen percent of the smallest companies (less than $300 million) indicated that their hiring practices resulted in a net loss.

Looking forward to the next quarter, directors most commonly responded that their companies would retain the same number of employees. However, a significant 43 percent indicated they planned to expand the workforce. Survey results show a company’s hiring in the last quarter tends to dictate its practices for the next. Seventy-five percent of the respondents who expanded their workforce in Q2 2011 plan to continue hiring in Q3; 76 percent of those who neither expanded nor contracted their workforce in Q2 plan to retain the same number of employees in Q3.

The view from the boardroom on hiring practices echoes that of CEOs, according to The Business Roundtable’s CEO Economic Outlook survey, which found that more than half of CEOs plan to add staff in the next six months—the highest result since the survey started in 2002. Unlike the BCI, the CEO Economic Outlook rose to 113 from 101. However, as noted by Business Roundtable Chair Ivan Seidenberg, survey responses were taken before the significant events affecting Japan and the Middle East.

Kate Iannelli is a research analyst with NACD.

William B. Chandler III

The process of choosing Chandler’s successor got underway in May when the Delaware Judicial Nominating Commission, chaired by Andre G. Bouchard, managing partner at Bouchard Margules & Friedlander, issued a public notice soliciting candidates. The court is required by the state constitution to be bipartisan, and all candidates must be Delaware residents. Following interviews, the JNC would refer any finalists to Gov. Jack Markell, who would then recommend one candidate to the state Senate for approval.

The 60-year-old Chandler, the subject of a cover story in NACD Directorship (December 2010/January 2011), notified the Delaware governor in April he planned to resign to seek opportunities in the private sector. His last day on the court was expected to be June 17.

Franklin, Hockaday to Co-Chair BRC on Lead Directors
A group of more than 20 corporate directors and governance thought leaders convened this spring to initiate the 2011 Report of the NACD Blue Ribbon Commission on the Lead Director. Hosted by the NACD, the commissioners will leverage their years of experience to develop recommendations that will define and clarify the role of the lead director in the boardroom. The commission is co-chaired by Barbara Hackman Franklin, former U.S. Secretary of Commerce, and currently a director for Aetna and the Dow Chemical Company and chairman of the board for NACD; and Irvine Hockaday, director for Ford Motor Company, Estée Lauder and Crown Media Holdings. Holly Gregory, corporate partner at Weil, Gotshal & Manges, will serve as governance counsel to the commission.

“As boards rise in accountability and visibility, the role of the lead director has become increasingly important. Lead directors play a critical role in ensuring independence of thought and oversight, and help build consensus in the decision-making process,” said Ken Daly, president and CEO of NACD. “The diversity and depth of experience represented on this year’s commission provide a unique opportunity to study leading practices for the lead director position.”

The new commissioners will meet once more in June as they continue to collaborate on their recommendations. The report is scheduled for release at the NACD Annual Board Leadership Conference on October 2-4 in Washington, D.C.

Delaware VC Cuts Plaintiff Lawyer Fee
What did shareholder plaintiffs lawyers achieve in their litigation over an abandoned tender offer for shares of Sauer-Danfoss? Not much, according to a recent decision by Delaware Vice Chancellor J. Travis Laster. In fact, Laster found that the plaintiffs lawyers did so little of value that he slashed their fee request by 95 percent and awarded them just $75,000 of the $790,000 they asked for, according to Morris James’ Delaware Business Litigation Report. Wrote Laster: “Plaintiffs never engaged in meaningful litigation activity.”

Heidrick Study Finds Number of Directorships in Decline
New director appointments decreased 22 percent from 2009 to 2010, according to the new Heidrick & Struggles Board Monitor Fortune 500 quarterly trend report, with 279 new directors at the studied companies in 2010, down from 356 in 2009. In addition, only one-third of these appointees had non-CEO or –CFO backgrounds, reflecting the growing post-Dodd-Frank disclosure requirements. “The ongoing economic uncertainty is causing companies to lean towards those with top-job experience when they do make an appointment,” said Bonnie Gwin, the leadership advisory firm’s vice chairman and head of the North American Board Practice. Average director age remained at 57, and female placements increased slightly from 17.9 percent to 19.3 percent.

Outside CEOs Cost More, Perform Worse
CEOs promoted from within are more cost-effective and outperform their external counterparts, according to a study conducted by The Kelley School of Business at Indiana University in conjunction with A.T. Kearney, that examined 36 companies that had promoted internally between 1988 and 2007. It compared their performance with other S&P 500 companies that had chosen external candidates. The study found that none of the external CEOs’ companies performed better than the 36 identified companies, and the external CEOs commanded salaries that were 65 percent higher than those of CEOs recruited from within.

Transocean Execs Donate Safety Bonuses to Victims’ Families
After sparking public ire by rewarding executives with safety bonuses, five Transocean senior executives will donate $250,000 collectively to a fund for the families of victims of last year’s Deepwater Horizon explosion in the Gulf of Mexico. Transocean had given safety bonuses because the company had reached two-thirds of its safety target, despite the deaths of 11 workers in the explosion and the subsequent massive oil spill. Overall, the five executives received about $900,000 in incentive bonuses; 25 percent of the bonus equation is determined by safety performance. Transocean reported that 2010 was its “best year in safety performance.”

Judge Orders Borders Bonus Plan Changes
Bankrupt bookseller Borders Group was ordered by U.S. Bankruptcy Judge Martin Glenn to revise its executive bonus plan after the lawyer representing unsecured creditors, Bruce Buechler, notified the judge that the plan rewarded executives for staying with the company though its bankruptcy. The plan had proposed giving the top five executives $4.9 million if unsecured creditors were paid at least $95 million, and a $1.8 million bonus if creditors received $73 million. Glenn instructed the retailer to include a provision that would apply if less than $73 million were returned to creditors.

Basel Establishes Criteria for Globally Essential Banks
The Basel Committee on Banking has established criteria designating banks that must maintain extra capital reserves because they are essential to global financial stability. The international regulatory committee did not compile a list of firms that these rules would affect. Banks will be evaluated based on “size, interconnectedness, substitutability, global activity and complexity,” said the committee’s secretary general, Stefan Walter, who noted that the Basel committee would monitor hedge funds, money market mutual funds and other securitization structures to help prevent another financial crisis.

Class Actions Lose, Arbitrators Win in Supreme Court Ruling
In a ruling expected to provide businesses with significant protections against class-action lawsuits, the Supreme Court ruled that state laws couldn’t override contract clauses that require customers to present complaints to private arbitrators individually. The case in question, AT&T Mobility v. Concepcion, fought over a $30.22 sales tax charge on phones that AT&T had advertised as “free.” The ruling makes arbitration clauses more attractive to companies in consumer contracts, and is expected to apply to employers in employee contracts under the Federal Arbitration Act of 2001.

Geronzi Resigns, Faces Ruling
Cesare Geronzi resigned as chairman of Italian insurer Assicurazioni Generali after the board threatened a vote of no confidence. He was awarded a payoff of 16.6 million euros ($24.3 million) upon leaving Europe’s No.3 insurer, according to Reuters. The controversial Italian financier has in succession chaired three of the country’s most important financial institutions: Capitalia; Mediobanca, which is Generali’s top shareholder; and Generali itself. Separately, a Rome court is due to rule on whether Geronzi contributed to the 2003 bankruptcy of Italian food group Cirio. Prosecutors are seeking an eight-year sentence for Geronzi, who has denied any wrongdoing.

Wall Street Banker Pay Falling
An unnamed Wall Street paymaster told The Wall Street Journal recently that the median banker pretax salary is currently $1.6 million, down from $2.2 million before the financial crisis hit. The pre-crisis pay was approximately 60 percent cash payments, with bankers taking home about $700,000 a year after taxes. Now, however, more bankers receive deferred compensation rewards, which brings their median aftertax take-home pay to about $380,000.

Director Shortage
Despite median director compensation increasing from $45,000 in 2001 to $119,500 in 2010, Canadian companies are having increasing difficulty finding directors to fill their boards. Spencer Stuart found “a definite increase in the number of first-timers joining boards,” said Andrew MacDougall, president of Spencer Stuart Canada. Over the past three years, almost 25 percent of all directors appointed were joining their first board. One-third of the newly appointed directors in 2010 were from the United States—the highest proportion since Spencer Stuart began tracking Canadian directorship trends. In addition, female board members increased to 20 percent in 2010, from 13 percent in 2009.

Top Paid CEOs in 2010
1. Philippe P. Dauman – Viacom
2. Lawrence J. Ellison – Oracle
3. Leslie Moonves – CBS
4. Martin E. Franklin – Jarden
5. Michael White – DirecTV
6. John F. Lundgren – Stanley Black & Decker
7. Richard C. Adkerson – Freeport-McMoRan Copper & Gold
8. Robert A. Iger – Disney
9. Donald J. Stebbins – Visteon
10. Jeffrey L. Bewkes – Time Warner
11. Alan Mulally – Ford Motor
12. Brian L. Roberts – Comcast
13. John H. Hammergren – McKesson
14. Samuel J. Palmisano – IBM
15. David M. Cote – Honeywell
16. Laurence D. Fink – BlackRock
17. James Dimon – JPMorgan Chase
18. David N. Farr – Emerson Electric
19. Thomas M. Ryan – CVS Caremark
20. Rex W. Tillerson – ExxonMobil
Source: The Wall Street Journal Survey of CEO Compensation

Corporate Reputations
Best:
1. Google
2. Johnson & Johnson
3. 3M Company
4. Berkshire Hathaway
5. Apple
6. Intel Corporation
7. Kraft Foods
8. Amazon.com
9. General Mills
10. The Walt Disney Company

Worst:
11. AIG
12. BP
13. Goldman Sachs
14. Citigroup
15. Chrysler
16. Bank of America
17. General Motors
18. ExxonMobil
19. JPMorgan Chase
20. Delta Airlines
Source: 2011 Harris Interactive

“The dramatic drop in board turnover from 2009 to 2010 reveals a continued risk aversion among the leadership of the Fortune 500,” says Bonnie Gwin, vice chairman and head of the North American board practice at Heidrick & Struggles. New director appointments among Fortune 500 companies numbered only 279 last year vs. 356 in 2009, down 22 percent, according to the newly launched Heidrick & Struggles Board Monitor, which will track board trends in the Fortune 500 on a quarterly basis.

“The ongoing economic uncertainty is causing companies to lean towards those with top-job experience when they do make an appointment,” says Ms. Gwin. “Two out of every three new directors brought on board in 2010 were either sitting or former CEOs or CFOs—only a third of new board members had non-CEO or -CFO backgrounds.

“This overwhelming preference for ’battle-tested’ leadership is the strongest trend we’re seeing in what boards are looking for. This also means that the demographic makeup of boards is not changing much—the average age of newly appointed directors stayed the same at 57.  Women appointments were up slightly but overall, diversity metrics did not appear much changed year over year.”

The Heidrick & Struggles Board Monitor analyzes directorship profile data from Fortune 500 companies. The current study pulls trends from 2009 and 2010, and The Monitor will be updated quarterly to reflect new director appointments.

Key findings

Additional key findings from the new Heidrick & Struggles Board Monitor include:

• CEOs still in high demand for directorship—2010 director appointments included a high percentage of those who occupy or have occupied the top job, with sitting CEOs numbering 22.2 percent of appointments and former CEOs at 27.2 percent of appointments. These numbers were up slightly from 2009, which had 21.9 percent and 26.1 percent, respectively.
• Average director age remarkably consistent— “The magic age of 57 remained strikingly consistent over the past two years, with 57 being the average age of directors appointed in 5 of the last 8 quarters,” says Ms. Gwin. “It was only in the fourth quarter of last year that the average age dropped down to 54, which may indicate the beginning of a turn toward more youthful directors, but we’ll have to monitor whether this trend will continue.”
• Gender diversity maintaining but not progressing—“Despite the fact that there were fewer overall placements, there was still a larger percentage of female placements in 2010 compared to the prior year—19.3 percent versus 17.9 percent. This small shift shows a continued interest in expanding the numbers of women in the boardroom, but no dramatic change. The reality is that most of these were probably ‘like for like’ replacements.”
• Ethnic diversity dropping—“The numbers of ethnically diverse directors actually dropped from 14.3 percent in 2009 to 13.6 percent in 2010. This drop seems to reflect the ‘flight to experience’ and the small numbers of diverse directors with classic ‘CEO’-level operations experience.”

Implications for companies? A shifting board profile. “These numbers point to some clear questions that boards have to ask themselves as they recruit new members in the coming year,” says Ms. Gwin.

“First, how to deal with the coming generational shift as directors ‘age’ off? Boards often hesitate to add dramatically younger members for several reasons: Will an earlier appointment mean that the director will stay on the board for 30 years or longer? Does a 45-year-old have enough ‘life experience’ and ‘seasoning’ to contribute to the board? Will a younger member be viewed as a true peer by the other directors? Does a younger director—who is more likely than his or her peers on the board to be a working executive—have the time to devote to board service?

“These are real concerns, but many companies are starting to recognize the impending generational shift that is starting to happen as younger CEOs are appointed and huge consumer trends, especially in social media, impact the business world. Very quickly, boards will need to begin actively considering how to deal with these new generational dynamics and the leading edge boards are already looking to add individuals who bring a lens into the next generation.

“When will we see dramatic shifts in the diversity of boards? During this downturn in the economy, adding battle-tested experience has been more important than almost anything else. Boards wanted experienced hands at the table while they were making death-defying decisions about the future of their company. As the best boards look forward again, continuing to aggressively add diverse perspectives will be important as a competitive advantage, especially for consumer-oriented businesses.

“Regulatory imperatives—and quotas in particular, are gaining more traction outside the United States.  This will be an interesting trend to watch in terms of how it impacts U.S.-based boards.”

Bonnie W. Gwin is a vice chairman and the managing partner of North America for the Heidrick & Struggles’ Board of Directors Practice. She focuses on searches at both the director and CEO level across a wide range of industries.

Stephen A. Miles

“During the first round of selection, I heard people say, ‘Well, we’re not really sure how we ended up with Bob or Jane as our lead director,’” said Theodore L. Dysart, vice chairman of Heidrick & Struggles. “We want to make sure that the success of our next selection of leadership is something in which everyone around the boardroom table is invested.”

The roundtable’s participants discussed numerous characteristics of a good lead director, but the main focus was on the importance of performing a company self-evaluation, examining both the long-term strategic plan and the personality types already represented on the board.

“I’d start at the other end of the project, I’d say, ‘What do we want this individual to do?’ before I try to define the individual’s characteristics,” said Mitchell Saranow.

Stephen A. Miles, vice chairman of Heidrick & Struggles, also agreed that a potential director could not be effectively evaluated by a list of check-the-box criteria. “Having a process for lead director or chair succession is number one; good process can lead to good outcomes,” he noted. “Clearly, there’s an element of ‘fit’ that needs to happen between the CEO and the chair or lead director, because there needs to be trust in that relationship.”

Cheryl Krongard

Since lead directors’ roles inherently require him or her to become a bridge between the independent board members and the CEO, one of the most common prerequisites cited was the ability to communicate effectively and facilitate consensus building. “You build your board not to be of one opinion, but of many different opinions,” said William Bolinder. “Smart people can disagree, as we see quite regularly, so you really have to work to build that consensus to help communicate to management and back to the board.”

Although the duties of a lead director can vary from company to company, it is “critical for a lead director to be someone that’s willing to make the time commitment,” said Cheryl Krongard.

A proximity commitment is also necessary, noted Andrew Berger. “Even in this digital age, geographic proximity to the headquarters, the ability to drop by and have lunch with the CEO or with the executive committee and the management committee once in a while is very important,” he said. “It takes some time to build the confidence of both constituencies.”

“I sort of view the lead director,” said Richard Beckler, “not as somebody who’s aspiring to be CEO, but rather a more senior kind of really seasoned, savvy person.”

“It’s one thing to have somebody available to step in if there’s a disaster,” concurred Berger. “They could be the interim CEO for three months or six months, but having someone who management, including the CEO, views as a possible successor or competitor goes against my view, which is that the lead director needs to be someone who has the respect of management as well as the respect of the board.”

Stephen Wasserman

Whether there is a crisis, scandal or illness, lead directors must not only be able to lead a meeting of independent directors, but also must be able to lead the company. If there is a situation where management is accused of involvement in a scandal “and has to be taken out of the investigation, the

board has to step up,” said Saranow. “Who leads that process

of the board stepping up and investigating and retaining the law firms, retaining the accounting firms—you’re not going to have the CEO do that in these instances; there has to be another person in that office.”

Since the lead director is often expected to oversee the company when a CEO or chairman is unavailable, Dysart noted that lead director selection and executive succession should be planned to occur at separate times whenever possible.

“It’s much more difficult, because you don’t have an anchorperson who’s stewarding the process and leading the process,” if both successions occur simultaneously, he said. “You need to have someone in a position who can help you to get to the place where the board has consensus and alignment around the candidate.”

Lead directors must be able to balance the interests of management, the board and shareholders, said Royce Winsten. “A good lead director understands the role of the board as the protector of shareholders’ interests.”

Richard Beckler

“Accepting that the role of the board is protecting shareholder interests,” said Kevin Collins, “I think that it’s important for the lead director, in that context, knowing how intense the different constituencies can be, to have a high level of emotional maturity.”

Many noted that the lead director must have experience in the company’s industry. Stephen Wasserman said an industry outsider may be a perfectly good director on an audit or governance and nominating committee, “but the lead director has to have some basis for understanding what the strategy of the company is and really assessing it and helping provide oversight to management, as well as to the board, in that role.”

Whether in regard to a company’s strategy, how it chooses its directors or what jobs those directors perform, the most commonly agreed-upon principle at the roundtable was that each board must decide what works best for them. Said Miles, “You have to think about the circumstances. There’s no manila envelope you can open with the right answer.”

Participants:
Neil Baron – Director, Assured Guaranty

Richard Beckler – Director, Rosetta Resources

Andrew Berger – Director, Thermadyne Holdings Corp.

William Bolinder – Director, Endurance Specialty Holdings, Genworth Financial

David Bushnell – Director, RenaissanceRe Holdings

Loren Carroll – Director, KBR, Inc.; CGG Veritas, Forest Oil Corp.

Thomas Chorman – Director, Standex International Corp., Symmetry Medical

Betsy Cohen – Director, CEO, The Bancorp; Director, Aetna

Lynn Coleman – Director, Key Energy Services

Kevin Collins – Director, Key Energy Services, PowerSecure International, Applied Natural Gas Fuels

Joseph Coradino – Director, A.C. Moore Arts & Crafts

Edward Cox – Director, Noble Energy

Rodman Drake – Director, Crystal River Capital, Inc., Celgene Corp., Jackson Hewitt Tax Service, Student Loan Corp.

Theodore L. Dysart – Vice Chairman, Heidrick & Struggles

Malcolm Elvey – Director, Children’s Place Retail Stores

Hon. Barbara Hackman Franklin – Chairman, NACD; Director, Aetna, Dow Chemical

Allan Grafman – Chairman, Majesco Entertainment

Patrick Kenny – Director, Assured Guaranty

Lynn Krominga – Lead Director, Sunrise Senior Living; Director, Avis Budget Group

Cheryl Krongard – Director, Legg Mason, US Airways Group

IIene Lang – President, CEO, Catalyst

Michael Mardy – Director, Green Mountain Coffee, ModusLink Global Solutions

Stephen Miles – Vice Chairman, Heidrick & Struggles

Kathleen Misunas – Director, Tech Data Corp.

Joseph O’Donnell – Director, Comverse Technology, ModusLink Global Solutions, Comverge

Dr. Warren Phillips – Lead Independent Director, CACI International

Mitchell Saranow – Director, Telephone & Data Systems

Laurie Shahon – Director, Knight Capital Group

Melvin Spigelman – Director, The Medicines Company, Synergy Pharmaceuticals

James Swartwout – Director, Sparton Corp., ATS Corp.

Gretchen Teichgraeber – Director, Forrester Research

Howard Tischler – Lead Independent Director, DealerTrack Holdings

Stephen Ward – Director, Carpenter Technology Corp.

Stephen Wasserman – Director, IRIS International, Inc.

Heywood Wilansky – Director, DSW

Royce Winsten – Director, Duckwall-ALCO Stores

The overall NACD Board Confidence Index (BCI) rose to 64.9 in Q1 2011, showing a slight improvement over last quarter’s overall index of 64.4. This score reflects the fact that directors continue to exhibit feelings of restrained optimism, a trend that began emerging last winter. While directors no longer show the hesitancy seen in the autumn of 2010, current business conditions have not yet improved to a point as to encourage outright enthusiasm.

When asked to characterize the current state of the economy compared to one year ago, directors registered a confidence index of 73 in Q1 2011. This compares to a level of 69 in Q4 2010. Taking a shorter timeframe and looking at changes in conditions from the previous quarter, as opposed to the previous year, directors also felt more confident, although to a lesser degree—61 in Q1 2011 versus 59 in the previous quarter. Despite this growing confidence, directors’ optimism about the progress made during the past year and past quarter is tempered by a slight decline in expectations of future economic conditions.

With proxy season on the horizon, the Securities and Exchange Commission is yet to finalize rules regarding shareholder voting and transparency, proxy access or new whistleblower programs. This uncertainty about the future corporate environment is reflected in boardroom index data. It appears as though these concerns may be relatively short-lived, however. Looking ahead, directors are less confident about the future in the short run, as opposed to a year out. Boardroom expectations for the next quarter dropped to 57 from 60 in Q4 2010. Expectations for the next year dropped to 69 from 71 the previous quarter.

The survey also asked respondents several questions regarding the hiring practices of their primary company. In Q1 2011, 48 percent of directors responded that their hiring remained the same, while a third said their companies’ hiring practices resulted in a net gain. Looking forward, just 8.6 percent indicated their companies planned to reduce the workforce in the next quarter—more than half responded that their hiring practices would remain the same. —Kate Iannelli

BP Chief Bob Dudley Apologizes for Gulf Oil Spill
In his first public address to oil industry executives since becoming BP chief executive, Bob Dudley apologized in London for the 2010 Gulf of Mexico disaster that caused the biggest offshore oil spill in history and killed 11 people. Touting his record since taking the top job, Dudley said that BP would not sign contracts with drillers whose rigs do not meet BP standards “and there are a number of cases where we have either turned away rigs or are negotiating for modifications which could bring the rig up to our standards.” The London Telegraph reported that the past year’s events have affected compensation at the company. While two of BP’s most senior directors “have taken bonus payments for their work in the year of the Gulf of Mexico oil spill,” the newspaper notes, “Dudley waived his reward.”

Dudley believes the entire industry needs to change to prevent another deepwater oil spill on the scale of the one BP suffered a year ago. The New York Times pointed out that his comments “were in sharp contrast to the statements of other senior oil executives who said their companies would have designed wells differently” from BP’s ill-fated Macondo well. They assert that the accident would not have occurred had rig workers and their supervisors conducted adequate testing, followed industry procedures and been properly trained.

Americans Want Less Corporate Political Influence
Major corporations should have less influence on politics, say 62 percent of respondents to a recent Gallup poll. This is down from 68 percent of respondents who wanted less corporate involvement in 2008, but a marked increase from 52 percent 10 years ago. Twenty-four percent of respondents want about the same level of influence, while 12 percent want to see influence increase. An equal number of respondents want influence levels to stay consistent in 2011 as compared with 2008, a decrease from 36 percent in 2001. Democrats were more likely to call for less influence (73%) than Republicans (49%).

Shareholders Seek More Disclosure on Succession
Pressure is building on publicly traded companies to give details about their succession planning, as evidenced by an increase in the number of shareholder proposals asking boards to disclose such details. The situation can be especially troublesome at a company such as Ford Motors, whose recent success appears to be closely tied to 65-year-old President and CEO Alan Mulally. “Given that his employment agreement has no formal term,” the Detroit Free Press reported, “it’s only natural that investors have been asking questions about Ford’s succession plan, which remains private.”

Gupta Resigns Board Positions
Potential jurors in the insider-trading trial of Galleon Group founder Raj Rajaratnam, now underway, were questioned about whether their feelings about Wall Street executives and the financial crisis in the United States would affect their ability to fairly consider the evidence at trial, The Wall Street Journal reports. Rajaratnam is charged with making improper trades at his hedge fund based on alleged tips about publicly traded firms obtained from company insiders. U.S. District Judge Richard Holwell made available a copy of the questions he will ask potential jurors to determine if they might be biased. One section will focus on their experiences as investors and their views on insider-trading laws. Federal prosecutors have said former Goldman Sachs Group and Procter & Gamble Co. director Rajat Gupta was an unindicted co-conspirator who shared inside information with Rajaratnam. The SEC promptly filed a civil administrative action against Gupta for allegedly tipping off Rajaratnam when Gupta was a member of Goldman Sach’s and P&G’s boards.

More Companies Consider Risk in Compensation Decisions
Risk management has become more prominent in financial firms’ overall performance goals and compensation decisions, with a new Deloitte survey finding that 37 percent of institutions have placed more weight on risk. Companies plan to continue integrating risk management in incentive compensation, with 64 percent of firms looking to balance the emphasis on shortterm versus long-term incentives. Fifty-seven percent of companies paid incentives in company stock and 52 percent deferred payouts based on future performance.

The “Navigating in a Changed World,” survey, which queried chief risk officers at 131 financial institutions worldwide, also found that four out of five institutions require that a portion of the annual incentive be tied to overall corporate results, but less than one-third matched senior executive payout timings to the risk term at hand.

“While we saw an uptick in risk-based compensation practices, it was mostly at the senior management level,” said Deloitte’s Edward Hida, who edited the report. “It is even more important that financial institutions take risk management into account in performance evaluations and incentive compensation across the organization.”

More Auditor Changes Seen
With companies looking to save money wherever possible after the recent financial crisis, more companies are changing auditing firms and taking more time to make their choice. The Big Four—Deloitte, Ernst & Young, KPMG and PwC—still cover more than 90 percent of the market capitalization of U.S. public companies. Recent major auditor switches have occurred at Apple and Tyson Foods. Apple exercised a new policy of reviewing its auditor every five years, with an option to change firms after 12 years of being a client at the same firm.

Bribery Act Delayed Indefinitely
Following businesses’ concern about ambiguities in a new anti-bribery law, the British government has delayed its implementation. The law has been compared to the Foreign Corrupt Practices Act in the United States, but would be more restrictive, banning bribes between private businessmen, in addition to foreign officials. The law also would be enforceable even if the offender did not realize a transaction was a bribe. The pending rule currently has no limits on fines and would increase the maximum bribery penalty to 10 years in prison. Scheduled to take effect in April, the law was delayed pending government guidance on corporate compliance.

CFOs Expected to Do More More
CFOs are being called upon to evaluate corporate strategy and information technology plans, among others. An Accenture survey found that 43 percent of CFOs had assumed information technology roles in the past 18 months, while 41 percent got more involved in business development and 39 percent in human resources planning. Eighty percent of senior finance executives reported an expansion of responsibilities. The study surveyed 1,054 senior finance executives across North and South America, Asia and Europe.

Some CEOs Getting Higher-Value Health Plans
Companies appear to be offering executives high-value health care plans, an issue of growing importance in light of Apple CEO Steve Jobs’ health concerns and subsequent speculations on how it will affect the company. In both 2009 and 2010, 32 Fortune 100 companies reportedly paid for their CEOs to have extensive executive physicals, which include collecting a medical history, blood tests, X-rays, eye exams and nutrition counseling at Baltimore’s Johns Hopkins Hospital. Companies such as McCormick & Co. are offering free preventative care and encouraging gym membership, according to The Baltimore Sun.

Wall Street Lawyers Help SEC Funding Campaign
Forty-one Wall Street securities lawyers and professionals appealed to Congress to allow the SEC to become a “self-budgeting” agency, meaning it would set its own annual budget. A provision to make the agency self-budgeting was removed from the Dodd-Frank Act in the final hours, with some senators still wary of fully trusting the SEC without the regular performance review required by budget evaluations.

Fed Works to Define Systemically Important Nonbanks
The Federal Reserve is working to utilize powers it was given under the Dodd-Frank Act to establish terms to identify those financial firms that are not banks and risky enough to necessitate additional regulatory measures. Under the proposed rules, a firm would be considered systemically important if 85 percent or more of its revenue was related to activities that are financial in nature, have at least $50 billion in assets or already are designated by regulators as systemically important.

Top and Bottom
For its annual 50 most admired companies overall, Fortune asked businesspeople to vote for the companies that they admired most from any industry. Here are the top 10:

1. Apple
2. Google
3. Berkshire Hathaway
4. Southwest Airlines
5. Procter & Gamble
6. Coca-Cola
7. Amazon.com
8. FedEx
9. Microsoft
10. McDonald’s

Least Admired

1. Kirin Holdings
2. Carlsberg
3. Asahi Breweries
4. Heineken
5. China South Industries Group
6. Dongfeng Motor
7. Pernod Ricard
8. China FAW Group
9. Shanghai Automotive
10. AbitibiBowater

“I have a passion for great management. I want business to behave responsibly. I want corporations to be proud of themselves, what they do and how they do it. Boards need new perspectives and more people with different perspectives. I believe that my perspective is too often absent in the boardroom. I have a deep understanding of how the core of a corporation functions. And I believe if directors don’t know what’s happening in the middle of an organization, they don’t really know what’s happening at all.” Directors, Dunn says, need to listen to the “melody of the middle” as much as employees listen to the “tone at the top.”

Dunn currently serves on the board of Easter Seals in Connecticut where she lends her 30 years of experience to the non-profit sector. Even though she has not been a CEO, she understands their challenges because she has coached and trained generations of them. Though not a CPA, she has scrutinized balance sheets and assessed financial performance. And while not a lawyer, she has counseled managers who are confronting the immediacy of compliance issues in the field. Her profile is at present unconventional for nominating committees, but she is determined to find new avenues for her experience that lead to the boardroom.

More stories in The Boardroom Guide for New Directors:
Directors Registry Now Exceeds 4,000 Listings
A Performance in Three Acts
A Dodd-Frank Cheat Sheet for New Directors

To help Dunn prepare for her desired role as a director, NACD Directorship invited her to join a gathering of new and seasoned directors to share their experiences and discuss best practices for newly appointed board members. The ground rules for the conversation that ensued were simple: we wanted the new or aspiring directors to ask their more seasoned counterparts how to get to the boardroom—and how to succeed there upon arrival. Questions around the table included: How did you land your first directorship? What questions should a new director ask of company management and fellow directors when first coming on board? What about culture? Pay? Finally, how will responsibilities match the value a candidate has to contribute?

Breaking In…With Class
How to get your first, second and third board seats? Network. Network. Network.

Directors come to board service in a variety of ways—and for a variety of reasons. The population of directors available for board seats can be pretty much divided into two camps: the C-suite executive who seeks personal development with an eye toward moving up to become chief executive or business executives looking to embark on a second career after a successful and rewarding first career.

Michele Dunn

Most directors and their professional advisors acknowledge that the first board seat is both the hardest to obtain and most important. According to Thomas J. Presby—who chairs the audit committees of five public-company boards— your first board seat helps establish your credibility and should play an important part in the expansion of your board network. Looking for a directorship should be approached with the same vigor and rigor as a job search. “It’s a job, not a hobby,” he says. Presby goes so far as to recommend writing to the chair of a nominating and governance committee stating your case for why that company board specifically aligns with your skills and experience.

Allen F. Freedman was named to his first public directorship in 1980 when a company he had invested in went public. Freedman remained on that board for more than 30 years, served on other boards and founded the Association of Audit Committee members.

A professional colleague recommended Lou Lipschitz to his first public-company board seat shortly after he retired from Toys “R” Us in 2004. Now the audit committee chair for The Children’s Place Retail Stores, New York & Co. and Majesco Entertainment Co., and the compensation committee chair for Forward Industries, Lipschitz was the CFO of the toy retailer as it grew from operating 300 stores with annual revenues of less than $2 billion into to a worldwide retailer with more than 1,600 stores and revenues of $11 billion before he retired in 2004.

With more than 23 years of sales, marketing and operations experience at Kellogg, Alan F. Harris agreed to join the board of his first public company board shortly after retiring in 2007. Heidrick & Struggles was retained to lead the search for an independent director by Lancaster Colony, a Nasdaq-listed company that manufactures and distributes specialty foods, glassware and candles; Fulton was the partner in charge and aware of Harris’ relevant marketing, sales and operation experience along with his desire to serve. Harris, who now calls both North Carolina and South Africa home, says public-company board service gives him the opportunity to stay involved in business after nearly 30 years at Kellogg: “I am still fascinated and motivated by business, and you don’t simply switch into the off position when you retire.”

Philip Lochner

“We’ve discussed it at every board I’m on and have uniformly decided not to have a separate committee,” said Philip R. Lochner Jr., a veteran of public-company board service. “Part of the concern, I think at all these boards, has been that if you put it off on some committee, then that committee will feel responsible. That’s fine, but the rest of the board will kind of ignore the issue and it’s too big an issue to ignore.”

“The audit committee still handles all of the fiscal risk issues,” said Warren R. Phillips, explaining that companies in different industries require different risk-oversight structures. “We’re an IT company with international and defense and intelligence contracts. So public risk has a very special meaning for us.” The CACI International governance committee divides responsibilities between the risk and audit committees as well as the board as a whole.

Participants also were concerned about risks that could be calculated and those, such as reputational risk, that cannot. “I think the trap sometimes of getting the accounting firms involved in [risk assessment] is that it does tend to boil down to a quantification,” said Faye Wattleton. “But reputational risks can get you in the biggest trouble and you really can’t quantify it very well.”

Faye Wattleton

EisnerAmper Partner Peter Bible, referencing a risk assessment his firm recently completed, was struck by the fact that “risk that could be quantified can be usually pretty accurately measured, or pretty accurately mitigated or reduced through the use of insurance contracts or derivatives. It’s those that can’t be quantified that create the big problem.”

The participants’ most popular concerns were losing his or her personal reputation or being faced with new unforeseen consequences stemming from rules on corporate governance being ushered in by the Dodd-Frank Act. EisnerAmper’s Steven Kreit said that this was a common sentiment. “EisnerAmper is in the process of putting together the results of the second annual board survey,” he said. “And clearly, reputational risk and regulatory compliance risk are by far the two biggest issues.” Kreit also said he advises clients to utilize a company’s internal audit system to assist with proxy disclosure regulations.

With reputational risk such a high concern, Heidrick & Struggles Vice Chairman Theodore Jadick said that some directors may see joining an audit committee as a risk in itself. “You talk to people about going on audit committees and you get a lot more ‘nos’ than you get ‘yesses’,” he said. “People are concerned about liability, they’re concerned about getting their name in the paper.”

“I think anyone who is now serving on an audit committee would agree the workload and time commitment required have grown substantially in the last few years,” said Mark Schulte.

Victor Grijalva

“I think the audit committee needs to handle both risk management and the financial reporting process. There are not enough hours in the day,” agreed Bible, noting that the time commitment for an audit committee member is only going to grow. “The amount of time the audit committee is going to have to spend with the internal management that does the accounting, as well as the auditors, all the judgments involved, it’s going to be substantial.”

Director participants offered advice for minimizing damage associated with risk, but one of the most common suggestions was simply being aware of the strengths and weaknesses of management and fellow directors. “I’m putting in a pitch for extensive personal due diligence on your leadership team, and you’ll find out a lot about where your risk vulnerabilities are,” said Rodman L. Drake.

“I fully agree that knowledge of the management and their understanding of risk is number one. These are the guys who take us into the risk area,” said Victor E. Grijalva. “They are managing the business every day. So they should be right for the job.” Solid succession planning is an essential aspect of risk management, said Phillips. “It’s not just knowing who you’ve got now, but what’s your strategy for a replacement?” he added.

Charles Weinstein

With many investors in the private sector sitting on record amounts of cash, public companies are becoming more attractive prospects, “One trend that we’re seeing now through our clients is the emergence of private equity as a new vehicle to fund public companies and perhaps taking them private,” said Charles Weinstein, chief executive of EisnerAmper. “We’re seeing tremendous activity in that area.”

EisnerAmper Audit Partner Neal Godt provided some advice on recruiting private-equity investors: “One of the first things they look for if you’re trying to bring in money is they want to be confident. They do due diligence. We’re seeing more and more companies do what we would call supply-side due diligence: Bringing somebody in to perform due diligence as if they’re representing a private-equity investor, and then using the results of that due diligence to see where they may need to improve some of their operations,” Godt said.

Recalling the experience of teaching his 16-year-old son to drive, Michael Breit, audit partner at EisnerAmper, said, “if you talk about catastrophic risk, that’s catastrophic risk.” Breit likened this to the current governance climate: “I’ve been around for a while; who would ever think about an oil rig exploding, or having a volcano erupt or going through the global financial crisis that we’re all going through right now?

“I would also tell you that in this environment, there are so many ‘what if?’ scenarios that should be presented to management,” he continued, saying that the best way to manage risk is to evaluate as many potential situations as possible and consider how the company would respond.

Participants:
Cynthia A. Baldwin – Director, Koppers Holdings

Peter Bible – Partner, EisnerAmper

William H. Bolinder – Director, Endurance Specialty Holdings, Genworth Financial

Michael Breit – Partner, EisnerAmper

Rodman L. Drake – Director, Crystal River Capital, Celgene, Jackson Hewitt

David D. Elliman – Director, Applied Signal

Sean T. Erwin – Chair, President, CEO; Neenah Paper

William W. Fox – Director, Tower Group

Bart Friedman – Director, Allied World Assurance Holdings

Neal Godt – Partner, EisnerAmper

Victor E. Grijalva – Director, Transocean, Dynegy

David R. Haas – Director, National CineMedia

Reuben L. Hedlund – Director, Unitrin

Lloyd L. Hill – Director, Red Robin Gourmet Burgers

Theodore Jadick – Vice Chairman, Heidrick & Struggles

Carolyn F. Katz – Director, American Tower, NII Holdings

Joseph Klein, III – Director, Gauss Capital Advisors, Keel Pharmaceuticals, Savient Pharmaceuticals

Steven Kreit – Partner, EisnerAmper

Philip R. Lochner, Jr. – Director, CMS Energy, Clarcor, Crane Co., Gentiva Health Services

Robert C. Murray – Director, Mirant

F. Gardner Parker – Chairman, Sharps Compliance, Triangle Petroleum; Director, Carrizo Oil & Gas, Hercules Offshore

Wilmer F. Pergande – Chairman, Consolidated Water Co.

Warren R. Phillips – Director, CACI International

Robert M. Rayner – Director, U.S. Concrete, RM Industries

Mark Schulte – Director, Brookdale Senior Living

Steven W. Schuster J.D. – Director, Tower Group, MIT Holding

Laurie M. Shahon – Director, Knight Capital

Faye Wattleton – Director, Savient Pharmaceuticals

Charles Weinstein – CEO, EisnerAmper

David N. Weinstein – Director, Georgia Gulf

Omer S.J. Williams – Director, Dime Community Bancshares, Thacher Proffitt & Wood

Royce Winsten – Chairman, Duckwall-Alco Stores

Making Progress?
The overall NACD Board Confidence Index rose to 64.4 in Q4 2010. This marks an improvement from the last BCI (Q3 2010), which hovered on the brink at 56.6. We believe this jump reflects a shift in the boardroom from a hesitant view of the economy to a view of restrained optimism. As the Index score is a composite, breaking down the elements tells a larger story.

“The results are exactly what I would have expected overall,” said David Swinford, president and CEO of Pearl Meyer & Partners. “People have become more confident over the past year, in large part because of the continued increase in economic activity and increased stock market prices that have largely alleviated the fears of a double-dip recession. At the same time, people are more confident further out, largely because they’re getting validation of economists’ original prediction that the recovery would be at best a slow, steady process.”

Directors were asked to characterize the current state of the economy compared to one year ago. In the final quarter of 2010, when looking back over the past year, directors perceived improvement, but less so than perceived in the third quarter of Q3 2010—a retrospective score of 69 in Q4 vs. 77 in Q3. Directors feel dramatically better about the change in conditions over the last quarter—a score of 59 in Q4 compared to a subpar 42 in Q3.

The politico-economic environment has been anything but stable. In the third quarter, the SEC worked furiously to put rules enacted by the Dodd- Frank financial reform legislation on the table. In rapid succession, proposed rules were issued on proxy voting and transparency, proxy access, “say on pay” and new whistleblower programs. These rules, not yet finalized in the fourth quarter, still loomed large over the boardroom. The political climate presented an extra layer of ambiguity for Corporate America. The Republican victory in the November midterm elections is expected to bring a different tone to 2011 legislative activity. Furthermore, the current Administration’s debate over a corporate tax overhaul has left many business leaders hesitant to act.

Looking Forward
Not surprisingly, the results of this quarter’s Board Confidence Index reflect this uncertainty for the short term. Looking ahead, directors are most confident about the state of the economy in the next year. When asked, 72.5 percent of respondents indicated they expected economic conditions to be moderately better a year from now. This longterm optimism, however, is tempered by short-term uncertainty. Directors are not nearly as confident for the upcoming quarter as they are for the upcoming year—more than half believe conditions will remain the same in the next three months. Looking ahead to the next quarter, or looking at the past quarter, respondents reflected nearly the same moderate attitude.

The data reflects companies’ increased willingness to shed recessionary habits, says Heidrick & Struggles Vice Chairman Theodore L. Dysart. “Companies have been watching their pennies add up to dollars. The gains they made from last year’s operating cycle are really going to bear fruit as we enter 2011.”

Contrary to the third quarter, directors feel slightly more optimistic about their own industries in relation to the general economy. Forty-nine percent of respondents indicated their industry would fare moderately better in the upcoming year. “People are more confident in their own industry than in others. You know your own environment pretty well and the further away from your center of your universe, the less confident you are about it,” Swinford observed. “There’s a much higher appreciation for the potential impact of the unknowns than there used to be.”

Directors from the information technology and utilities industries were most likely to believe their industries will fare better in the upcoming year than the general economy. Interestingly, those representing the healthcare sector were most likely to feel their industry would do “moderately worse” in the upcoming year. Directors from the materials and telecommunications industries generally believed their industries would perform in the same fashion as the markets.

The Board Confidence Index also offers a breakdown of respondents by industry size. The largest companies ($10B and over) were the most confident about the long-term future state of the economy. Larger companies ($5B to $10B) were less optimistic about the future state of their primary industries.

Beyond Confidence
In addition to measuring directors’ level of confidence toward the economy, the survey also asked respondents several questions regarding the hiring practices of their primary company. Most respondents indicated a fairly stagnant job market over the past year. In 2010, 37.8 percent of directors indicated their company’s net hiring was the same—suggesting they brought on as many employees as had left the company. However, 34.9 percent of respondents said their company’s hiring resulted in a net gain, while 27.3 percent resulted in a net loss.

“There has been a maniacal focus on driving out costs and operating as efficiently as possible, as opposed to just throwing people at a problem,” observes Dysart. “Boards have pushed their management teams to be very cost conscious, and the hiring practices currently reflect that.”

The largest companies ($10B and over) were most likely to hire in 2010. Fifty percent indicated their hiring practices resulted in a net gain, while 19 percent cut back their workforce.

Looking forward to hiring practices in 2011, responses further supported the theory of potential growth. Slightly under half of directors (48%) forecast their company will retain the same amount of employees in the next year. A substantial amount, 40 percent, forecast their company will expand their current workforce. Just 11 percent plan to pare their current number of employees.

Survey results show a company’s hiring in 2010 tends to dictate its practices in 2011. Of the respondents who neither expanded nor contracted their workforce in 2010, 60 percent plan to retain the same amount in 2011; 77 percent of directors whose companies’ hiring practices resulted in a net gain in 2010 plan to further expand their workforces in 2011. The companies that plan to add workers in 2011 are most likely to be from the financial or information technology industries.

We were fortunate to have our partners from Heidrick & Struggles there—Ted Dysart and Stephen Miles, who are both vice chairmen for this leading executive recruitment firm. Through a very candid dialogue, we were really able to dig into this topic. At the session, and in many praiseworthy emails following this gathering of esteemed directors, I heard many common suggestions that all boards can put into action.

The key takeaways? Everything is subtle; just work through the details, expectations and preferences that fit for your situation.

Beyond the subtleties, three key themes did emerge for me:

1. Role: Define expectations first. How will the CEO and management team work with the chairman or lead director?  What do we expect him/her to do?
2. Criteria: What skill sets and experiences are required, preferred and desired?  Surprisingly, this aspect of the process is really no different from other director hire decisions, but many boards overlook this critical step.
3. Process: Have a process and make it transparent. No need to keep your selection process a secret from your fellow board members. They can help you identify key criteria and you want them invested in the success of whomever you select as your next board leader.

While many other items were discussed, here are a few that rose to the top for me:

1. Term limits/rotation: No consensus…all over the board: Yes, no, perhaps.
2. Time commitment: Ensure this person is willing to make the commitment and has the time available after making that commitment.
3. Crisis and succession: Ensure this person is willing to take on a key role in times of crisis. You never know what can happen, and the lead director needs to be ready to step up, whether as interim CEO or chair of a search committee.
4. Experience: This leader should be seasoned and savvy (some felt, ideally, from the company’s industry), and can act as a sounding board for the CEO, management and others on the board.
5. Trust: This is a “no kidding” area, but many emphasized the need to ensure the lead director check his/her ego at the door and not have a personal agenda.
6. Collaboration: Near the top of requirements, the lead director needs to be a strong team builder with exceptional listening skills. Is he/she a facilitator?
7. Raising the bar. One passionate participant even suggested that all boards separate the chair and CEO roles. Perhaps this director was thinking about asymmetric information risk. No matter; we assured the participants that NACD does not advocate for specific board structure, rather, it’s situation-dependent—
   i.e., it’s subtle! Combined chair/CEO roles make sense for some companies, and separating the roles is appropriate for other companies.

In closing, I wish I had brought copies of page 10 from the Report of the NACD Blue Ribbon Commission on Board Leadership. The chart on page 10 summarizes the relationship of the leader of the independent directors and the CEO and their respective areas of responsibilities.

Net net: this topic is hot, and we are exploring the optimal next steps to help directors continue to advance exemplary board leadership.

Henry Stoever is director of marketing at the National Association of Corporate Directors.

“CEOs will encounter a wealth of new challenges in 2011, further complicating a role that has become more highly scrutinized over the past two years than ever before. The impact of the financial crisis combined with the new requirements for conducting business on a global scale have transformed the office of CEO. Today’s challenges require someone who can demonstrate a much broader and more strategic perspective than in the past.”

10 Key Challenges for 2011

Mr. Miles sees 10 major challenges for CEOs in 2011:

1. Moving from “business case” to “social business case”

“As companies weigh decisions such as entering a new market or embarking on a multi-jurisdictional acquisition, the ‘business case’ must now be viewed through a new lens: how will this business decision impact the country/region/state/province they are going into? It is no longer enough for companies to simply make a good business case or meet the ‘legal requirements’; they must make the case to the local stakeholders that this move will benefit the target community, who may have concerns about, for instance, the environmental impact. On the flip side, the transformation of developing local economies due to a major corporate presence can then affect the original business case: new unionization and increasing wealth may impact the decision as to whether to grow operations in the area or call into question whether the original business case was a sound one.”

2. Stepping into the role of “ambassador”

“Related to the development above, we are seeing that the CEO must actively engage with politicians and regulators around the world. The CEO must be conversant on policy – be it financial regulation or healthcare reform – that affects his or her company and industry. Policy makers or regulators do not want to speak with delegates, but to the CEO. Given this, the CEO must act as diplomat and build these relationships him- or herself. Only unusually qualified delegates – such as a former top politician who still carries much influence – can effectively step into this role and supplement the CEO.”

3. Repairing the corporate image problem

“One of the many lasting legacies of the financial crisis will be the image of corporations around the world as ‘bad,’ a view that politicians and shareholder activists have taken hold of with developments such as the Dodd-Frank Act. In this environment, CEOs in all industries – not just financial services – must work assiduously to repair their reputations among the media, regulators, investors, and the public at large. One way of doing this is through earnest CSR. Taking corporate social responsibility seriously not only helps to balance out the negative press, but also jibes in particular with the priorities of today’s younger employees – another important constituent that companies must consider. CEOs must do this without losing focus on their corporate strategy and mission.”

4. Making the board an ally

“With first Sarbanes-Oxley and then the global financial crisis, corporate boards have stepped in to become more ‘executive,’ instilling themselves further into the role of scrutinizing and interrogating management. The CEO must build a strong relationship with these key stakeholders and bring them on a ‘journey’ against his/her (or their) desired initiatives, operating with transparency. If you treat the board as your enemy, you will get the enemy you deserve! Conversely, treating the board as a partner along a strategic path will only help your cause.”

5. Building a global leadership pipeline

“It is incumbent upon every CEO to ensure that he or she has a robust and ‘global’ pipeline of talent throughout the organization, especially at the senior-most levels, and that multi-year succession is regularly discussed at the management and board levels. It is critical that investment in these programs is a priority regardless of the economic cycle – they cannot be ‘fair weather’ programs. As the recent survey that Heidrick & Struggles conducted with Stanford’s Rock Center found, 51% of companies cannot name a CEO immediately if needed, and 39% have no internal candidates whatsoever. To that end, it is important that CEOs encourage their boards to recruit directors with succession expertise and experience, and to help make the all-important issue of succession a top corporate priority.”

6. Grappling with China

“If their company isn’t there already, almost every CEO is eyeing China – either as a consumer market or supply chain base. But partnerships there can carry much risk. As the joint venture partners in China begin to learn and then take over the technological developments and processes introduced by their Western partners, these Western companies may be uninvited to the party. Chinese companies, supported by their government, are aggressively acquiring intellectual property, and are increasingly looking to go it alone in competing on the world stage. CEOs must thus be aware that they may be creating competitors if they enter into a JV in China – and manage this risk accordingly.”

7. Understanding shifting employee values

“Managing the demographic changes as baby boomers move into retirement and ‘millennials’ come up through the ranks is something no CEO should overlook or just delegate to HR. The CEO needs to understand the motivations and values of his or her workforce in order to leverage organizational capabilities. He or she must also know the risks involved in a less ‘loyal’ employee base who may not, for instance, be as willing to move for a job as were the ‘company people’ in previous generations. The need for constant real-time feedback and sharing of information is something new. Software applications like Rypple allow CEOs a vehicle to communicate deeply across the organization in a reciprocal manner.”

8. Operating in a world of social media

“Today’s CEO is coming to realize that potentially all of his or her decisions and actions are broadcast in real time on company blogs or on Twitter and Facebook. Instead of being a ‘victim’ of this new exposure, CEOs must embrace and become part of the new media social discourse. Indeed, carefully leveraging this new medium instead of running away from it can do much to help tackle other challenges, such as combating negative public opinion and forging a dialogue with younger employees.”

9. Driving diversity

“We have now spent decades talking about diversity, and it is now time to move from a compliance-based approach to one where we truly build (and value) diverse companies and boards. As part of their greater engagement with recruiting and talent management, CEOs will need to drive diversity in their organizations rather than making this an HR issue. A number of countries are taking a legislative view regarding gender diversity on boards (UK and Australia), and are set to begin to mandate the percentage of female directors that must be on boards. With the combined drivers of a renewed call for quotas and the growing business case in support of diversity, the CEO will be expected to take concrete action steps toward creating a diverse workplace.”

10. Managing a globally distributed leadership team

“A corollary to a more diverse and more geographically diffuse management team is the complexity of actually managing a team that is so spread out. Expatriate programs – in which companies send executives abroad for experience – carry the risk of having those employees scooped up by competitors, erasing the value of the company’s investment unless you have an equally robust repatriation program. As attrition rates continue to rise for these expatriates, CEOs must think differently about where a division is led or who should lead it. Increasingly CEOs are thinking locally. Hiring local teams around the world has two distinct advantages – the local executives may be more likely to stay with the company and they may also be better able to compete with any local competitors who emerge on the market.”

From ad hoc to process
Board member selection is always critical; this is never more true than when choosing the right person to be the lead director. These placements are more difficult to undo than management selections, yet they often fail the test of process and rigor. How can boards put structure and discipline around this all-important decision?

Proper process starts with developing, in detail, the forward- looking criteria that the lead director should possess. Decision-makers should gather input from multiple stakeholders, including the entire board, the CEO and, in some instances, the management team. Through this fact-finding exercise, the company aligns itself around what it needs and expects from this critical role, ultimately leading to a more successful selection. Soliciting feedback from a variety of sources both within and outside the company can provide clarity about the expectations of what is sometimes a nebulous position within the board.

Timing
From a process perspective, it is important to think ahead so that the company is not conducting lead director and CEO successions at the same time. Planning these events well in advance is critical, particularly since the lead director should play a primary role in running a planned CEO succession process. Further, lead directors are often called upon to step in on an interim basis when there is an unplanned succession event. Most recently, Neil Austrian stepped in as interim chairman and CEO at Office Depot when Steve Odland resigned; earlier, Robert Druskin served as interim CEO at E*Trade Financial when Don Layton retired and Robert Matschullat filled in as interim chairman and CEO at Clorox when Jerry Johnston suffered a heart attack. Needless to say, having an established lead director in place can provide stability during a CEO succession, which is a situation that is often fraught with risk and uncertainty.

Identifying potential lead directors should actually begin earlier than one might think—at the time of initial recruitment. When a board is recruiting new directors, it should keep in mind those candidates who might be able to step into the position of the lead director one day, applying the same thought processes used when adding a senior executive to the company. Having more than one option is ideal, so that the board can select a candidate based on the best fit for the needs of the company and the CEO at the time. The number one way to mitigate risk is to give yourself options.

The best lead director?
The best lead directors bring a perfect mix of substance and style to the job. From a style perspective, the role requires a combination of interpersonal, advisory, leadership and Socratic skills. The lead director must have a strong relationship with the CEO and be able to effectively interface with the board. These directors also need to have a broad range to their style, with the agility to move from facilitator to coach to strong leader. Advisory skills are critical when it comes to the lead director’s relationship with the CEO. It is imperative that the CEO completely trusts the lead director to both effectively probe and challenge, as well as to be a strong supporting voice when needed.

For the most effective interface between the CEO and the lead director, “fit” should be assessed. From a CEO’s perspective, this will require the lead director to be mature in the sense of knowing the line between governance and management; every CEO has had a lead director or board member who becomes too “executive.” In the post-financial crisis era, even more so than in the post-SOX years, boards have moved into management’s space. The lead director needs to have the discipline to maintain the fine line between governance and managerial oversight. Recently retired CEOs often struggle with this; they typically need two to three years out of the role to hone their director skills before taking on the lead director role.

From an experiential perspective, succession expertise is important, though often overlooked. It is one of the most critical functions of the board and one in which the lead director plays a crucial role. Let’s face it: very few directors have ever hired more than three CEOs. Therefore, this may rate high on the experience scale but low overall when one thinks of areas of expertise. It is also helpful for the lead director to have actually held the CEO title. Having the “battle scars” and experience in the corner office helps them to credibly coach and mentor the CEO and liaise with the board in a more effective manner.

Finally, the lead director should be someone who has the time to truly invest in the role. In other words, this cannot be someone’s fifth current board. The person selected will need to make the role a significant priority in his or her portfolio. Assuming that other requirements are met, simply investing in the role can change the overall effectiveness of the person and make the difference between a good and great lead director.

The reality is that high-performing lead directors are not born; they are developed and grown over time: Life experiences and a level of calm from having lived through a variety of situations is crucial. The right candidates will embody a blend of executive and board experience with the right relationship touch to mold a board of high- powered directors into a cohesive team.

Stephen A. Miles is a vice chairman of Heidrick & Struggles and runs the firm’s Leadership Advisory Services. He specializes in CEO succession and board development work and also serves as an executive coach to CEOs around the world. Theodore L. Dysart is a managing partner with Heidrick & Struggles, where he is a leader in the Global Board of Directors practice and a member of the CEO Search practice.

The NACD’s Governance Advisory Council, comprising directors who chair board nominating and governance committees at Fortune 200 companies, met recently with top decision-makers from the Securities and Exchange Commission (SEC), Institutional Shareholder Services (ISS), Vanguard, the California State Teachers’ Retirement System (CalSTRS) and the Council of Institutional Investors (CII) to candidly discuss perceived barriers and practical solutions to bolster shareholder confidence. In particular, the Council addressed the opportunities and challenges of board composition. The meeting was supported and co-hosted by Heidrick & Struggles International.

Directors, shareholders and regulatory representatives discussed the need for boards to apply maximum capacity to strategic issues in this environment. Directors expressed concern that responding to a bevy of rule making stemming from the Dodd- Frank Act will divert board time and attention away from strategic and risk oversight issues.

All constituencies concluded that relying on compliance and disclosure measures is not an effective way to bolster shareholder confidence and that more can be done to get ahead of the issues.

The Council suggested the following areas where both boards and shareholders can apply their energies and time:

Outcomes of the 2010 proxy season provide guidance for 2011
Patrick McGurn, special counsel for ISS, noted that ISS’ recommendations in favor of boards’ nominees and investors’ support for these candidates were actually higher during the 2010 season than they had been in 2009, despite the elimination of broker discretionary voting. “Big company boards have fixed the structural issues, such as independence and attendance, that shareholders view as the ‘chlorine in the government swimming pool,’” said McGurn. Instead, the 2010 bull’s-eye landed on mid-caps and smaller companies where structural flaws gave rise to the lion’s share of the season’s failed director elections. Because investor confidence remains shaky going into 2011, McGurn suggested that mid- and small-cap firms can expect an equal or greater level of scrutiny going forward.

Boards can increase oversight of the shareholder communications process
Both directors and stakeholders in attendance agreed that it was important for a board to know who the key shareholders are, understand their disparate concerns and gain a clear understanding of how the company and management have responded to their concerns. Establishing a benchmark of understanding will give the board context for any issues that may arise. “I like your IR people, they’re very nice, and I like your corporate secretaries. But I want to be sure that when I’m communicating to them, you all are getting that message,” said Anne Sheehan, director of corporate governance at CalSTRS. “I know we don’t all speak with one voice and you’re going to get some mixed signals,” she said, “but as you and/ or management have those discussions, you’ll pick up themes at the board level that can work in your advantage for considering long-term strategy.”

Boards that engage in dialogue with their shareholders are less likely to be targets of shareholder actions
Stakeholder representatives in attendance all agreed that good communication can help companies when and if proxy access becomes law. (In October, the SEC stayed proxy access, pending a ruling by the U.S. Court of Appeals for the District of Columbia Circuit on a lawsuit filed by the U.S. Chamber of Commerce and the Business Roundtable.)

CalSTRS’ Sheehan also emphasized that when companies engage in quality dialogue with shareholders, actions such as proxy access become unnecessary. “For example,” said Sheehan, “before the proxy access ruling was stayed (by the legal challenge), we were getting calls asking ‘Who are you going after?’ Everyone assumed we’d target companies where the concerns were most publicly glaring, like Massey and Chesapeake. But we’re not ‘going after them’ with proxy access,” said Sheehan, “because CALSTRS has a good dialogue going with those very companies in terms of those concerns.”

Thomas Kim, chief counsel of the SEC’s Division of Corporation Finance, echoed the need for dialogue. Referring to new “say-on-pay” provisions enacted this year as part of Dodd-Frank, Kim counseled that “while companies obviously should figure out for themselves what to do with the input they receive from shareholders, I think showing that you’re actually listening and are being responsive would be helpful in lessening shareholder frustration.”

Even if particular processes important to shareholders are not yet in place, just having an open dialogue can reduce the likelihood of proposals. “We (ISS) surveyed our institutional clientele during the off-season this year and asked, ‘Should we give boards credit for prospectively pledging to change particular behaviors if the company is responsive and promises in writing to improve its governing documents?’ Overwhelmingly, our client base said they would like to take that approach, looking forward rather than back,” said McGurn.

The concern over Regulation Fair Disclosure (Reg FD) is overdone
Boards can communicate with their shareholders without violating Reg FD, as long as they take certain precautions. This point was reinforced by the SEC’s Kim, who also previously served in the private sector as securities counsel at General Electric. “We recently issued staff guidance in which we said ‘Reg FD does not prevent directors from talking to you.’ We had to do this because investors were coming to us saying that they’d approached boards, but the corporate lawyers told them that the directors could not engage with them because of Reg FD. There is really only one regulatory barrier to speaking with shareholders, and that is that you cannot disclose material nonpublic information unless you have a confidentiality agreement in place,” said Kim.

The Council also agreed that boards can and should have the lead role in determining board composition, and that only the board can really ensure that composition is aligned with strategy
In response to director qualification disclosures mandated for this proxy season, one director participant said, “There have been all kinds of fads for director qualifications over the years. Operating and industry experience are very valuable. But for most of the boards I sit on, we’ve come to the conclusion that the most important qualifications for directors are judgment, pattern recognition and wisdom. We have to know a candidate to determine that.”

Theodore L. Dysart, managing director of board search for Heidrick & Struggles International, said, “That’s what I’m finding somewhat uncomfortable about the stage we’re getting into, where shareholders exercise judgment on director qualifications.” Dysart questions shareholder skills in this domain. “They know how to swing a bat, but can they hit a major league fast ball?”

However, participants also agreed that boards could provide more clarity on this process to shareowners, along with how the board is aligning board composition with strategy, and how it is working to maintain a high level of independent-mindedness. Recommendations from participating directors included:

• Look outside the box: “One of my toughest roles as a nominating and governance chair has been to broaden our board’s composition to include an individual with strong operating experience, particularly when the best candidates were not public company types,” said one director of a Fortune 100 company. “We chose someone from the non-profit sector with experience in very complex operations and she’s doing an excellent job.”
• Longevity is not always a good thing: Dysart noted that people are retiring younger; of the 225 new board members placed in the Fortune 500 last year, the average age was 57. “When someone who retired at 57 is on the board still at age 70, we need to be mindful of the greater distance between the active experience of that board member and the world that the management team lives in,” said one board member, who himself is a retired executive.
• Conduct a skills matrix: “On my board, we consider skills and strategy,” said another director. “If we’re expanding in Asia, we look for skills in that dimension. If we’re losing someone to retirement who is really knowledgeable about acquisitions, then we look for that experience.”
• Evaluations are a useful tool in developing a board skills matrix. “We used to pigeonhole our directors into what we thought they were good at,” said one nominating and governance committee chair. “Now, we’ve begun asking directors as part of the annual board evaluation process what they believe they bring to the table in terms of value. We found we had skills we weren’t leveraging, and that was great. But we also found that we had holes to fill in terms of aligning our composition with strategy.”
• Board member evaluations may also help directors understand how well they do or do not fit, noted several participants. Conducting annual director evaluations provides the lead director with a sound framework for having difficult conversations about resignation, if necessary.

Consider new technologies for better board-shareholder communications
Boards are encouraged to explore new options for actively monitoring the company’s level and quality of shareholder communication. “Everyone talks about transparency, but when you look at the regulations coming out, I don’t see anything that actually creates more of it,” said Richard Daly, president of Broadridge, the company whose technology plays a significant role in the proxy voting process. “It’s up to directors and shareholders to create a proactive and meaningful information flow.” New tools soon to be available may help directors screen shareholder comments by size of holdings. Sentiment recognition technology may soon even help directors see trends in shareholder views regarding key issues, providing advance notice of potential shareholder proposals.

Make sure the boardroom perspective is present in the regulatory process at the SEC
The SEC’s Kim also indicated that the Commission would like to hear from directors about the implementation of rules under Dodd-Frank, including disclosure requirements and say on pay: “It’s nice to hear your views in a private meeting like this, but for the Commission to take your perspective into account in developing the rules, your comments must be part of the official notice and comment rule-making file.”

The NACD has established several channels where directors can provide feedback, in part to inform comment letters to the SEC on behalf of the director consituency. See www.NACDonline.org for the NACD’s latest comment letter to the SEC.

“Wall Street engineers must get ahead of what comes down the pike,” said Becky Quick, co-anchor of CNBC’s “Squawk Box,” who introduced Hu. Quick noted that SEC Chair Mary L. Schapiro tapped the University of Texas professor 13 months ago to head the first new division created by the Commission in 37 years because she had “identified someone that first started warning us about derivatives.”

Hu’s remarks focused on his “decoupling” concept as well as the importance of the Dodd-Frank Act, which he labeled the “most comprehensive change in generations… representing a new era for corporations and boards that introduces new challenges and opportunities. It is important to get the balance between corporate governance and financial innovation right.”

Less than two weeks after Hu addressed the NACD audience, his resignation was announced by SEC Chair Mary Schapiro. No replacement was immediately named and Hu told Bloomberg News the decision to depart was “completely my own. This seemed like a very natural point in terms of having accomplished the very basic goals” of setting up a new division, he said. Hu’s unit was created through the merger of separate SEC units that conducted economic analysis and identified emerging financial risks. He hired people who previously worked at hedge funds and on Wall Street, adding to an SEC staff primarily made up of securities lawyers. “I am deeply grateful to Henry for the great start that he has given the division, and for his valued judgment on a wide range of important substantive issues,” Schapiro said in the SEC’s statement. Hu told Bloomberg he looks forward “to going back to what I have loved for 20 years, which is research.”

Sugar Joins Apple Board
Apple Inc. has appointed Ronald D. Sugar, former chairman and CEO of Northrop Grumman Corp., as its board’s audit and finance committee chairman. The appointment expands the board to seven members, including Apple CEO Steve Jobs, Intuit Inc. Chairman Bill Campbell and former U.S. Vice President Al Gore.

Gender Differences Noted in Board Decision-Making
Greater board diversity may help improve the public’s trust in corporate boards after the financial crisis, perhaps in part because there are strong differences in opinion between how men and women directors view certain issues. A study conducted by Heidrick & Struggles, WomenCorporateDirectors and Dr. Boris Groysberg of Harvard Business School found that 65 percent of women and 35 percent of men believe increased boardroom diversity would be beneficial. However, only half of both groups believed that their board was adequately advancing diversity. Female directors were also more critical of their board’s performance and competitive compensation practices, but had greater faith that executive compensation and proxy access regulations would have positive effects.

Rise Seen in Third-Party Litigation Funding
Investors are looking to court battles as a new way to earn profits, by supporting medical malpractice claims, divorces and class action lawsuits and retaining a portion of the winnings, The New York Times reports. A review by the newspaper and the Center for Public Integrity found that while funds from banks, hedge funds or private investors make it possible for those with minimal financial resources to take their cases to court, investors can also become too involved in the court proceedings; interest paid to the investor could eventually total more than the winnings.

Director Comp Steady
Director compensation has remained relatively constant this year, according to a survey of board compensation practices of 600 mid-market public companies by the accounting firm BDO. The annual study found that directors had a median compensation increase of just two percent. Last year’s study predicted that compensation would normalize as the current economic situation and boards’ reactions to it shifted. The stability of director pay this year “can be attributed to the survival mode that a lot of companies are in, a lot of them are just holding the line,” said Randy Ramirez, Northeast practice leader for the Compensation and Benefits Practice at BDO. “They’re not trying to push the envelope.”

FedEx Giving 1.5 Percent of Profits
FedEx designates about 1.5 percent of its pretax profits for corporate giving, compared with the average 0.9 percent, a fact that CEO Frederick W. Smith said in a recent interview with The New York Times pays off for those they help as well as for shareholders. “It’s good business to be a good corporate citizen,” said Smith. “People absolutely make business decisions toward companies that have good corporate responsibility records.”

CalPERS to End ‘Focus List’
The California Public Employees’ Retirement System (CalPERS) has decided to change its method of pursuing companies that it feels are underperforming or have poor corporate governance practices. Previously, CalPERS released an annual “Focus List,” spotlighting companies that were unwilling to make improvements in corporate governance. Because a Wilshire Consulting study found that the firms CalPERS worked with privately to make changes outperformed the ones named on the publicly released Focus List, CalPERS has decided to dedicate more effort to private collaboration.

M&A on Track for Biggest Year Since 2007
The increase in mergers and acquisitions will continue in 2011, with global M&A deals expected to reach $3.04 trillion, according to a report from Thomson Reuters and Freeman Consulting Services, based on interviews with 150 executives. Although the numbers are unimpressive when compared to pre-recession figures, it would be the biggest year for M&A since 2007, when deals reached $4.28 trillion. Deals are expected to finish out this year at $2.23 trillion, an increase of 12.6 percent from the recent low achieved in 2009.

Moving On Up
The number of public company directors being promoted to CEO has significantly increased, a new study from Heidrick & Struggles finds. Between July 2009 and mid-October, 2010, 13 Fortune 1,000 companies named their own directors as permanent CEOs, and three were named interim CEOs. Four directors were named to the CEO position in the previous year.

To Thwart Poaching, Google Raises Salaries
Google bumped all 20,000 employees’ salaries up by 10 percent and promised a $1,000 holiday cash bonus, according to an internal email from CEO Eric Schmidt that was sent to Business Insider by an employee, who later was fired for the leak (and will not be receiving the salary increase or bonus). The move, which is expected to cost the internet giant around $1 billion a year, is described by analysts as an attempt to retain employees being wooed by Facebook and other competitors.

Director Quits Metha Energy Over Governance Issues
David P. Meachin resigned from the board of Metha Energy Solutions because of “disagreements with the company in relation to corporate governance matters,” according to the company’s 8-K filing to the SEC reporting his resignation, filed on November 9. Meachin’s resignation letter, dated October 11, specifies that he “lost confidence in Jesper Toft’s role as the CEO of the company based on his performance.”

CEOs More Confident
CEOs feel positive about the economic outlook for the next six months, according to a quarterly study on CEO confidence from the Young Presidents’ Organization. Only 12 percent of CEOs surveyed felt that economic conditions would worsen, while nearly half of executives were optimistic. CEOs also reported more frequently that their companies are planning on hiring; one in four had hiring plans this quarter, while only one in three did in the previous study. Sixty percent believed sales would increase over the next year.

Pressure to Donate
Sixty percent of business leaders surveyed feel pressure to contribute to political efforts, finds a poll conducted by Zogby International, commissioned by the Committee for Economic Development. Business leaders also reported concern about undisclosed donations to third-party political organizations, with 77 percent believing that companies should disclose all political spending. Half of the respondents familiar with the Supreme Court’s Citizens United decision in January to allow unlimited and undisclosed political spending disagreed with the ruling.

Fewer New Directors Are Also CEOs
Only 26 percent of new directors are active CEOs, compared with 53 percent 10 years ago, according to the latest edition of Spencer Stuart’s annual board study. The report finds that boards are more independent now, with a ratio of 3:1 outside to inside directors when the firm began its studies, to 5:1 today. Diversity has become more important to boards, with 44 percent seeking women and 47 percent reporting looking for minorities. In contrast, only 21 percent of new directors this year are female, and 12 percent are minorities.

McChrystal Joins JetBlue Board
JetBlue Airways has appointed retired General Stanley A. McChrystal to its board of directors. McChrystal is a 34-year U.S. Army veteran who most recently commanded the U.S. and NATO security mission in Afghanistan. McChrystal retired from the Army shortly after a Rolling Stone article earlier this year portrayed him in a light that “does not meet the standard that should be set by a commanding general,” said President Barack Obama at the time. JetBlue Corporate Secretary James Hnat cited McChrystal’s “depth of experience and the track record of leadership” as reasons for his appointment.

Total Realized Comp for CEOs Falls
Annual compensation rates for executives edged up 1.6 percent in 2009, while total realized compensation — which adjusts for changes in value realized on stock options and other vested equity income — slipped 0.3 percent, according to a recent report from The Corporate Library.

The results indicate a continued increase in base salaries and a modest increase in the number of bonuses that were handed out last year. Meanwhile, the category of all other compensation, in which companies typically disclose CEO perks, fell 18 percent from 2008, due in large part to fewer CEOs receiving tax reimbursements for certain perks.

Who’s Tops In CEO Pay
The Wall Street Journal released findings from consulting firm Hay Group on the top 10 most highly compensated CEOs in 2009:

• Liberty Media’s Gregory B. Maffei – $87,095,900
• Oracle’s Lawrence J. Ellison – $68,649,800
• Occidental Petroleum’s Ray R. Irani – $52,181,400
• Yahoo’s Carol Bartz – $44,613,900
• CBS’s Leslie Moonves – $38,932,700
• Viacom’s Philippe P. Dauman – $33,728,900
• Thermo Fisher Scientific’s Marc N. Casper – $33,048,200
• Boston Scientific’s J. Raymond Elliott – $32,102,500
• Polo Ralph Lauren’s Ralph Lauren – $27,024,300
• McKesson’s John H. Hammergren – $24,464,800

Female directors were also more critical of their board’s performance and competitive compensation practices, but had greater faith that executive compensation and proxy access regulations would have positive effects. The study also found that it takes more education and time for a woman to be placed on a board, with the average woman obtaining her seat after 2.4 years, as compared with the men’s average of 1.4 years.  More females, at 87 percent, had advanced degrees, with men coming in at 74 percent.

“Women directors, more than men, seem open to challenging the status quo,” said Susan Stautberg, co-founder and co-chair of WCD, the only global community of women corporate directors. “The issue of diversity, in particular, elicited a sharp division among the men and women we surveyed, especially around the topic of quotas in the boardroom and how regulatory changes will affect diverse representation on boards.”

“Our survey suggests that there are still a lot of challenges as well as opportunities to improve effectiveness, truly leverage diversity, and carefully think through regulations directed at boards,” said Dr. Groysberg.

The survey was conducted in the spring of 2010, and included 294 WCD members and 104 male directors.

Herewith, the first Board Confidence Index (BCI). This collaboration between NACD, Heidrick & Struggles and Pearl Meyer & Partners, is designed to measure boardroom confidence in the economy and in business, reflecting how public company board directors feel about the overall American business climate, as well as their own companies’ prospects now and in the future.

This first NACD Board Confidence Index, launched in Q3 2010, realized a middling 56.6, reflecting, we believe, both the natural inclination of boards towards a conservative outlook as well as the effect of the recession on most businesses.

According to the Board Confidence Index, while directors feel the state of the economy has improved over the past year, they are still uncertain about meaningful short-term improvements. The majority, 72 percent, responded affirmatively when asked if they believed general economic conditions have improved compared to a year ago.

When asked if economic conditions have improved compared to the second quarter, however, 43 percent said no, and 31 percent were uncertain.

The data indicates that many directors are cautious, perhaps even skittish, says David Swinford, president and CEO of Pearl Meyer & Partners, the executive compensation-consulting firm. “Frankly, there are two interpretations of this data: how we were a year ago versus how we were last quarter, and what do we see next quarter. It seems the economy recovered some a year ago but has gone flat, as the recovery has slowed significantly. It appears we’re worried that we are headed downhill.”

The results of the first Board Confidence Index also suggests that the recovery is going “to be slow and lumpy. It appears we have taken two steps forward and one step back,” says Heidrick & Struggles Managing Partner Theodore L. Dysart. “In my conversations, and, this is anecdotal rather than research-based, there is great concern about our political environment and where we’re going with broad economic policy.”

Directors’ assessment of conditions in their own industries was slightly less confident than their perceptions of the overall economy. When asked, only 60 percent of respondents indicated conditions had improved in their industry over the past year. Despite the current administration’s claims of the 2010 “Summer of Recovery,” directors’ perceptions of their industry tell a different story. Almost half of respondents indicated conditions had not improved since the last quarter, and 20 percent were uncertain.

Furthermore, nearly two-thirds of respondents were either uncertain or did not believe conditions in their primary industries would improve in the next quarter.

“What I’m drawn to is the uncertainty, and it’s an even distribution across all size companies. This indicates how bumpy this recovery is and how cautious people are being,” notes Dysart; he expects this anxiety will continue through the upcoming mid-term elections in November. “The partisan divide and the possibility of Congress changing over will continue that uncertainty,” he suggested.

The Board Confidence Index also offers a breakdown of respondents by industry size. Smallest companies (under $1B), while more confident about the state of their primary industries, are the least optimistic of the overall economic conditions.

Why a BCI?

The Board Confidence Index is an imperative because the influence of today’s public-company boards is an increasingly influential constituency: Directors’ input into corporate risk-management, regulatory oversight and strategic development reverberate throughout the larger economy.

“Board opinion matters because directors provide significant input into business strategy and approve management’s recommendations,” says Swinford. “Building for the future starts with the board. If they are confident in the future, they will invest, and to the extent that they are cautious or skittish will be reflected in their decision making.”

Executive recruiters such as Dysart rely on data from a variety of sources to keep current on trends that could affect hiring. What’s been missing, however, is a view of how public company board directors are feeling about the economy and their industry. “At the end of the day, even the CEO has to go to the board to deploy capital and make an investment,” Dysart says. “Over time, the Board Confidence Index should become a leading indicator of what’s to come in other economic indicators. The decisions on where and how companies deploy capital begin in the boardroom.”

For directors, the opportunity to be informed about the opinions and mindsets of their peers at companies of similar sizes and in the same or different industries will be beneficial for many reasons. Curtis Crawford, who serves or has served on numerous public company boards and runs a California-based leadership consulting company called XCEO, says directors have “a significant impact” on the economy.

“The reason I stressed ‘significant’ is because directors approve transactions that corporations make and they have a heavy influence on how those decisions are being shaped. So when a corporation decides to acquire or dispose of assets or to go global in their strategic thinking, that has a profound influence on the GDP and the economy.

“From my perspective as a director,” he continues, “it would be helpful to learn how directors see the economy. We have a different perspective because of a strong sense of commitment to shareholder value—that’s what our charter is—to make sure that we’re striving to achieve shareholder value. We have fiduciary accountability, along with the responsibility to collaborate with management to produce the desired outcome…the opportunity to have the collective view of boards would be helpful.”

The expectation is that over time, the Board Confidence Index could portend future trends, because directors are on the frontline, informing and approving the corporate strategies that ultimately contribute to the expansion or contraction of our economy.

Beyond Confidence

In addition to measuring directors’ attitudes toward the economy, product pricing and profitability, the survey also asked respondents whether they were in favor of Congress’ proposed financial-system overhaul. Some 60 percent said they were not in favor, with 32 percent favorable and 8 percent uncertain. Nearly half of small companies believe economic conditions have not improved over the last three months. The smallest companies also represented the largest group not in favor of financial-reform legislation.

Those who said they were not in favor of Dodd- Frank were asked to choose from a checklist about what concerned them most. “Say on pay,” the elimination of broker voting and proxy access topped the list of concerns. This is not surprising, since these are the issues that have been most frequently pushed to the top of regulatory and legislative agendas by reform-minded shareholders in the aftermath of the financial crisis. Swinford notes that each of these issues goes to the heart of how companies are run. “Directors worry about the relative freedom they have to run companies,” he observes. “If you couple more liberal proxy-access rules with the elimination of broker votes, you have more pressure on votes.”

Presumably, directors would answer this question differently in future surveys. At the time these questions were being asked in August, Dodd-Frank had passed, but the Securities and Exchange Commission had not yet approved the proxy-access rule, the first of of several rules related specifically to corporate governance. As it turns out, the rule passed by the Commission was more favorable for corporations than was largely expected: for example, shareholders who want to nominate directors must own at least three percent of the company’s stock for a minimum of three years. Even so, Swinford thinks proxy access will continue to top the list of directors’ concerns, at least through the next proxy season as the new rule plays itself out.

How the BCI Compares

Directors’ perceptions mirror consumer perceptions, but differ from the opinions of CEOs.

The Conference Board Measure of CEO Confidence, which decreased in the first quarter of 2010, was unchanged in the second quarter. The measure remains at 62. (Like the BCI, a reading of more than 50 points reflects more positive than negative responses.) “CEOs’ confidence held steady in the second quarter and expectations signal no change in the pace of economic growth in the coming months,” said Lynn Franco, director of The Conference Board’s Consumer Research Center. “The outlook for corporate profits remains optimistic, with almost half saying market demand growth will be the principal driving force.”

Among the buying public, the University of Michigan’s Consumer Sentiment Index and The Conference Board’s Consumer Confidence Index are the most widely followed measures of U.S. consumer confidence. The Michigan index began as an annual survey in the late 1940s; the Conference Board launched its consumer index in 1967. The two indexes broadly measure the same concept—public confidence in the economy— but are based on different sets of questions and sometimes give conflicting signals.

Case in point: the month of August, which at the time this article was being written, was the most recent data available. The Michigan Index fell from 68.9 in July to 66.6 in August. The lack of confidence was not due to worries about the current economic environment—the economic conditions index increased from 78.3 to 78.4—but from an increasingly cautious outlook regarding the future. Michigan’s economic outlook index fell from 62.9 to 59.1, its worst level since March 2009.

Meanwhile, The Conference Board’s Consumer Confidence Index in August showed a “moderate” improvement from 51.0 in July to 53.5 in August. The TCB survey is based on a representative sample of 5,000 U.S. households that were polled between August 1-24. Consumers’ assessment of current conditions was less favorable, as employment concerns continue to weigh heavily on consumers’ attitudes, said Franco: “Expectations about future business and labor market conditions have brightened somewhat, but overall, consumers remain apprehensive about the future. All in all, consumers are about as confident today as they were a year ago” when the index stood at 54.5.

What needs to happen for boards to feel confident enough to encourage their companies to spend some of the cash they have amassed, amid restructuring and increased productivity? “Clarity about the rules of the game and enough incentives to get businesses to hire,” said Crawford. “Our economy will only begin to expand again when we have put enough people to work in jobs with enough discretionary income that they begin to spend again.”

This report was prepared by NACD Research.

Devising the First BCI

The first step in creating the Board Confidence Index was to study what exists in the marketplace. Consumer and CEO confidence levels have been in existence for decades; more recent polls seek to measure the confidence or sentiments of such groups as credit managers, retirees, employment managers and investors to provide both a current snapshot and historical trends and, perhaps, indicate future behavior that could shape economic activity.

The two most widely known and cited confidence indices are conducted by The Conference Board, a nonprofit, non-partisan organization that has reported CEO confidence on a quarterly basis since 1976 and consumer confidence since 1968. Its widely reported results provide a useful gauge on the economic outlook of America’s top business executives and consumers. Each month, some 100 CEOs are asked their concerns for their business and their views on where the economy is headed. A reading above 50 indicates that the CEOs surveyed are more optimistic; below 50 indicates that they are pessimistic about the economic future. The survey asks and reveals their views on hiring, the reasons for layoffs, concerns about their particular industries and their short-term and long-term outlook on where the economy might be headed.

Since consumers account for two thirds of the domestic spending in the United States, their expectations play a critical role in the contraction and expansion of the U.S. economy. These two indexes informed the methodology of the BCI so that comparisons could be drawn between the sectors: CEOs, consumers (of which, of course, CEOS and directors are a subset) and directors.

Based on five key indicators, the Board Confidence Index will provide a snapshot of the state of the economy from the boardroom’s perspective. During the month of August, 1,000 directors were asked to answer several questions. Per question, there were three reply options: Yes, No and Uncertain.

Assigned to each option is a point value: 100, 0, and 50, respectively. The point values are averaged for each question. Based on the scale, scores can be interpreted as follows: scores above 50 are positive about the state of the economy, scores around 50 are uncertain, and those below 50 are negative. Of the 1,000 directors asked by email to answer the survey, 155 responded.

NACD Directorship, in collaboration with Heidrick & Struggles and Pearl Meyer & Partners, plans to update and publish this index every quarter to provide directors with their peers’ perceptions of current business conditions.

BCI Advisory Council

Robert L. Barnett, former executive VP, Motorola; director, Central VT Public Service Corp., EF Johnson Technologies, Johnson Controls, USG Corp.

Dennis Beresford, Ernst & Young Executive Professor of Accounting in the School of Accounting at the University of Georgia’s Terry College of Business; director, Fannie Mae, Kimberly-Clark and Legg Mason

Curtis Crawford, president and CEO, XCEO; director, duPont, E.I., ITT, ON Semiconductor, DePaul University

Jeffrey M. Cunningham, managing director, senior advisor, NACD

Kenneth Daly, president and CEO, NACD

Theodore L. Dysart, managing partner, Heidrick & Struggles

Robert S. Kaplan, Baker Foundation Professor of Leadership Development, Harvard Business School; director, Acorn System, Evergreen Energy

David Swinford, president and CEO, Pearl Meyer & Partners

Laura Unger, former SEC commissioner (1997- 2002); director, Ambac Financial, CA, Inc., CIT Group; advisor to Promontory Financial Group

Of course, the court of public opinion has been well established since the first crowd at the Roman Coliseum gave the thumbs-up or thumbs-down. Today’s version can be just as brutal—and far harder to grasp, with its instantaneous, pervasive and ideologically fierce jungle of news outlets, websites, blogs and social media. The result is not just a 24-hour news cycle but an uninterrupted torrent of competing information—accurate and inaccurate alike.

Although high-profile crises may jeopardize the existence of the company itself, many boards are caught off guard when such disasters  strike. The board in its oversight role should, of course, try to ensure that management is doing all it can to avert obvious catastrophes. That includes developing, regularly reviewing and updating contingency plans and having in place a crisis-management team consisting of lawyers, a public relations firm, auditors and other relevant specialists.

In today’s atmosphere of continuous news, an activist government and “got-cha” politics, the board should also be sure that once calamity hits, the company isn’t hastily tried and convicted in the court of public opinion. At a minimum, directors can insist on these simple guidelines:

■  Closely coordinate communications and crisis-management strategy with legal counsel. Leaving legal out of the loop is a recipe for further disaster. They should be deeply involved at the outset to assure consistency in defense efforts, maintain privilege, avoid inadvertent violations of rules on public disclosures on pending legal actions and to help protect the company’s overall interests.

■  Initiate an impartial audit. Direct management to undertake an impartial internal investigation into the causes of the disaster, both to get to the bottom of it and to create a comprehensive report that can be provided to outside investigators and to the public—without  serving as catnip to trial lawyers.

■  Appoint a neutral figure of impeccable credentials to lead the audit: When revelations about the widespread use of performance-enhancing drugs threatened the integrity of baseball, Commissioner Bud Selig appointed George Mitchell, the distinguished former U.S. senator and broker of peace in Northern Ireland, to lead an investigation.

■  Be transparent and be bold: Make sure the company provides accurate and open information about the disaster as it becomes available. And, be bold. Johnson & Johnson did not wait to pull Tylenol from the shelves: they were bold and tilted toward action.

■  Engage judges of the company’s credibility: Encourage management not to shy away from public dialogue with respected authorities—environmental scientists, for example, in the case of environmental damage, safety experts with industrial accidents, physicians or epidemiologists with healthcare issues, and so on.

■  Present the right face to the public: In an unfolding disaster, the company should have a trustworthy, knowledgeable and open  spokesperson conducting public briefings. After poor performances by other spokespeople following Hurricane Katrina, Lt. General Russel L. Honoré became the highly respected face of the recovery effort in New Orleans, welcomed by the public and the press alike for his directness.

Above all, remember that management of an ongoing crisis is not simply a question of managing perceptions and PR, but of providing a window into the company’s underlying commitment to integrity—the best defense in any court.

Theodore L. Dysart is a managing partner at Heidrick & Struggles. Jack Oliver is a senior policy advisor to Bryan Cave LLP and Barclays Capital.