Regardless of your personal viewpoint, proxy access is being hailed as a game changer that significantly enhances shareholder rights and, in particular, is widely believed to give institutional investors unprecedented power in board director elections. Until now, shareholders who wanted to elect their own directors have had to bear the expense of the election costs. The new rules give shareholders access to the company’s proxy statement, putting them on the same level as company-nominated directors. The majority of the director community is still uncertain about the true impact of the new rules, according to the results of a survey conducted by NACD Directorship as part of the first Board Confidence Index (see story page 38).

Said one public company director, “Everyone should take note of the fact that there is going to be more scrutiny of the representation on boards. There is a broad misconception that boards are not representing shareholders well when in fact, I believe, that is not the case. Be that as it may, boards should probably be looking at this issue offensively. Boards that are well governed should rest comfortably, but self assessment is always important and this now provides an extra incentive.”

Editor’s Note: Since this article was published, the SEC stayed the effectiveness of its proxy access rules due to a legal challenge by the U.S. Chamber of Commerce and the Business Roundtable.

The changes in the winds for the boardroom are twofold: the prospect that directors will have to either campaign for election in a popularity contest that could pit boards against management, or fight dissident nominees to maintain their seats. Most of the tens of thousands of public-company directors now serving on America’s public-company boards (estimates vary, but our research suggests the number could be as high as 75,000) have been nominated to boards by an independent nominating and governance committee. Based on disclosures to the SEC mandated since 2003, sources for these nominees vary. In rough order of prevalence, they include recommendations to the nominating committee from non-management directors, senior managers, executive recruiting firms, and shareholders submitting names to the nominating committee. (Half of the 701 respondents to the 2010 Public Company Governance Survey said their boards use an executive recruiting firm for directors). Some governance experts see proxy access as a deal breaker for many director candidates who may not want to face the prospect of having to fight for a board seat and risk harm to their reputations by failing to succeed in a director election.

The concern that proxy access will politicize the director election process—by driving shareholders dissatisfied with company performance to propose their own director candidates—has been fueled in part by the U.S. Chamber of Commerce and the Business Roundtable. Both organizations have criticized proxy access for the potential handicaps it places on the more than 10,000 publicly traded companies whose 2011 proxies have already been made accessible to some shareholders. The rule is seen as federalizing what was originally left up to the discretion of individual company boards.

William Gruver, who serves on the board of TheStreet.com, says he is of mixed mind on the rule. “In an ideal world, having a popular wide-open process where anyone can nominate as many candidates as they’d like is the democratic ideal,” he says, “but we’re not ancient Athens. We live in a much more complex world and what gets lost in that ideal is some of the subtleties that might influence a vote and can be understood by directors who are responsible for nominations and might not be as well understood by the shareholder base.”

Gruver knows something about running for office. After retiring from a 20-year career at Goldman Sachs, he moved full time to his home in the tiny resort town of Eagles Mere, Penn., where he became a three-term mayor. He ultimately decided not to seek re-election because of the rigors of the political campaign process. When asked if he would agree to run on a dissident slate at a company, he said it would depend on the circumstances—a sentiment expressed by other directors.

Tom Wajnert, lead director of RJR, has been opposed in a director election in which he prevailed, and would be willing to run again. He advises boardroom brethren “not to get worked up about” the rule changes. When shareholders nominate directors, it’s important for them to make their perspective and point of view known to the company and its sitting directors. “I don’t see this as personal campaigning. The people who are nominated are usually very qualified and if they’re not, the proxy advisors won’t recommend them,” Wajnert says.

Given his prodigious board experience, Edward A. Kangas, who is non-executive chairman of Tenet Healthcare and serves on boards including United Technologies and Intuit, is among the highly regarded statesmen of corporate governance. He says he is okay with making the director election process “more democratic.” He believes that if a board is doing a good job and CEO compensation is truly aligned with the interests of shareholders there is little to worry about, even with the new rule. On the other hand, if a company is doing a poor job and is being unresponsive to shareholders, and proxy advisors such as Institutional Shareholder Services (ISS) start to recommend withhold votes, there will be some shareholders who will say, “We’re not happy with that” and they’ll want to make a change. “I’m okay with that, too,” Kangas says, “and think sometimes it will improve governance.”

What is not okay, Kangas says, is the director nominee who is not independent because of his or her allegiance to a specific cause or issue. “I believe that directors represent all shareholders. If I were on a board and there was a director or two who were basically representing the interests of one investment fund and were simply worried about that one shareholder, that would be outrageous. Independent directors need to represent all shareholders, not a distinct subset.”

The SEC may have closed the door on easy access by approving a three-percent three-year holding requirement. Robert A.G. Monks, the shareholder activist who co-founded ISS and The Corporate Library, an independent research firm of which he is a principal and member of its board, thinks these caveats establish a high enough threshold to be “dissuasive.”

To that point, some funds are not allowed to hold as much as one percent of any equity in their portfolio, so shareholders would have to get together to amass shares to qualify for access. “It’s not going to be easy, but it’s not going to be completely impossible either. To nominate a director will require a high degree of collaboration and coordination,” says Francis Byrd, senior vice president and risk practice leader in corporate governance at the Laurel Hill Advisory Group.

These kinds of collaborations have been happening long before proxy access. In fact, they have been occurring since the proxy reforms of 1992. Veterans in the field will remember the proxy reforms advocated by United Shareholders Association (USA) founded by T. Boone Pickens and Ralph Whitworth (who reportedly worked for $1 a year to advance the cause of shareholders). When those reforms resulted in easier communications among shareholders, the USA actually closed its doors, announcing that its mission had been accomplished.

More recently, Whitworth’s firm, Relational Investors, teamed up with the California State Teachers’ Retirement System (CalSTRS) to try to resolve a number of governance concerns both shareholders had with Occidental Petroleum. After a year of discussions with various company officials and no results, the investors threatened to nominate as many as four new directors in a classic proxy fight for control that ultimately, forced the retirement of Ray R. Irani as CEO. Shareholders may not use the new proxy-access mechanism for such initiatives, but the point is clear: the most effective way to prevent shareholders from nominating their own slates is to understand and address their concerns before they file for access. Certainly this has been the case when shareholders filed proxy resolutions about governance matters other than access. During the 2010 proxy season, after successfully engaging companies to make corporate governance changes, CalSTRS withdrew 21 of the 28 shareholder proposals it had filed on various governance matters.

“It’s important that the board not over- or under-react…it’s also important for the board to understand what investors are looking for. Take a step back: Investors are interested in maximizing their returns; it would be foolish of them to suggest something that would not be in the best interest of the company,” said one major public company director.  “The framework is now in place for more scrutiny on the selection of board members, but the levers can be adjusted if that becomes necessary,” said this director.

Shareowners have a 30-day window—no later than 120 days prior to the proxy filing, no greater than 150 days—to notify the company and the SEC of director nominees. The company, however, has until 14 days after the close of this window to respond to the nominating shareowner or groups. This allows the board to collectively evaluate the candidates and make a decision regarding the slate to be presented. A public company has the ability to exclude a shareowner nominee if:

• The nominating or shareholder group has not met compliance requirements.
• The nominating shareowner or group or nominee does not meet the eligibility requirements.
• Including the nominee(s) would result in the company exceeding the maximum number of nominees.

If a board chooses to exclude a nominee, it must notify the nominators within 14 days following the window for nomination submissions.  In return, the nominating shareowner or group has 14 days upon receipt of the board’s notification to respond. This is the nominator’s opportunity to fix any defects in the nomination.

Investor groups (including labor unions and pension funds) have largely applauded the new proxy-access measure, which has been described as a “silver bullet” for shareholders. The California Public Employees’ Retirement System (CalPERS), the country’s largest public-pension fund with assets of more than $206 billion, achieved its top governance goal with the new rule and plans to use it with a careful aim.

In advance of passage of proxy access, CalPERS and CalSTRS began building a database of independent directors. The Diverse Director Database, nicknamed “3D,” is a pool of qualified candidates who can be nominated for seats on poorly performing corporate boards in which they hold shares. Anne Sheehan, head of corporate goveranance at CalSTRS, explained to one corporate governance writer the reasons the pension fund wants to expand the director pool. [NACD has  a similar database, Directors Registry.]

“We are working on establishing a database of independent director candidates and we are doing that for a few important reasons,” Sheehan said. “One reason is that there is now demonstrated economic value from having a diverse board of directors and we believe that makes the composition of boAards a shareholder value issue. Another reason is the necessity to expand the pool of qualified candidates.”
Almost 3,000 of the sitting directors on companies in the Russell 3000 are over age 70, she noted, while many companies have retirement policies that typically go into effect at age 72. This means that many boards will be retiring directors in the next two years, leaving seats open for nomination and election. “Couple that with the adoption of majority voting standards by companies and this looks like a significant long-term shareholder value concern,” Sheehan said. “Add to that the last three decades of market collapses, beginning with the 1987 crash, and we as long-term investors have to take the director pool seriously.”

As to qualifications, the SEC’s recent disclosure rules are “going to be very valuable for shareholders, because we should learn why the sitting directors are on the boards,” Sheehan notes. “Naturally, the qualifications are going to have to match the company’s needs. We will put quality people in the database, many of whom will not have prior public-company board service, and we will do some screening to be sure that the qualifications that people put forth are true, but the final decision will still be made by shareholders when they vote. The nominating committees on these boards are going to be critical to this effort as well. In the final analysis, we are dealing with a human problem and there are no guarantees. There aren’t any in the current environment and the existence of the CalSTRS/CalPERS database is not going to produce any magical guarantees either.”

Passing the Legal Test

Some investors are hugely concerned that proxy access will be stymied by litigation while momentum around the access issue wanes. Dissenters in the 3-2 vote along party lines were Republican Commissioners Kathleen L. Casey and Troy A. Paredes. “I believe the law is so fundamentally flawed that it will have a great difficulty surviving judicial scrutiny,” said Casey, after the SEC announced adoption of the rule.

David Hirschmann, president and CEO of the Chambers’ Center for Capital Markets Competitiveness Group, has said it “will carefully review the rule that was approved…and will continue to fight this flawed approach using every method available.” Opponents of the rule had 60 days from its date of passage on August 25 to file a legal challenge. (Outside counsel for the Chamber, which has successfully challenged other SEC rules, is Eugene Scalia, son of Supreme Court Justice Antonin Scalia.)

Monks said he is concerned legal challenges could slow down implementation but others, including Patrick McGurn, special counsel to ISS, think the SEC did a thorough job “putting its ducks in a row,” noting that the SEC’s initial draft was 250 pages but the final version at 451 pages addressed issues such as the costs and benefits of the rule and its potential impact on competition and capital formation that would likely be the basis for a court challenge.

The bottom line on proxy access? ISS McGurn warns, “If you’re dead wood in the boardroom, you’re in trouble.”

Where to begin? There are hundreds of them—and we at NACD spend much of our time dispelling them. Our main tool for setting the record straight is our set of Key Agreed Principles, reflecting a consensus of managers, shareholders and directors.

So, what are some of the myths, why do they matter, and how can directors overcome them through action?

Governance Myth Number 1: The fundamental purpose of the board is to represent the desires of shareholders.

This “agency theory” is close, but no cigar. The truth is that the board is there to build the long-term value and sustainability of the corporation on behalf of shareholders and all stakeholders. Believing the agency theory myth causes problems because it cuts other constituents (for example, rank-and-file employees) out of the picture.

Action step for directors: When requesting reports from management, ask for long-term financial projections and constituency impact statements (with proper disclaimers, of course).

Governance Myth Number 2: The main job of the board is to monitor management.

There goes that agency theory again. This isn’t even close, and frankly, it’s insulting (makes it sound like all CEOs and CFOs are crooks). The main job of the board is to select and develop a CEO, who will in turn select and develop a management team that will in turn select talent that can create and market worthwhile products and services. Believing the monitoring myth creates headaches because it puts everybody on the defensive and impairs productivity.

Action step for directors: Work with senior management and the head of human resources to develop and implement a CEO succession plan that empowers managers to be the best they can be.

Governance Myth Number 3: The main purpose of a board or committee meeting is to hear, discuss and vote on proposals from management.

This is fine for Civics 101, but the real world delivers more board value. If your company is using directors in this way, it is wasting a powerful resource. When a company has a fully engaged board, not all ideas come from management; sometimes they come from the board. There are times when instead of giving a long proposal to the board, management is better off making a very short proposal and then asking a question: What do you think? The board meeting then becomes a living proposal. (Indeed, this was exactly how we came up with our Key Agreed Principles mentioned above!)  The idea that directors are there only as a sounding board deprives a company of board brainpower.

Action step for directors: Insist that the meeting agendas have short timeframes for presentations and long timeframes for discussion.

Governance Myth Number 4: When considering management proposals, directors only know what senior management tells them.

The fancy name for this is “information asymmetry.”  It’s a problem but hardly a universal law. Directors receive information from many sources—including from the results of their own research, and reports from the consultants they are empowered to hire. Under Sarbanes-Oxley Act Section 301, “Each audit committee shall have the authority to engage independent counsel and other advisers as it determines necessary to carry out its duties,” and “each issuer shall provide for appropriate funding  … to any advisers employed by the audit committee under paragraph (5).”

Also, remember that audit committees receive direct reports from the internal audit function, which may or may not be part of senior management, and hotlines bring the information connection down to the shop floor. Most governance guidelines specifically permit board members to make and receive direct contact with any employee, as long as they inform the CEO of any non-routine contact. Believing otherwise impedes communication.

Action step for directors: Learn as much as you can about the companies you serve, from as many sources as you can. Rob Galford’s recent post on this subject is a good place to start.

Governance Myth Number 5. When it comes to governance, process is everything.

This is a half-myth, because it’s almost true, but it still misses the mark. To be sure, it is much more important for the board to make a decision the right way than to make the right decision. This is the basic idea behind the judicial concept called the Business Judgment Rule, and it was the great lesson of the 2005 Disney case decided by the Delaware Chancery Court as well. But the problem with believing in this half-myth is that if directors believe process is everything, they may start focusing too much on the mechanics of decision making and avoid making any decisions based on their own experience and intuition, which can sometimes transcend procedures:

Action step for directors: Go through all the proper steps—but don’t get so hung up in process that you miss a chance to make a good decision.

Today, this notion of shareholder primacy is under attack from two directions.

The Legislative Attack
First is the legislative attack. The present economic crisis has precipitated a federal governmental response that may be harmful to this philosophy and ultimately  results in a scarcity of capital necessary to the success of our system. Regulators have been weakening the alignment of executive pay to stock price performance—a critical component in shareholder primacy. The economic stimulus bill signed into law by President Obama last year included a curb on performance-based pay for the most highly paid executives in firms receiving funds from the Troubled Assets Relief Program (TARP). Such pay cannot be more than one-third of the executive’s total compensation. To be sure, there are exemptions, including one for long-term restricted stock. Still, the law erodes shareholder primacy by weakening the link between executive pay and stock price performance. In doing so, a primary tenet of modern compensation philosophy has been upended—to relate executive pay to corporate performance to effectively align management and shareholder interests to result in ultimate corporate profitability and greater shareholder return. Limiting compensation in this manner suggests that the corporate goal is no longer greater shareholder value and return to the investor, but the preservation of the corporate status quo, ultimately harmful to investor interests.

The Academic Attack
Second is the intellectual attack. There has been some prominent academic support for the notion that corporate directors serve multiple stakeholders to an equivalent degree, rather than shareholders first and foremost. This school of thought says that directors serve the corporation, not its owners, and as such, directors serve multiple constituencies, including employees, customers and communities.

The legislators and scholars who are challenging shareholder primacy offer some intrinsically appealing ideas. One might be tempted to cheer for the legislators’ TARP restrictions, for who would not want to put an end to outrageously excessive compensation during a time of economic depression? And one might be easily drawn to give a sympathetic ear to scholars’ arguments for the stakeholder model of governance. After all, who does not want to honor those who toil for companies or who buy company goods? Who would cavalierly overlook the interests of one’s own hometown?

Why Preserve Primacy?
These attacks may be well armed with attractive arguments, but they are all the more dangerous.  In my view as a director and as a shareholder, it is urgently important to preserve the notion of shareholder primacy for five reasons.

1. Shareholder primacy is key to our entire capital system. Simply put, companies have three sources of capital: earnings, debt and equity. Weakening equity as a source of capital will force com-panies to rely increasingly on earnings or debt. Reliance on earnings has its limits, particularly for long-term investment, as earnings can be volatile and have a natural size limit. As for debt, it has its place, but the effects of overleverage can be disastrous. Equity is the answer for many corporations at various points in their life cycles.

2. Unless shareholders are protected, they will not invest and the economy will stagnate, contract, and ultimately grind to a halt. If we didn’t put shareholders’ interests first, investors simply would not invest and we would lose the capital vital to U.S. economic success.

3. The stakeholder system has numerous problems. As a famous corporate commentator used to say, “Even a broken watch gets the time right twice a day.” If boards of directors are responsible to multiple constituencies, directors will make decisions that will always benefit someone, but at the expense of the health of the corporation.

Furthermore, while the other stakeholders can protect themselves contractually, shareholders cannot—that is why we have a board that is elected by the shareholders. Shareholders are indeed the last “residual claimants” and in this lies their primacy from both a legal and economic perspective. Finally, obligations to multiple constituencies lessens managerial accountability, as even a bad   decision may please someone— leading to inadequate management and corporate disaster.

4.  The argument and conflict between the shareholder primacy and stakeholder theories is more apparent than real. To maximize shareholder value, all of the stakeholders need to be content with corporate direction.

5. We have met the enemy and it is us. The investment class in this country is broad. In today’s world, most taxpayers are investors and every investor is a taxpayer. Most stakeholders are in fact shareholders. The largest owners of many companies are the employees, through their      retirement plans.

Significance of Equity Pay
Perhaps the greatest proof of the importance of shareholder primacy comes from the realm of director compensation. Numerous studies have shown a correlation between good corporate performance and the receipt of director pay in stock. This was true two decades ago when I wrote about it in the Boston College Law Review, and it remains true today, as Sanjai Bhagat of the University of Colorado has confirmed with his extensive current studies—notably his December 2008 Columbia Law Review article (with co-authors) on “The Promise and Peril of Corporate Governance Indices.” Professor Bhagat and team ran every commonly measured governance variable and found only one that correlated to financial performance—and that was paying directors in stock. They wrote: “In sum, of all the measures of governance quality evaluated…only the outside directors’ stock ownership measure was related to multiple measures of performance, firms’ future accounting profitability and disciplinary management turnover upon poor performance.”

The image of battle may seem extreme, but much is at stake.  Looking back to eras before our own, we see investor protection as a motivating force in much of modern economic history, dating back at least as far as the era of joint stock-trading companies 400 years ago. Without exaggeration, one could say that the new world of America itself was founded on the principles that make equity capital possible. Do we want to cast this vital legacy aside for     political expediency or correctness, however well meaning?

Independent, equity-holding boards, accountable first and foremost to investors in free elections, are the ultimate solution to the compensation controversy and the key to effective investor protection. As independent directors elected by shareholders and serving their collective interests, we are both the proof and the prize of shareholder primacy. We must  defend and serve this concept vigorously for the good of free enterprise and the future vibrancy of the American economy.

Charles M. Elson is the Edgar S. Woolard Jr. chair in corporate governance and director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. He is a director of HealthSouth Corp.

Today, this notion of shareholder primacy is under attack from two directions.

The Legislative Attack
First is the legislative attack. The present economic crisis has precipitated a federal governmental response that may be harmful to this philosophy and ultimately  results in a scarcity of capital necessary to the success of our system. Regulators have been weakening the alignment of executive pay to stock price performance—a critical component in shareholder primacy. The economic stimulus bill signed into law by President Obama last year included a curb on performance-based pay for the most highly paid executives in firms receiving funds from the Troubled Assets Relief Program (TARP). Such pay cannot be more than one-third of the executive’s total compensation. To be sure, there are exemptions, including one for long-term restricted stock. Still, the law erodes shareholder primacy by weakening the link between executive pay and stock price performance. In doing so, a primary tenet of modern compensation philosophy has been upended—to relate executive pay to corporate performance to effectively align management and shareholder interests to result in ultimate corporate profitability and greater shareholder return. Limiting compensation in this manner suggests that the corporate goal is no longer greater shareholder value and return to the investor, but the preservation of the corporate status quo, ultimately harmful to investor interests.

The Academic Attack
Second is the intellectual attack. There has been some prominent academic support for the notion that corporate directors serve multiple stakeholders to an equivalent degree, rather than shareholders first and foremost. This school of thought says that directors serve the corporation, not its owners, and as such, directors serve multiple constituencies, including employees, customers and communities.

The legislators and scholars who are challenging shareholder primacy offer some intrinsically appealing ideas. One might be tempted to cheer for the legislators’ TARP restrictions, for who would not want to put an end to outrageously excessive compensation during a time of economic depression? And one might be easily drawn to give a sympathetic ear to scholars’ arguments for the stakeholder model of governance. After all, who does not want to honor those who toil for companies or who buy company goods? Who would cavalierly overlook the interests of one’s own hometown?

Why Preserve Primacy?
These attacks may be well armed with attractive arguments, but they are all the more dangerous.  In my view as a director and as a shareholder, it is urgently important to preserve the notion of shareholder primacy for five reasons.

1. Shareholder primacy is key to our entire capital system. Simply put, companies have three sources of capital: earnings, debt and equity. Weakening equity as a source of capital will force companies to rely increasingly on earnings or debt. Reliance on earnings has its limits, particularly for long-term investment, as earnings can be volatile and have a natural size limit. As for debt, it has its place, but the effects of overleverage can be disastrous. Equity is the answer for many corporations at various points in their life cycles.

2. Unless shareholders are protected, they will not invest and the economy will stagnate, contract, and ultimately grind to a halt. If we didn’t put shareholders’ interests first, investors simply would not invest and we would lose the capital vital to U.S. economic success.

3. The stakeholder system has numerous problems. As a famous corporate commentator used to say, “Even a broken watch gets the time right twice a day.” If boards of directors are responsible to multiple constituencies, directors will make decisions that will always benefit someone, but at the expense of the health of the corporation.
Furthermore, while the other stakeholders can protect themselves contractually, shareholders cannot—that is why we have a board that is elected by the shareholders. Shareholders are indeed the last “residual claimants” and in this lies their primacy from both a legal and economic perspective. Finally, obligations to multiple constituencies lessens managerial accountability, as even a bad decision may please someone— leading to inadequate management and corporate disaster.

4.  The argument and conflict between the shareholder primacy and stakeholder theories is more apparent than real. To maximize shareholder value, all of the stakeholders need to be content with corporate direction.

5. We have met the enemy and it is us. The investment class in this country is broad. In today’s world, most taxpayers are investors and every investor is a taxpayer. Most stakeholders are in fact shareholders. The largest owners of many companies are the employees, through their retirement plans.

Significance of Equity Pay
Perhaps the greatest proof of the importance of shareholder primacy comes from the realm of director compensation. Numerous studies have shown a correlation between good corporate performance and the receipt of director pay in stock. This was true two decades ago when I wrote about it in the Boston College Law Review, and it remains true today, as Sanjai Bhagat of the University of Colorado has confirmed with his extensive current studies—notably his December 2008 Columbia Law Review article (with co-authors) on “The Promise and Peril of Corporate Governance Indices.” Professor Bhagat and team ran every commonly measured governance variable and found only one that correlated to financial performance—and that was paying directors in stock. They wrote: “In sum, of all the measures of governance quality evaluated…only the outside directors’ stock ownership measure was related to multiple measures of performance, firms’ future accounting profitability and disciplinary management turnover upon poor performance.”

The image of battle may seem extreme, but much is at stake.  Looking back to eras before our own, we see investor protection as a motivating force in much of modern economic history, dating back at least as far as the era of joint stock-trading companies 400 years ago. Without exaggeration, one could say that the new world of America itself was founded on the principles that make equity capital possible. Do we want to cast this vital legacy aside for political expediency or correctness, however well meaning?

Independent, equity-holding boards, accountable first and foremost to investors in free elections, are the ultimate solution to the compensation controversy and the key to effective investor protection. As independent directors elected by shareholders and serving their collective interests, we are both the proof and the prize of shareholder primacy. We must  defend and serve this concept vigorously for the good of free enterprise and the future vibrancy of the American economy.

Charles M. Elson is the Edgar S. Woolard Jr. chair in corporate governance and director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. He is a director of HealthSouth Corp.

There are already a variety of regulatory reform proposals on the table and a broad spectrum of policy actions ready to be implemented by different nations in an effort to address the widespread feeling of discontent flowing from the recent financial crisis. There is an alternative path, however, that may prove to be a more productive and powerful force of change—one that is driven by the corporate sector itself. Progressive companies are taking the opportunity to “lead by example,” promoting the key tenets and principles that will help restore investor confidence. In effect, their day-to-day interactions with all stakeholders demonstrate how to live the right values and ethics.

The starting point for this journey is the board of directors. Collectively, the board has the responsibility for the future direction of the enterprise, its impact on stakeholders and society at large. The board     directly influences the critical management actions to drive short-term financial results, incent long-term value creation and develop strategies and plans that will ensure sustainable growth.

After the recent holiday break, a dozen Fortune 500 directors were asked for their thoughts on the biggest changes they see on the horizon and the implications for the boardroom. Common themes included greater globalization pressures, additional regulatory intervention and the potential rise of national protectionism. Many thought the current flashpoint issue of executive compensation must be addressed quickly to begin restoring investor confidence and credibility on Main Street.

The directors shared the view that a possible long-term, slow growth economic environment, combined with the aforementioned external forces, would challenge boards to become more transparent with key stakeholders on the major decisions that affect the enterprise. They see stake- holders continually “raising the bar” on board performance and taking a more proactive role in influencing the board through enhanced proxy access and more targeted advisory votes.

The fundamental issue to be addressed is how best to rapidly propagate the hallmarks of highly effective boards across the broadest group of companies while promoting the right governance principles and values. When one looks back on the prior decade, from Enron at the beginning, to Bear Sterns and Lehman Brothers at the end, it is easy to conclude that the core    enablers of boardroom change are already taking shape—a large pool of engaged, qualified directors; more shareholder-friendly director election processes; and a viral 24/7 communication cycle that ruthlessly disseminates information on any type of misstep or egregious behavior.

What is still needed is a common forum that brings together the best ideas, innovative practices and new approaches in a non-threatening environment that encourages collaboration and action across boardrooms.

One idea currently building momentum involves creating a closely linked global network of corporate chairmen and lead directors to serve as the primary conduit to more rapidly exchange current best practices, practical insights and actionable ideas. Its mission would help accelerate the development of highly effective boards and promote more progressive shareholder relations and corporate responsibility agendas. As one of the survey respondents concluded, “If I could wave a magic wand today, I would create a self-policing entity that would watch over the large public-company boards and help ensure no one went off the tracks, not the Securities and Exchange Commission, not Institutional Shareholder Services, but a group of practicing chairman and other board members who are fighting the good fight every day, with the goal of looking back in ten years to see a continuous improvement in corporate values, ethics, incentive systems, sustainable business growth and the impact on the global community.”

Keith Meyer is a vice chairman of Heidrick & Struggles and global managing partner of the firm’s Board Consulting Services Practice. Contact him at kmeyer@heidrick.com.