Boardrooms aren’t isolated entities anymore. Directors are influenced by public opinion, from issues of financial performance and risk management to executive compensation, regulation and compliance. Missteps are amplified by negative coverage in the media and blogs, not to mention electronic social networking that travels faster than wildfire.
While directors should not be slaves to public opinion, they must realize that they operate in a rarified zone of intense public scrutiny, in an arena little-known to the average citizen. In recent years, even board members who take their responsibilities seriously can find themselves in the crosshairs. Their prestigious backgrounds and years of business experience aren’t enough to shield them from the public’s wrath when the company gets into trouble.
The current crisis gives us the opportunity to learn some valuable governance lessons, some tried and true, some tough to face:
- Increased regulation will be a fact of life for the foreseeable future. Board members will be operating in a climate of intense scrutiny, some of it burdensome and a possible constraint on growth.
- Policies and procedures will assume more impo tance. Some board sign-offs that were pro forma will now involve more examination and discussion in committee and by the whole board. This will add considerable time to the governance process.
- Board members who ask probing questions should be valued. Directors who aren’t satisfied with perfunctory answers and who aren’t afraid to challenge management strengthen their boards. The downside: Unless there’s a happy medium, arrogant directors lead to dissension and a board made up of cliques.
- Board education looms as important now. Some boards have requirements for refresher courses for their directors. Proactive boards have been doing this for awhile. Training never hurts.
- Competencies wax and wane, usually after a raft of scandals. Today’s boards seek qualified candidates with expertise and familiarity in risk management, internal controls and varied aspects of financial reporting and executive compensation.
- Board evaluation processes can be beefed up. Refine the procedures that enable all outside board members to assess colleagues privately. All must understand that vigorous assessment is a condition of service—this goes for the board and management. There’s no room for underperforming directors marking time and collecting their retainers.
- Encourage management to simplify public documents. A place to start: The SEC has mandated more transparency and clear language in proxies to disclose how boards derive executive pay, but explanations remain murky and convoluted.
- Correct board pay practices. If the public perceives that directors are taking risks at their companies (purchasing a required amount of shares on the open market annually with their own money, for example), people might be less inclined to view them unfavorably. There’s nothing like a sense of shared mission and skin in the game.
- Be visible. Boards already interact with key investors. The full board should be out there, attending the annual meeting, for one thing. Each committee chair should make a presentation at the meeting. Directors should make site visits without management, during which they put unfiltered questions to employees, suppliers and other key constituents.
Even the most diligent board with excellent procedures in place can be blindsided by a secretive management that doesn’t want its directors to know the truth. There will always be tension between disclosure and necessary confidentiality, between a board’s fiduciary duty to the company and to society at large. Companies rightfully worry about issues of competitive advantage and intellectual property. These matters won’t be resolved by the latest round of reforms.
Yet in the midst of all this, the importance of perception can’t be underestimated. The public’s attitude about negative developments at a corporation can result in a major hit to its reputation and billions in lost market capitalization. It can take years for a company to recover–some never do.
Directors are in a unique position. They’re not as visible as CEOs, but they are the embodiment of how well a company is governed, over and above its day-to-day operations. What will go a long way to restore public confidence in business is the perception that those who govern corporate America are doing their best and taking their responsibilities seriously, willing to take action quickly when warranted, and intensely focused on business decisions that will have an impact on shareholders, employees, or society.
Robert L. Dilenschneider is president of The Dilenschneider Group, Inc., a New York-based strategic communications firm. Barbara Ettorre is a principal at The Dilenschneider Group in charge of the firm’s board and governance practice.
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