Another Year, Another Wish List for Corporate Boards

Having developed a tradition at Compliance Week of writing a year-end column, I’m once again presenting my wish list for corporate boards of directors. The objective here is not to dream of improbable possibilities, but rather to help directors and others working with corporate boards consider where and how they can improve board performance in the coming year.

Recent events along with personal experience make it all too clear that boards need the help these days. So here are my top five wishes for directors in 2009.

No. 1: Boards Will Have the Right Composition

For some years now boards of public companies generally (though with notable exceptions) have been comprised of individuals with the skills, knowledge, experience, and judgment to provide sound advice, counsel, monitoring, and direction to management. The old boys’ network for the most part is gone, replaced with independent directors who can effectively oversee where the company is going and how it is run.

Experienced directors know how important it is that as they look around the table, they feel comfortable with the others they see sharing their responsibilities. Alas, some directors shouldn’t feel too comfortable. One issue is the growing trend of CEOs of other companies moving off corporate boards. This is entirely understandable, as the boards of the companies they run are demanding full attention at home—especially given the troubled economy, turbulent markets, and related changes in strategic direction. Another problem involves the appointment of “name” directors with outstanding reputations but whose skills simply don’t address a board’s needs. And we see boards with members who can do a good job, but for one reason or another fail to do the good job necessary to keep their companies on the right track.

We’ve seen numerous instances recently of boards failing at their job, watching great companies brought to their knees. Yes, the confluence of many factors played a part in their demise, but truly effective boards have enabled many other companies to avoid disaster and indeed prosper.

My wish is that directors—especially board chairs, chairs of governance and nominating committees, and lead directors—look closely at which of their fellow directors not only have the necessary attributes, but also bring needed perspective and insight, put in the required effort, and provide the critical judgments. They also need to take a hard look at which directors do not. When the right CEOs are not available, redirect that attention to leaders of major business units whose operating experience will serve the board well. And when directors are not up to the task they should be replaced, so the whole board can fully and effectively direct the company to achieve established corporate goals.

No. 2: Boards Will Understand Their Role in Risk Management

We’ve witnessed the fall of companies with great reputations and stellar brands. Again, there are many reasons for their failures. But a common thread provides an invaluable lesson: how boards deal with risk management.

The term “risk management” has been bandied about for years, frequently discussed in boardrooms across the country and the world. But experience shows that when risk management is addressed, individual directors and senior executives often have contradictory notions of what is entailed, and in fact talk at cross purposes. Quite frankly, many boards have little idea what management is doing to manage risks. They may talk about enterprise risk management when no such system exists; they may think there’s agreement on risk tolerances and risk appetite, when there isn’t. And too often when boards are presented with a “risk assessment” or list of top risks, they believe they’re appropriately apprised of what’s important, when they aren’t.

My wish is that boards truly understand what risk management and enterprise risk management each entail and how they differ and dig deeply enough to ensure that not only is the board properly informed, but also management has the right processes in place to identify, analyze, and manage critical risks, and to bring relevant information to the board for discussion.

No. 3: Boards Will Get CEO Compensation Right

We know that shareholders at many companies are furious about CEO compensation, as they watch stock prices plummet while chief executives walk away with tens or even hundreds of millions of dollars. They’re working to unseat board compensation committee members, pushing for “say on pay” shareholder advisory votes, and lobbying for legislative change. And restrictions around CEO pay contained in the government’s financial rescue plan, while limited in scope and reach, are driving broader-based limits on pay.

Some progress has been made, as compensation committees focus more closely on pay-based performance metrics, and gain more understanding of the potential scale of pay under various scenarios. And recognizing the political and business climate these days, senior managements of some companies have agreed to forego bonuses and otherwise reduced pay for this year.

Still, a stronger focus is needed. My wish is that boards and their compensation committees do better at relating pay to performance measures linked directly to effective strategy execution; at making pay risk adjusted, so it’s not a case of “heads I win, tails you lose”; at ensuring that severance provisions result in compensation fair to both the executive and company owners; at basing pay on long-term performance, with appropriate vesting, deferrals, and claw-back provisions; and at finding the right mix of pay components to align executives’ performance with shareholder interests.

No. 4: Boards Will Improve Their Own Performance

Board responsibilities have increased dramatically in recent years. In many cases, the average time commitment has doubled, without counting the skyrocketing time demands when a company is in crisis. Challenging economic times, difficult credit markets, increased compliance requirements, and expanded stakeholder expectations all have driven a need for more attention by corporate directors.

To deal with this reality, but still accept the constraint that board service is a part-time job, boards have maintained and expanded a committee structure. That idea has worked reasonably well, but too often it hasn’t worked well enough. Audit committees, for example, can be saddled with risk management, investigations, and other responsibilities added on top of an already overloaded plate. Board and committee meetings are scheduled so tightly and agendas are so full that time for meaningful discussion of critical issues often does not exist. Further, decisions made at the committee level that bind the full board may be made with little or no participation from other directors.

My wish is that responsibilities for the board as a whole, and for each committee, are allocated such that necessary and reasonable time is available to handle the many board challenges. Also, I wish that communication is sufficient so that decisions made at the committee level are supported by the full board, and directors must devote the time to execute their responsibilities and provide real value to the organization. That means directors are fairly compensated for their work, even in a difficult economic environment.

No. 5: Boards Will Get Strategy Right

Directors know all too well how much time they’ve had to spend on compliance matters—from financial filings to internal control to codes of conduct to whistleblower programs, and a host of other legal and regulatory requirements. They understand their fiduciary responsibilities, which are regularly refined based on Delaware or other state-based legal cases as well as federal regulations. For many it has been almost total emersion into monitoring management’s progress with compliance.

With processes and procedures at both the board and management levels in place, many boards now, in the context of economically challenging times, have refocused their attention back to the company’s strategic plan. While this shift in attention is positive, we see mixed performance by too many boards in doing the kinds of things needed to bring real value to the table.

My wish is that boards of directors bring balance to the boardroom. Yes, compliance continues to need attention, but we want to see renewed energy and focus on strategy: where the company should be going in this environment, and how it’s going to get there. This wish includes a company’s board ensuring its management team, business processes, and supporting resources are in place to make it all work, focusing on the implementation plan geared to achieving agreed-upon strategy. And it includes having the right performance metrics, directly linked with the strategy and with the compensation-based measures, so that clear alignment exists to drive toward the common goal.

Looking to the New Year

We live in extraordinary economic times, and actions taken by the incoming Obama Administration as well as corporations and the entire American workforce will play critical parts in determining our economic future. But boards of directors have a central role and will hopefully use their great talents to drive success.

On a personal note, I wish all Compliance Week readers a wonderful holiday season and a healthy and prosperous new year. With that, I plan to spend time with family and ready myself to get back to work in 2009.