Vertigo. That’s the feeling many readers may be getting these days as they watch the federal government seize control of commanding heights of the capital market.

You’re not alone. We’re also dizzy as we watch Main Street sentiment zoom from complacency to finger pointing in mere months. The trick everyone will have to master is to keep focus on rational, long-delayed corporate governance reform, rather than squandering this rare moment on a frenzy of regulatory beheadings of those deemed responsible for the mess.

Take the executive compensation limits written into the various economic stimulus laws and initiatives. They have drawn fire from such well-known corporate governance advocates as Lucian Bebchuk at Harvard Law School (who shot to prominence by criticizing “pay without performance”) and Judith Samuelson at the Aspen Institute, who has spent years trying to make U.S. executives and investors think longer term. They, and we, believe that while the limits may be politically understandable, they are simplistic and focused on arbitrary levels—rather than incentives that can drive real, long-term performance.

Make no mistake about it; a return to the status quo ante is not available. When once-banished words like “nationalization” are on the front pages, it’s clear that the crisis has forced ground to shift so violently that common assumptions are obsolete. One assumption that should be jettisoned: the idea that investor champions and management advocates should be at loggerheads. The time has come for levelheaded businesses and investors to find common cause.

For example, nine months ago, some observers (not us!) declared the drive for ‘say on pay’ out of gas. The Shareholder Forum, for instance, opened a “Reconsidering Say on Pay” project. Well, times have changed. Headlines of big Wall Street bonus payouts and perks amid the financial sector’s collapse sent public outrage into the stratosphere. Some canny entrepreneur reportedly is even selling a doll of John Thain squatting on a golden toilet, to commemorate the ex-Merrill Lynch CEO’s $1.2 million office makeover.

Today, say-on-pay votes are already enshrined in legislation covering the federal rescue of some 400 financial institutions; a majority of the Securities and Exchange Commission appears in favor of it for the market as a whole; and if regulators don’t beat the SEC to the punch, it is only a matter of months before Congress and a willing president make say-on-pay the law of the land for all listed corporations.

Staying with executive compensation: One law is already on the books saying that companies accepting government bailout money pay no more than one-third of compensation to top executives in the form of bonuses. Some mainstream lawmakers now are drawing up bills dictating forms of internal pay equity at financial institutions, and maybe all public companies.

Talk about vertigo! Internal pay equity is the bloodless phrase that addresses how much CEOs may earn as a multiple of other top managers’ compensation, or even shopfloor wages. In the hands of populist legislators, it means imposing hard—and relatively low—ceilings on CEO pay. Even the bluest of liberals would have balked at government management of private sector pay—until, famously, Thain’s commode. Now the door is open to caps, bans on certain forms of compensation, or strict tax changes that enforce internal pay equity.

The public policy offensive hardly stops there. Connecticut Senator Christopher Dodd, chairman of the Senate Banking Committee, was caught raising the prospect of U.S. nationalization of banks. When critics scoffed at the ability of bureaucrats to run financial institutions, the public reaction was: You mean those big-shot bankers did such a great job we should trust them again? And that public revulsion at Wall Street is bleeding out to the entire corporate management class.

There are, of course, less frantic changes going on as well. Some are relatively non-controversial, such as the SEC pledging to take the handcuffs off enforcement (so regulated enterprises can expect a lot more visits from inspectors). Others were in the works and are long-time reformist ideas. The SEC will likely reintroduce, and adopt, a proxy access proposal giving investors fresh powers to nominate board directors at troubled companies. And the agency will move swiftly to abolish broker voting' in director elections, exposing more board members to close votes—and possible ouster. (Indeed, the New York Stock Exchange has already renewed its efforts to do precisely that.)

Meanwhile, the White House has seized dizzying powers to manage and restructure America’s automobile industry. The Department of Justice plans more intense anti-trust scrutiny of mergers and acquisitions. Expect the Department of Labor to nurture legislation, regulations, and enforcement that favors trade union over management stances. The list goes on.

Where All This Comes From

The tide of federal intervention is not simply caused by the crisis and recession. It stems, in our view, from a fundamental grassroots sense of betrayal. Many citizens believe that the corporate sector trashed a bedrock American value that honest pay should be tied to honest work, and therefore all that unchecked CEO greed and financial chicanery caused this shameful nosedive. That angry judgment highlights just how deep is the predicament faced by business.

All those firewalls that Corporate America has spent decades building to keep government at bay—those are vaporizing. Corporate executives, directors, and the industry associations charged with representing corporate interests in Washington are all at real risk of being sidelined by public reaction.

Some would say it is too late for business to regroup in the midst of the crisis frenzy. But we think the business community can reclaim its voice through a few strategic moves. A word of warning, though: Unprecedented times call for unprecedented tactics. It’s time for Corporate America to make common cause with shareowner advocates. Those traditional sparring partners need to unite to drive reform toward a new dynamic center, rather than let the emotions of the moment take the wheel.

So what to do? First, find your company’s tolerance for public policy intervention. Identify what rules and regulations and state takeovers you really could live with if they came about, and which ones would be business killers.

Next, find some friends—fast. Boards and managements should reach out to shareowners, investor and consumer groups, unions, and community organizations that have credibility and traction in Washington. Don’t talk at them; enter a two-way dialogue. You will need to hear and address any concerns they have about your business. Only then can you put your case for why the worst government intervention would not be in the best interests of stakeholders. Find common grounds for compromise—and enlist help.

Then find paths around any obstructionist corporate leaders or lobbies. Whether justified or not, the two major general business lobbies in Washington—the Chamber of Commerce and the Business Roundtable —have lost power. The Chamber in particular has maintained unbending opposition to corporate governance reforms that could have strengthened investor and board oversight, even when it became clear that only negotiation would stave off legislation. Nobody negotiated, and legislation has arrived. For its part, the Business Roundtable, as the entity representing CEOs has little public sympathy. Neither has much clout with the White House right now on this subject.

No doubt those two groups will eventually come out of the doghouse, but for now, companies should adopt a two-prong approach. On narrow issues affecting your industry or your business specifically, you might consider going around those industry lobbies and using your new stakeholder allies to reach receptive parties in the administration and Congress. For the big economic picture, it may be time to join with other companies and press the Chamber and BRT to reconsider the way they approach corporate governance reform.

This is no moment to let vertigo overwhelm our native talent for pioneering ways out of trouble. Albert Einstein once said insanity was doing the same thing over and over again and expecting different results. Let’s not let the dizziness of the moment become a permanent insanity for U.S. business.

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