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Boardroom Showdown

Investors are revolting against poor corporate governance, demanding tighter controls that will boost earnings and stock price.
Fortnightly Magazine - June 2004

a majority of the board is independent. The board members' first duty is to represent the interests of shareholders, not management, and they are required to be clear of any conflicts that would sway them from acting effectively in their watchdog role. Independent directors are not there as friends and personal advisors to the CEO and his team; they are there to ask tough questions, critique strategy and question corporate practices to make certain that the corporate ship is sailing in the right strategic direction.

In addition to re-establishing independence, a tough eye has been turned to information flow more broadly. Many reformers believe that if better controls had been in place and key information had flowed to the board, many of the scandals that rocked the industry would have been uncovered earlier. In addition, both investors and board members are demanding more timely and higher quality information on how companies are run and increased comfort that the inner workings of corporate America are free from infirmities. For example, new regulations have been put in place requiring that corporate financial controls be independently audited on an annual basis.

Many critics have contended that boards historically were dominated by individuals picked more for their prestigious reputations or relationships with the CEO than the skills they brought to the boardroom. They were not expected to spend time fully understanding the business or industry in which the company operated. Strategy and business operations were the purview of the management. Board members were relied upon to bring external perspective to an organization and at times their stature within industry could be used by management to help achieve certain corporate goals. Utilities, in particular, sourced board members from their service territories, looking to add local business leaders, educators and community leaders as directors, rather than individuals with skills in the core business such as regulatory, operational, or strategic expertise.

Under the old regime, time commitments to serve on boards were limited, which allowed an individual to be a director for numerous companies. Serving on multiple boards became another sign of a successful career. However, in this new world of good governance, the demands of board membership are increasingly more rigorous. To comply with the new regulations, board members are required to spend much more time preparing for and participating in board-related functions. To adequately play the role of corporate cop, board members are now expected to have independent views on the industry and the company's position within it. Board members need to have an in-depth view of a company's operations and financial condition so that they can ask the right questions in case things go amiss. They must be able to evaluate corporate strategy and reign in management that drifts too far afield. This desire to achieve independence has been further reinforced by requirements for executive sessions of independent directors, where management (including management who may also be on the board) is absent. These sessions are designed to allow independent board members to discuss a company's prospects, operations and senior executives without being influenced by the management