Upheaval in the Boardroom: A Blessing in Disguise- How to make the most of the new rules of governance.

, November 27, 2002

Recruiting board directors ain’t what it used to be. Thanks to Sarbanes-Oxley — the corporate governance legislation — and new rules put in place by the Securities and Exchange Commission, the New York Stock Exchange, Nasdaq, and other exchanges around the world, the whole task has gotten a lot harder.

By James M. Citrin Business 2.0

Among other things, the Sarbanes-Oxley law requires that the audit committee of any publicly traded company be made up of independent directors and that at least one of these directors be a financial expert. The legislation goes further to direct that the audit committee hire the company’s accountants and stand responsible if they fail. The SEC and NYSE rules now state that the full board must have a majority of independent directors.

The risks of serving on a board are now riskier, and given current compensation practices, the rewards are less rewarding. That has led to much hand-wringing over compliance. Not surprisingly, compliance experts — not to mention boards seeking new members — have concluded that the market for directors is out of whack. I believe, however, that in the challenges lies an opportunity. The key is to line up the right people with the right qualifications, personal characteristics, and motivations to take on directorships in the current environment.

The most productive way to think about the evolution of governance is to recognize that what used to seem like a club, where executives joined boards for the affiliation and prestige, is rapidly becoming a profession, filled with hard work and commitment. And now that it is a profession to serve as a director, it demands people who have the right skills, enough available time, and suitable personal characteristics.

While most major public-company boards traditionally sought sitting CEOs to become their directors, this group isn’t necessarily the appropriate pool from which to draw future candidates. A sitting CEO should join another corporate board only when there is a strong business rationale for doing so. For example, a consumer-products company CEO may want to gain financial services expertise, or a health-care CEO may find it in his or her company’s interest to have greater depth in the technology industry. Board candidate pools should expand to include recently retired CEOs, recently retired audit-firm partners and major-company chief financial officers, and up-and-coming executives such as chief operating officers and chief financial officers who can benefit from the professional development opportunities of serving on an external board.

With the candidate pools squarely aligned with the new requirements of the market, boards can now turn to the equally important task of thinking about what qualities make someone the right person. The following makes a good starting point:

# Reads broadly on general business and governance issues.

# Makes independent judgments after listening to all viewpoints.

# Prepares for meetings, reading material and alerting the CEO to conflicts prior to the meeting.

# Asks good questions at meetings.

# Has an ego that’s in check; fulfills power needs outside the boardroom.

# Has more or different experience than the CEO.

# Has held a leadership position in a similar-size or larger organization.

# Has experience serving on other boards.

# Can present a contrary point of view without creating conflict.

# Is able to articulate a point of view without digressing or rambling.

# Is committed to attending meetings regularly — stays for the entire meeting.

# Maintains independence; provides no paid consulting to the organization and has no other perceived conflicts of interest.

# Provides candid feedback and reasoned counsel to the CEO and the board chair.

# Is willing to provide contacts from his or her personal network to benefit the organization or assist the CEO.

# Maintains confidentiality.

# Respects the chain of command, requesting information from the board chair, CEO, or designated board liaison, not directly from other members of the management team.

By keeping these qualities in mind and by "fishing in the right ponds" for candidates, boards can use the current upheaval to strengthen themselves for the future.