The New Accountability in Governance

It's time for boards of directors and CEOs to seriously examine their governance practicesbefore an angry crowd of citizens calls for their heads

Jan. 21 marks the 216th anniversary of France's King Louis XVI being guillotined for, in effect, being a lousy chief executive officer. If Louis' modern-day, private-sector counterparts don't quickly change their "let them eat cake" ways, many will share the same fate—figuratively, if not literally. Do I hear the echo of Howard Beal's cry from Network, "I'm mad as hell, and I'm not going to take it anymore?" Or the sound of scaffold-building on Chambers Street?

Roiling markets, diminished returns, foreclosed neighborhoods, TARP bailouts, greedy grafters, careers lost, and leaders tottering in the dangerous dance of debts, defaults, and delistings, have all put Wall Street and Main Street on edge. Tone-deaf CEOs flew their private jets to plead for bailouts while millions of retirement savings died, along with fabled firms, after Sept. 15.

Greed has taken trust hostage. Shareholders and consumers have lost money and a legacy of believing their leaders protected them. Or cared at all.

How to Restore Trust

Our firm just completed a series of compelling conversations with some two dozen leading CEOs and board members from a range of Fortune 150 companies to see if we can define a path back to confidence and credibility. With the lessons of conducting board audits for leading British companies since 2002 and more than three decades of shared experience working with U.S. CEOs and boards, we've shaped some principles, or new norms, for the "new" 2009 board of directors.

The leaders we talked to agreed that things have gotten out of hand and that business as usual is over. Shareholders, lawmakers, and regulators will demand accountability and reform, and boards of directors will be first in line for the next wave of reform and renewal.

Indeed, the swooning decline in confidence has been earned. And it sits squarely with CEOs and the boards that guide them, or are supposed to guide them. Board leaders will have to question how effective they really are in being stewards of trust and CEOs will have to become much more active in bringing new voices to the governance conversations.

Tough Talk for CEOs

This will demand tough, grown-up work, for boards will have to act with courage and clarity to reform old practices and toss out some cherished beliefs. For example, among the board members we spoke to, CEO evaluation existed in name only. Not one of the boards conducted a rigorous evaluation. Even those who seemed to speak with pride about their process were appallingly deficient. All deemed it sufficient to seek data only from the CEO's management team.

Who in their right mind would give really critical feedback to a board member about their boss? Whatever happened to gathering scientifically valid data from a random sample of employees at all levels—anonymously compiled, of course?

Boards Will Have to Work Harder

Both board members and senior managers complain that they are short of time, attention, and energy. They complain about the time reforms like Sarbanes-Oxley require. Many members report they spend all their time on reporting rather than thinking about the core business, talent depth, and the profound changes and fault lines in the larger economy. The average number of board meetings has inched up from 7 a year in 1998 to 8.7 in 2008.

CEOs and board members admitted to us that instead of harnessing and leveraging the intellectual power and experience of their board, directors often morph into compliance officers and accountants.

And as firms flounder, board members quit. It's harder than ever to recruit smart and seasoned players who are willing to live in the glass house of governance. Boards rely less on former CEOs, and now have to spend more time and money seducing candidates.

In the New Economy, leaders and board members will have to spend more time, not less, to insure that they are a high-functioning group, and not a bunch of pals and partners, and dare we say, there may even be a trend toward splitting the roles of CEO and Board Chair, as has been mandated by Britain's 2002 Combined Code. The latest research by a leading search firm confirms that "S&P boards [are slowly moving] toward separate chair and CEO roles." Sixty-one percent still have a combined role, but that is down from 84% in 1998.

Expect More Regulation

In addition to external, unbiased CEO evaluations, we also expect the emergence of external board reviews to provide systematic, in-depth report cards on board functioning and compliance.

Shareholders are getting tougher, becoming better informed and more persistent in their demands for results. It would be a surprise if President Obama's choice for Securities & Exchange Commission Chairman, Mary Schapiro, won't ratchet up regulation and the SEC's oversight of markets and board reform. The Madoff scandal and the sudden demise of legendary firms should trigger tougher rules and more persistent involvement by the government into what have been polite provinces of privilege.

It will take courage and leadership for companies to take stock of how their boards really work, and to accept that the medicine of reform is better than the illness. We'd bet the smart ones will take on the challenge of building better boards and framing new expectations for how they perform in the public interest before they are forced by others to do it.

This is a call to action for our best leaders to step up to another level of engagement, accountability, and transparency. There may still be time, but I'm quite certain I hear hammering in the background.

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