Public Policy Enters the Boardroom
Change isn't coming; it has arrived. The country's economic implosion and the resulting activist rescue plans endorsed by both the former and newly inaugurated U.S. Presidents have created a game-changing scenario in corporate governance. It is imperative at this critical intersection of profit and politics that boards equip themselves with the expertise to navigate the impending era of Washington's heightened scrutiny. The trend toward government involvement in business is clear. The financial crisis has escalated to what President Barack Obama has termed "the greatest economic challenge of our lifetime." He has promised oversight and government intervention polices not only in the banking sector, but also in the auto and energy sectors.
Congress has also brought to the table a multitude of regulation reform proposals ranging from increased proxy access for shareholders to executive compensation regulations. And shareholders are confronting corporations and boards for changes in social policy issues. For example, at Microsoft (MSFT), shareholders proposed management policies to protect freedom of access to the Internet, and at Boeing (BA), shareholders have put forth health-care reform and human-rights related initiatives. And, with the current mood of public mistrust of business, there is no telling what the proxy season will bring.
Grappling with serious issues like these requires more than just financial literacy skills. Corporate boardrooms must include directors with a strong background in and understanding of government policy, as well as a deep knowledge of Washington and its key players. How else will boards be able to partner successfully with the new administration and Congress in devising mutually beneficial solutions to fundamental issues? How else will boards be able to understand the broader context in which they now must evaluate risk?
Many who carry the weight of responsibility understand the new environment. "Individuals who have had direct responsibility in areas important to the company and have a regulatory perspective are valuable," emphasizes Vic Fazio, a former Congressman who currently sits on the board of Northrop Grumman. Adding nontraditional directors to the mix adds a crucial dimension of innovation and diversity in approach.
In recent years, major corporations have been recognizing this need for a fresh viewpoint. Since 2000, there has been a 14% increase in the number of executives with public policy experience sitting on Fortune 1000 boards, according to an internal study of Korn/Ferry's proprietary database. For example, Kenneth M. Duberstein, the former Chief of Staff to President Ronald Reagan, currently sits on the boards of Boeing, ConocoPhillips (COP), Fannie Mae (FNM), and Mack-Cali Realty (CLI). And APX, a provider of software solutions for the energy industry, tapped Carol Browner, former Environmental Protection Agency head under President Clinton and Obama's reported choice for a new White House position overseeing energy, environmental, and climate policies, for its board.
Links between Public and Private Sectors
But, the stakes have been ratcheted up. While the amount of appropriate government involvement remains uncertain, we know that it won't be zero and that those responsible for setting corporate strategy will be operating under new assumptions. As a result, nominating committees may need to move more aggressively to round out the expertise around the board table.
The demand for a new type of corporate leadership has not escaped the notice of those who educate future leaders at our most prestigious business schools. Administrators at Yale School of Management and at Harvard Business School Center for Public Leadership have stated that if there is one thing to learn from today's challenging global economy, it is that it's impossible to ignore the inextricable linkage of the private and public sectors. Our future leaders will need to understand that even the smallest business decision will have broad implications, and boards will need the expertise to recruit, motivate, evaluate, and reward this new breed of executive.
There is no doubt that for today's boards, the job just got tougher. They will be expected to watch over an organization's various risks while helping corporate management develop strategies to cope with the myriad regulatory and policy issues that may affect their business.
Improved Risk Management
To improve the chance for success, Korn/Ferry International strongly encourages the inclusion of nontraditional candidates from the public policy arena in the director search process.
The first step is to assess a board's recruitment needs and include public policy among the critical factors that measure board effectiveness: board composition, the board's role, its prioritized agenda and board performance metrics. Once key issues are identified, boards can determine a definite set of criteria and skills to inform the board candidate search process and retain the director whose public policy experience best matches the company's long-term goals.
Boards who take this approach will find that their risk-management ability improves and that their understanding of this marriage between business and government enhances their ability to fulfill their fiduciary responsibilities to the owners and operators of the companies they serve.