Boards Face Higher Standards Of Corporate Governance

The aftershocks from the corporate scandals of the past two years continue to rumble throughout the nation's boardrooms.

Last July, President Bush signed into law the Sarbanes-Oxley Act, which established more stringent levels of corporate governance for public companies. A few days later, the New York Stock Exchange issued new rules affecting the composition and practices of the boards of directors that oversee its listed companies. And earlier this month, the Conference Board's Blue Ribbon Commission on Public Trust and Private Enterprise unveiled a set of recommendations to improve corporate governance.

"In the past six months, there had been a seismic shift in what it means to serve as a corporate director," says Jon J. Masters, leader of WJM Associates' corporate governance practice and chairman of Masters Governance Consulting LLC. "The new proposals place greater emphasis on issues like director independence, accountability and performance. Boards will not only have to measure up to the new standards, but also document their progress."

One step many organizations will have to take is to conduct an annual performance evaluation. "Evaluations provide an important opportunity for board development to facilitate the board's working together as a dynamic group, at the same time fostering collegiality," says Alan A. Rudnick, who served as counsel to the Conference Board's Blue Ribbon Commission on Public Trust and Private Enterprise.

A performance evaluation is best conducted by an independent third party. It usually consists of three phases:

• An evaluation of the full board, which includes its understanding of the company's strategic and operating plans; involvement in major business policies and decisions; oversight of financial resources; and other key measures;
• An evaluation of board committees, including their structure, leadership, effectiveness, and decision-making; and
• An evaluation of each individual director, focusing on such factors as independence, integrity, knowledge, experience, participation, preparation, and teamwork.

"Regulators and investors will be looking for these evaluations," says Masters. "Prudent boards will begin to explore them sooner rather than later."