Crisis in the Boardroom

A survey of responses to the financial crisis from business leaders and corporate governance experts

The job of corporate director will likely change permanently through
the severe economic downturn and its resulting effects on the financial
services sector. For a dose of perspective, we looked to corporate
governance experts from a variety of disciplines to shed light on the
crisis and tell us, in their own words, what boards need to do to steer
their companies through the difficulties.

ARTHUR LEVITT, senior advisor at The Carlyle Group and former chairman of the SEC

From a broader corporate governance perspective, companies that
provide for "say on pay" and shareholder access to the proxy now,
before these provisions are mandated, will differentiate themselves
within the investor community as the most thoughtful and accountable.
Regardless, all boards should concentrate on the following four areas:

• Increase focus on the relationship between how executives are
compensated and the amount and type of risks that the form of
compensation motivates the executive to take.

• Broaden the board's skill sets. As we face unparalleled
challenges, we must bring to the boardroom a much broader array of
skills, including risk management. Should boards include more global
regulatory expertise? An understanding of IFRS?

• Focus on the long-term. While this issue may be most obvious when
making compensation decisions, there are other strategic business
decisions that have been made in the recent past (e.g., use of credit
derivatives, off-balance sheet transactions) where it is clear that
short-term objectives prevailed.

• Increase and improve communications with shareholders. During a
time of market uncertainty, where investors' confidence has been
shaken, directors need to reach out even more.

HARVEY PITT, CEO of Kalorama Partners and former chairman of the SEC

The ongoing financial crisis underscores the critical need for
directors to develop and maintain an in-depth and pragmatic
understanding of the businesses they oversee. Directors must also
remain informed on how both extrinsic and internal events may affect
their business operations. In the wake of the conceded failure of our
current regulatory model and the need for a new regulatory paradigm,
directors should anticipate the imposition of even higher standards set
by regulators, prosecutors, legislators, institutional investors, the
media, and litigators.

Toward that end, directors should fashion—in coordination with
management—their agenda for each quarter's meetings. That agenda should
include issues management identifies as warranting board attention, as
well as issues about which the board should be hearing from management.
It's impossible to provide a laundry list of subjects, but among others
that should be the focus of board agendas in this environment are:
executive compensation (and especially the metrics for ascertaining
whether management is achieving stated objectives); risk management
(identifying the principal risks confronting each of the company's
various major business lines); transparency (to take account for a
renewed emphasis on full and fair disclosure that can be anticipated);
ethics and compliance; and the initiatives and interests of
institutional investors.

PEARL MEYER, co-founder and senior managing director of Steven Hall & Partners

There is a lot of tension in the system. Boards and their
compensation committees are caught in a complete quandary. They need to
retain, motivate, and attract management and professional talent while
recreating the shareholder value that's been lost. You've got to be
fair to shareholders, and yet business results and stock performance
are down. There are still only two methods of compensation: cash and
stocks. Granting of stock options and full value shares have been
awarded on a standard value per annum. If I paid you $100,000 at $5 a
share before the decline, you received 50,000 shares. If your stock is
now at $2 a share, do I give you 2.5 times the number of shares? If so,
that's a lot of stock and too much dilution

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