Corporate Directors Must Become More Proactive - Conference Board

New report calls upon board members to redefine their roles with management, strengthen independence

New report calls upon board members to redefine their roles with management, strengthen independence

New York — June 23, 2005 — Corporate directors must redefine their roles with management, strengthen their independence and improve practices and processes in their companies' key audit, compensation and governance committees, according to a new report from The Conference Board.

The report, "Corporate Governance Handbook 2005: Developments in Best Practices, Compliance and Legal Standards," focuses on best practices covering legal, regulatory and stock exchange requirements and precedents established by the influential Delaware courts.

The Conference Board called the study its most comprehensive report ever on what companies need to know — and do — to improve their corporate governance and compliance practices.

New "Management" Skills for Boards

"Recent settlements at WorldCom and Enron, which required directors to dip into their own pockets to satisfy irate investors, have made directors increasingly anxious to define their proper corporate role," said Carolyn Kay Brancato, research director with the Global Corporate Governance Research Center. "This new report gives directors what they need to know about crucial developments on the legislative and regulatory front, and shows how to determine what are 'best' corporate governance practices and how to implement them."

The study also examines basic legal requirements, as well as "management" skills that boards can and should adopt.

"To ensure maximum board effectiveness, boards need to shift their entire emphasis," said Brancato. "They can no longer be just advisors who wait for management to come to them. Their new role requires that they provide active oversight of the company's business to minimize corporate risk and promote creation of shareholder value."

Spotting "Red Flags"

The report includes insights and recommendations from prominent directors and chief executives from a variety of companies. Since it was founded in 2003, The Conference Board's Directors' Institute has trained more than 400 directors on their expanding responsibilities.

The report answers an array of questions being asked by directors, including how to spot and deal with accounting issue "red flags" that may indicate fraud, how to make compensation consultants accountable to the board, why the board needs to oversee a robust compliance program, what governance processes should be implemented to help restore public confidence in companies and capital markets, and why strong governance programs can reduce corporate risk.

"We have brought together what we hope will become the most useful reference document out there for corporate governance executives and practitioners," said co-author Christian A. Plath, associate director of the Corporate Governance Research Center and former head of International Governance Research at the Investor Responsibility Research Center (IRRC).

New Emphasis on Strategy and Risk

The new report organizes information according to key topics: overall fiduciary responsibilities, the role of the board versus the role of management, the requirements for each committee and how boards go about assessing their own effectiveness. An expanded section deals with the issue of strategy and risk and shows boards how to examine their drivers of performance and evaluate their risks in such a way that everyone throughout the company understands the process.

"Since the passage of Sarbanes-Oxley, new Federal sentencing guidelines and new stock exchange requirements ask boards to consider risk in a totally new light," said Brancato.

The Conference Board said its Corporate Governance Research Center will follow up materials in this report with a working group on enterprise risk management and corporate governance and a research project on the role of the board in strategy and risk.

Better Managing Corporate Risk

The report spells out evolving director fiduciary requirements involving "care," "loyalty" and more recently the "duty of good faith" to determine what best practices are. It argues that directors must increasingly stay on top of new and evolving trends in corporate governance in order to satisfy their duties and protect themselves from legal liability.

The report emphasizes that by instituting governance best practices, companies can improve their internal effectiveness and better manage corporate risk. The key to accomplishing this, says the report, is to make certain that the company's board is managed as well as the company itself is managed. Each board should operate differently according to the company's stage of development, ownership structure and size, and the mix of skills, and personalities of the individual directors. The "one size doesn't fit all" rule clearly applies, according to the Conference Board.

The 138-page report, "Corporate Governance Handbook 2005: Developments in Best Practices, Compliance and Legal Standards," currently is available as a PDF download for $495 ($125.00 for Conference Board associates) at Hard copies of this report will not be available until June 30.

Additional Articles of Interest

— When ex-Chrysler chief Thomas T. Stallkamp considers cures for what ails American manufacturing, he chooses not to look inside the four walls of the corporation but to the extended enterprise and the relationships that bind a company to its supply chain partners. Read about Stallkamp's take on the collaboration imperative in "No Company Is an Island," the Executive Memo column in the April/May 2005 issue of Supply & Demand Chain Executive.

— P-cards continue to advance, and e-payables solutions are making headway, but the convergence of the financial and physical supply chains is still a work in progress. Read more in "Enabling the Financial Supply and Demand Chain," in the April/May 2005 issue of Supply & Demand Chain Executive.

— Is your company getting the most from its supply management function? For a step-by-step look at how to phase in a successful "end-to-end" supply management strategy, read the article "Roadmap to a Comprehensive Supply Management Strategy," an In Depth article on