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Feature
Restoring Public Trust in American Capitalism: What Should Boards of Directors Do Now? Another realignment of boardroom power is coming. Step up to the challenge of increasing your effectiveness. By Barbara Hackman Franklin Editor’s Note: The National Association of Corporate Directors will be holding its annual conference in Washington, D.C., on Oct. 18-20. Barbara Hackman Franklin, a longtime board member of the NACD, assumed the chairmanship of the organization on March 31st of this year. The following is a condensed version of a major address on corporate governance that she delivered in July 2009 to the Chautauqua Institution. Let me begin by saying first and foremost that I believe in the American system of entrepreneurial capitalism. It is this system, coupled with our democracy and rule of law, which has made the U.S. economy the largest and most dynamic in the world and brought our country unprecedented prosperity. It is this system which makes the American dream a reality. But is our capitalist system perfect? No. No economic system is. At various times in our history, the U.S. capitalistic system has been attacked or questioned, and generally out of this questioning has emerged new ideas and fixes to remedy what went wrong. We Americans seem to believe that old adage, “Trouble is only opportunity in work clothes.” We are good at recognizing problems and then acting to solve them. This is one of our greatest strengths. We want to make our capitalistic system work better and more equitably. At this moment, much blame is being leveled at chief executive officers and boards of directors, as well as the way in which companies are governed — or not. From One Sea Change to the Next Good corporate governance is one of the legs on which American capitalism now stands, and its practices have been evolving over the years. This decade, beginning in 2000, has seen even greater change. A majority of U.S. households now own stock in U.S. companies; institutional investors own an estimated 75% of public company stock. So, many Americans have “skin in the game,” and company and stock performance is more avidly watched and reported about by the media. Sarbanes-Oxley ushered in new requirements for boards, some by law, some by regulation. And now, another sea change in corporate governance is ahead. This one is triggered by this severe economic downturn and the decline in public trust that has come with it. Once again, the U.S. government has stepped in, but this time, on a scale not seen since the Great Depression, to rescue our financial system, shore up our economy, and mitigate further loss of jobs. Although I believe boards are performing better, it is time for another step up in vigilance and performance. If we are to restore public trust in corporate governance and in American business, we as directors must be part of the solution. That need is urgent. The Response Plan Here is what I believe we, as directors, must do. I am talking to myself as well as to colleagues on other boards. First, renew efforts to understand fully the business or businesses of the company and know what the drivers of success are. Answer these questions: how does the company make money? Does the company make money by also doing good, in other words, providing products and/or services which are needed and useful? Does the company do no harm? If such questions cannot be answered, it is impossible for directors to do an adequate job of overseeing performance. In addition, we should rededicate ourselves to the qualities of character all of us, as directors, must have — integrity, good judgment, a commitment to excellence, and courage. And each director should know what he or she brings to the board table through expertise and experience. The nominating committees of boards today are giving more attention to all of these things and are working to bring onto the board individuals who have experience and insight to contribute to the company’s strategic direction. Second, reevaluate how board members work together. A board is usually a group of 6-12 people, so it must do its work as a group, by consensus. A key dimension of board effectiveness — often overlooked, I believe — is the group dynamic at work around the board table and the way the group interacts with the CEO. There are a variety of cases where, person for person, the directors sitting around the board table are excellent people. Yet somehow, apparently, the group process didn’t work well enough or quickly enough when action was needed. Boards should look at themselves and be honest about how things are working. Do board members respect and trust each other? Are they willing to challenge management? How do they deal with an overpowering CEO? Is board leadership — lead director or independent chairman — working well? These and many other questions should be examined and answered. Where different behavior is called for, the board should make that happen. Accept the NACD Challenge Third, accept the challenge to boards launched by the National Association of Corporate Directors (NACD) in March. NACD is providing tools for boards to use in evaluating their corporate governance structure and performance in order to increase their effectiveness. The basic tool is the “Key Agreed Principles to Strengthen Corporate Governance for U.S. Publicly Traded Companies.” This document is unique. It was a year and a half in preparation and represents the distillation and articulation of a variety of governance principles on which we believe there is agreement from business, directors, and shareholders. There are 10 principles, all quite logical: 1)
board responsibility for governance
2) corporate governance transparency 3) director competency and commitment 4) board accountability and objectivity 5) independent board leadership 6) integrity, ethics, and responsibility 7) attention to information, agenda, and strategy 8) protection against board entrenchment 9) shareholder input in director selection, and 10) shareholder communications. We ask each board to evaluate its practices against these 10 principles — and where it needs to strengthen its practices, do so — and then to repeat the evaluation process every year. The NACD is giving recognition to those boards that accept the challenge. Some of those are: Aetna, Home Depot, United Health, and Becton Dickinson. I want to emphasize that these principles are not prescriptive — they are not a “cookie cutter” one-size-fits all list of do’s and don’ts. We are challenging each board to evaluate and enhance its performance in whatever way it sees fit. Reach to Be the Best NACD further challenges boards to pay special attention to four key areas of their activity: executive compensation, risk oversight, strategy, and transparency. These four issues were chosen because they seem to be the ones that need focus most urgently. I urge boards to step up to the challenge. These are difficult times, and boards should reach to be the best they can be to serve the company and its shareholders — and thereby deter the need for further government intervention into the process of corporate governance, which is essentially a private sector activity. It is in the interest of everyone — taxpayers, workers, shareholders, managements, boards, and our government — that we succeed in proving that corporate governance can be effective and that our entrepreneurial system of capitalism really is the best. |
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Barbara Hackman Franklin is president and CEO of Barbara Franklin Enterprises. She has been a director of 14 public companies during her 26 years of service on corporate boards. She currently serves on the boards of Aetna Inc. and Dow Chemical Co. and is a trustee of several funds in the American Funds Family of mutual funds. She became chair of the National Association of Corporate Directors on March 31, 2009. She co-chaired the NACD Blue Ribbon Commission on Executive Compensation in 2003 and received the NACD’s Director of the Year Award in 2001. In addition to being an expert adviser on corporate governance matters, she is an adviser and advocate to American companies doing business in international markets, notably China. Ms. Franklin served during the George H.W. Bush administration as the 29th U.S. Secretary of Commerce. She is a director of the U.S. China Business Council, trustee and chairman emerita of the Economic Club of New York, a member of the PCAOB Advisory Council, and a regular commentator on the PBS “Nightly Business Report.” She can be contacted at bhfranklin@bhfranklin.com. Copyright © 2009 Directors & Boards, P.O. Box 41966 Philadelphia, PA 19101-1966. All rights reserved. Contact the webmaster. < Privacy Notice > |
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