When Jim Kristie asked me to write a piece on “The New Normal” in board practice, my first thought was that not much had changed in the past year. Boards continue to be accountable for making certain the company is well run, and board members are still responsible for holding management accountable for performance. In my experience, strong, independent directors, who combine intelligence and experience with character and judgment, are continuing to ask tough questions and engender open debate that challenge management. In particular, executive sessions continue to both enable and embolden independent directors to become more forceful in exercising their oversight accountability, as evidenced by the ouster of seemingly unassailable chief executives at some of the nation's largest companies. The fundamental duties of boards remain the same, namely strategic planning, management succession, and compliance. These governance responsibilities are enduring.
However, over the past year certain responsibilities have been ratcheted up, most notably risk management and a renewed emphasis on ethics. In some boards, the risk piece has been carved out of the audit committee and set up in a separate committee overseeing both financial and operational risks. At board meetings, risk management has become a prominent agenda item.
Although many overarching governance principles endure, the economic environment has undergone a sea change. The meltdown has challenged boards to take quick and decisive action to downsize their companies in the face of dramatic revenue declines, often in the range of 30-40%. Over the past year, boards have encouraged and often demanded a series of significant cutbacks to try to stay ahead of plummeting sales and profits.
The current environment has altered, sometimes drastically, the care and feeding of the board. On one of my boards, director pay was cut 15%, in line with reductions of top management. In another, a planned board trip to a European plant was scuttled, and our strategic planning retreat was combined with a regularly scheduled board session. In another board, the annual Christmas dinner with spouses was “suspended.” In each case, the board wanted to be seen sharing in the pain, which included layoffs, pay cuts, and benefit scalebacks.
The “new normal” for directors envelops many of the board's past practices. The board of directors should not attempt to manage a business. However, given the heightened challenges accompanying the current recession, boards in general and independent directors in particular have become increasingly more involved in overseeing business activities and practices. With directors now spending an average of 200 hours on their board duties, some CEOs are complaining that their boards have crossed the line separating corporate management from corporate oversight. Independent directors must be careful not to usurp management's responsibility to manage the company, and CEOs must recognize the board's authority to oversee management. Yet, the “new normal” requires directors to be more involved, and top management should learn to embrace this enhanced scrutiny.