A need for greater business acumen: in the face of mounting shareholder activism, corporate boards need to examine how they are structured and populated. A new measure of board member "Capacity" could serve as the roadmap.

• Author: Drury, James J.
• Position: Governance

Shareholder activists often contend that governance is about the Sarbanes-Oxley Act, independence, diversity, say on pay or shareholder-nominated directors. But that is hardly the case. Corporate governance has been, and always will be, about highly responsible directors overseeing management's commitment to sound business strategy and dedicated performance in order to assure the long-term health of the enterprise.

A new study by JamesDrury Partners--The Weight of America's Boards - Ranking America's Largest Corporations by the Governance Capacity of Their Boards--proposes a different model to examine board governance through the weighting of boardroom business acumen. The 500 largest public corporations, as listed in the 2009 Fortune 500 index, formed the sample for the study.

One of the widely accepted truths of corporate governance is that there is a clear separation between the board's governance oversight responsibility and management's decision-making responsibility. Yet, that does not seem to satisfy many who hold boards accountable, in the end, for almost every company failure, misstep and transgression. It is almost always assumed that a board should have anticipated and prevented anything that goes wrong.

A board's role is complex and multifaceted. Boards oversee management performance, safeguard the long-term health of the business and represent the interests of shareholders. As a board's governance will always be under scrutiny, its "capacity to govern well" becomes a very important question.

A Prevailing Mistrust

Institutional investors and shareholder activists have carved out a vocal niche focusing not on the virtues of corporate boards, but rather on their shortcomings. There is a risk that this mistrust, without deeper understanding, will lead to everincreasing rules and regulations that impair a board's decision-making ability and effectiveness.

In recent years, two parallel trends have led to this proposaf of a model that attempts to measure a board's capacity to govern well. They are:

A marked decline in boardroom business acumen, as fewer of America's most accomplished business executives become board members; and

A growing inclination on the part of shareholder activists to blame boards for the difficulties that companies encounter.

In 1990, 70 percent of active Fortune 500 CEOs served on outside boards, filling 772 seats. In 2011, only 47 percent served on outside boards, and filled only 293 seats--a 62 percent decline. If CEOs are not serving, it might be assumed that their top executives--including chief financial officers--aren't serving, either. As a result, America's boards have experienced a significant brain drain of business executives from board service.

Shareholder activists would have us believe that...