Boards of directors: expectations elevated.

• Author: Heffes, Ellen M.
• Position: Cover Story

On well-run boards of directors, it's business as usual--except in a super-sized way--as new rules and heightened external expectations comingle. Outside directors talk about the gravity of this new environment, their roles, due diligence and stakeholder expectations.

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Imagine the tension in the boardroom of Hewlett-Packard Co. during the seven weeks between firing CEO Carly Fiorina and hiring Mark Hurd on March 29. The board had gone through the process of parting company with the embattled Fiorina, following a tumultuous five and a half years of stock-price declines, company infighting, loss of key executives, shareholder battles and a questionable acquisition and strategy, etc.

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At any time, firing and hiring a new chief for an $80 billion public company is likely to be a pressure-packed situation for all involved. "It was very intense," says Robert L. Ryan. The just-retired senior vice president and CFO of Medtronic Inc. (he retired in April 2005) had joined HP's board in 2004 and chairs its audit committee.

In the high-stakes business climate of 2005--as the case of HP illustrates--eyes are clearly focused on the actions of the board of directors, and expectations are higher than ever.

In this case, the CEO ouster was due to strategic differences between Fiorina and the board. HP's board level of involvement in the CEO selection, says Ryan, was higher than any other he's experienced in his 25 years of board service. Early on in the process, he says, there was agreement among the members that each would "do what it took" to get this done. They laid out the criteria, engaged a search firm, planned interviews and screened candidates. Each also traveled cross-country, as necessary, to personally meet with the final candidates and ultimately bring in NCR Corp.'s former CEO Hurd.

Corporate governance across the landscape of Corporate America has been notched up, and while it may be that the vast majority of boards have been well-run, now even these good boards are taking heed.

"Boards are taking their responsibilities more seriously than ever," says Ryan, who believes this new environment "is causing directors to ask a lot more pointed questions, and be a lot less tolerant. It's also causing directors to hold CEOs much more accountable." Besides HP, he also serves on the board of UnitedHealth Group, where he was the prior audit-committee chair. In total, over the past 25 years, he's served on six boards.

"Boards are certainly more robust and meetings are more robust than they were five or 10 years ago," echoes Barbara T. Alexander, an independent consultant who serves on four public company boards. A security analyst-turned investment banker and up to recently a senior advisor to UBS Securities, she was the first woman to be elected a managing director of Dillon Reed in 1992.

Alexander is on the boards of Centex Corp. (chairs the audit committee), Harrah's Entertainment Inc. (chairs the audit committee), Burlington Resources (on the audit committee) and Freddie Mac (on its finance committee and mission and sourcing committee). A board member since 1999, Alexander says she's always been associated with good boards, where "sharp questions were asked of management--in the sense of [being] very thoughtful and provocative."

Prior to the scandals, she notes that few boards had executive sessions without management at every board meeting. "That's a real difference," she says, explaining that the transition was slightly awkward at first, since management was accustomed to being in the room. "But, that's now two-plus, year-old history, and boards are very comfortable having those conversations amongst the non-executives and then having other conversations with the executives."

Also, Alexander says the boards are "asking for a lot [more] of management--whether information about competitors, academic market studies about product demand or those sorts of things."

Gone are the days when serving on a board of directors was a matter of skimming through a pile of papers you received just prior to flying in for the quarterly meeting, showing up, dining, chatting with colleagues and "rubber-stamping" management proposals. In the new environment, directors cannot afford to avoid involvement with companies on whose boards they serve. It's now a matter of accountability--which, for some, has recently had a personal-liability price tag attached, and one that can add up to a steep percentage of one's lifetime savings if things go awry under your watch.

Charles H. Noski says, "Good boards have always been challenging and questioning positions and judgments of the management team--not in a hostile or confrontational fashion, but just being sure they understand what's going on." Noski is retired vice chairman of the board of AT & T Corp. and the recently retired CFO of Northrop Grumman Corp. He serves on the boards of Northrop Grumman and Microsoft Corp., where he chairs the audit committee and serves on the finance committee.

Being on boards of what he describes as "well-managed" companies, Noski hasn't noticed much difference in board actions. However, he says he is seeing more focus on process and the breadth of what audit committees are looking at now. "A lot more attention is given to risk management and mitigation, with risk being defined quite broadly." Also, he describes a heightened level of engagement, along with questioning and debating with management, making for "an increase in boards challenging management in a constructive way."

He says directors "have got to be quite diligent, do their homework, read all materials and think about what's going on in their business." Also, he says there probably is more comparison of performance of the business to competitors, suggesting directors try to be more externally focused on how the business is doing relative to its competitors and peers.

Certainly, Noski says, "everyone understands that with the very high-profile problems (at Enron and WorldCom and others), that there is a higher level of expectation by the public, by investors and regulators as to the diligence and engagement of directors. I think everybody is re-doubling their efforts."

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John M. Thompson, chairman of the board of Toronto Dominion Bank Financial Group (TD Bank), says both the regulations and the environment are causing all directors to spend far more time on all board issues--some imposed and some self-imposed. Headquartered in Toronto, TD Bank is listed on the New York Stock Exchange (NYSE), so it comes under U.S. as well as Canadian rules. Where rules differ, Canadian rules take precedence for Canadian corporations, he says, but he believes that regulators are "doing their best to harmonize things, because in a free-trade environment, it makes sense to have common rules on both sides of the border."

Thompson, who first served on a board in the 1980s when he was president of IBM Canada, says that board members are working harder now than 10 years ago. He's now on three boards: TD Bank (where he chairs the corporate governance committee and is a member of the management resources committee), Thomson Corp. (where he chairs the corporate governance committee and is a member of the audit committee); and European-based Royal Philips Electronics (where he is on the supervisory board and remuneration committee).

Increased Workloads, Especially for Audit Committees

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