Caesar's wife.

• Author: Rock, Robert H.
• Position: Role of corporate directors should be distinct and separate from that of a consultant - Letter from the Chairman - Column

Should companies hire their directors to provide consulting services? Last year, the National Association of Corporate Directors (NACD) emphatically said "No!" The NACD report, prepared by a Blue Ribbon Commission, recommended that "Boards should adopt a policy stating that a company should not hire a director or a director's firm to provide professional or financial services to the corporation." The NACD contends that the director's role should be totally distinct and completely separate from that of a consultant; moreover, commingling the roles would severely compromise both the real and perceived independence of the director.

Although the NACD report strongly recommends against a director/consultant relationship, the Commission members offer some suggestions if a company decides not to conform to the report's "best practice." To govern these relationships, the Commission recommends four safeguards: first, the director must be able to clearly provide the company with a superior service; second, the fee should be in line with industry practice; third, the entire board, preferably the outside directors, should approve the assignment; and fourth, the director's role, including the rationale for the engagement and concomitant fees, should be fully disclosed to shareholders. These four controls can help to mitigate the inevitable conflicts of interest inherent in a director/consultant relationship.

For many shareholder activists, a director should be like Caesar's wife - free from even the appearance of sin. A director's greatest virtue is the independence which allows him or her to challenge management decisions and evaluate corporate performance from a completely free and objective perspective. A director should not be beholden to management in any way. If an outside director performs paid consulting work, he becomes a player in the management decisions which he oversees as a representative of the shareholder. There are both real and potential conflicts inherent in a director or his firm providing professional or financial services to the corporation.

For several years, shareholder activists have railed against board members receiving consulting fees, and their campaign is now having an effect. Over the past few years, shareholder proposals in proxy statements increasingly have...