Board trends for 2006: it's back to the future; After digesting Sarbanes-Oxley, boards prepare to resume their strategic role.

• Author: Dysart, Theodore L.
• Position: HEIDRICK & STRUGGLES GOVERNANCE LETTER - Interview

As we enter a new year and a new quarter, it's the time to ask what issues of corporate governance boards and directors can expect to face in the coming year. Ted Dysart, who leads Heidrick & Struggles' Board Practice for the Americas, identifies the trends in board responsibilities, composition, and challenges likely to dominate in 2006 and beyond.

As we look back on 2005 and earlier years, what has been the most significant long-term trend in board governance?

For the past three years, boards have been preoccupied with issues of compliance, largely stemming from Sarbanes-Oxley (SOX). Those concerns were driven not only by the rigorous--and some would say onerous--requirements of the law, but also by a genuine desire to avoid the improprieties that occurred in the highly publicized corporate scandals that marked the early years of this decade. Directors didn't want to appear to be asleep at the switch and, more important, they certainly didn't want their integrity and their reputations for excellence inadvertently compromised by the actions of management.

Now, however, boards have begun to be less preoccupied with SOX and Section 404 compliance. Instead, they are returning to their role as a sounding board for management--asking themselves how they can best work as strategic advisers to CEOs and their management teams. Once again, they are spending considerable time and energy thinking about the business, bringing their expertise to bear on issues of growth, and seeking to provide their companies with competitive advantage. This transition really began in 2005 but is likely to accelerate in 2006.

What accounts for the change?

Three factors: a strong economy, new competitive pressures, and a growing mastery of SOX on the part of boards and the companies they oversee.

First, according to most observers, the economy is strong and getting stronger, with continued growth in productivity, consumer spending, and new job creation. At the same time, many companies are benefiting from growth in profits, strong internal cash flows, low interest rates, and increases in demand that result from sustained economic growth. In this environment, many directors see tremendous opportunities for growing the business. Directors are excited by the prospects, and they are deeply engaged in providing management with the guidance that can help companies capitalize on those opportunities.

Second, new competitive pressures are also drawing directors back into their traditional role as strategic advisers. Perhaps the greatest pressure is coming from the rise of China, which is seen both as a threat and as an opportunity. How do you take advantage of the opportunities for the offshoring of manufacturing and services that China offers? How do you operate effectively in what is likely to become...