Director monitoring has its limits.

• Author: Levy, Leslie

Formal structure and procedures alone cannot guarantee that directors will be influential as well as involved.

After six years of a strong economy and corporate performance accompanied by fabulous stock market advances, to demand tougher board monitoring (other than on an exception basis) seems peculiar. What explains this demand by corporate critics, the media, the National Association of Corporate Directors (NACD), and others?

In some large corporations where public pension funds have been most likely to invest and where board performance was at a minimum questionable, board monitoring does appear to have been sub-optimal, to put it mildly. Further, complaining loud and long has focused attention on why the board failed to act, rather than why the fund chose the stock in the first place and subsequently failed to divest it.

Second, because of spectacular market returns, many funds are awash in cash which must be invested outside their traditional circle of large U.S. corporations. Their new investment universe includes smaller companies and foreign corporations. Whether or not improved monitoring can help in these companies, their boards are being set up to take the blame if returns are less than satisfactory.

So, how much trouble might directors really be in if and when the market descends from the stratosphere? Legally and financially, probably not much. Laws protecting directors' assets remain in place, despite recent investor initiatives demanding director opt-out of indemnification. Even if directors take the rap, D&O insurers will pay a large part of the price.

The underlying problem, in any event, is not inadequately motivated or skilled directors, though many could certainly improve. Rather, major economic and technological change, probably as significant as the Industrial Revolution, is working its way through the economy. Using directors as scapegoats for the turmoil that such change creates may comfort the simple-minded and preserve the power of those who currently have it but, sooner or later, the nation must look beyond the catch-all of director monitoring.

Monitoring is not the only (and maybe not even the principal) tool by which...