How leading a role for the lead director? In this time of ferment in governance practices, there are two strong cases to be made: that one individual should serve as both chairman and CEO; and that, under such an arrangement, the board must designate a 'lead' or 'presiding' director.

• Author: Augustine, Norman R.
• Position: Lead Director

WINSTON CHURCHILL remarked that one can always count on the Americans to do the right thing ... after they have tried everything else!

The pressure to do something has mounted with each new revelation in the disastrous series of governance failures that beset a not-insignificant segment of American business--ranging from Enron, Rite-Aid and Waste Management, to Sunbeam, WorldCom, ImClone, and Xerox, not to mention Tyco, Adelphia, Global Crossing, Computer Associates, Cendant ... and more. As the dust--and greed--began to clear, more than $7 trillion of market value had evaporated.

Constructive changes in the way corporations are governed have already been implemented, including placing greater control in the hands of non-management directors; eliminating certain conflicts of interest of outside audit firms; codifying that external executive compensation advisers and auditors work for the board, not for management; introducing more stringent share retention requirements for senior executives; adopting the practice of expensing options; beginning to rein in CEO compensation; making it more difficult to reprice options; strengthening the accounting treatment of such devices as special-purpose entities and "swaps"; placing the use of pro forma reporting in context; and implementing annual board self-assessments. There can be little question that boards today are considerably more effective than they were five years ago. And well they should be.

On the dark side

On the other side of the ledger, some profoundly bad ideas have crept into contemporary governance practices. For example:

* Having a board that has compensated its CEO extravagantly--as, for example, the New York Stock Exchange--fire the CEO, presumably for having been paid extravagantly.

* Requiring individuals who knowingly and repeatedly have been devious in implementing accounting rules sign certificates promising that they won't be devious in implementing accounting rules.

* Creating a new genre of boutique organizations that unilaterally create governance rules and then assign "good-governance grades" to corporations and, as a one-stop service, will, for a price, tell those same corporations how they can get better grades.

* Avoiding the windfall attendant to management's "fortuitous" timing in the exercise of stock options by substituting the use of restricted stock--which, in most forms, unlike stock options, guarantees the recipient will be the beneficiary of a payoff--even when the shareholders are uniformly losers.

* Increasing dividends to shareholders on the grounds that "cash can be believed," whereas share-holders presumably cannot trust the accounting of the company (in which they voluntarily continue to invest their money).

* Destroying an entire accounting firm (which provided 85,000 jobs) when a relatively modest number of its employees demonstrate serious improprieties and the firm's leadership embraces a laissez faire tone at the top.

* And the Mother of All Goofy Governance: Providing selected large shareholders special access to a corporation's proxy for the purpose of directly nominating directors--thereby pleasing everyone who likes politicized campaigns, special-interest directors, and confrontational governance (potentially by representations of former as opposed to current shareholders), all in a boardroom where candid discussion will be held hostage by mistrust, factionalization, and the fear that any hypothetical observation will promptly be leaked to the media.

The 'separation' notion

One...