A fine balance: what makes an effective lead director; With the practice of naming lead directors at an all-time high, there should be a clear understanding of the characteristics that the role requires.

• Author: Jayne, Randy
• Position: HEIDRICK & STRUGGLES GOVERNANCE LETTER

FROM ITS INCEPTION in the 1990s, the position of lead director has offered a middle way between boards ruled by a CEO chairman and boards chaired by a non-management director. After General Motors Corp. instituted the role of lead director in 1994, the practice slowly gained adherents. It took off in 2002 when the New York Stock Exchange required the independent directors of listed companies to meet at least once yearly without management. The practice got an additional boost in 2004 when a blue-ribbon commission of the National Association of Corporate Directors (NACD) recommended that "where the chair and CEO roles are not separated ... there should be a designated leadership role for an independent director to serve as a focal point for the work of all the independent directors, with clarity of role and continuity of who performs that role."

The practice is now at an all-time high. In fact, in the most extensive study to date of board effectiveness, which Heidrick & Struggles recently conducted in conjunction with the Center for Effective Organizations at the University of Southern California's Marshall School of Business, we found that 75 percent of boards now have an independent director who serves as lead or presiding director. That represents a dramatic increase from 48 percent in 2003 and 32 percent in 2001.

The study, incorporating responses from 768 directors at approximately 660 of the 2,000 largest publicly traded companies in the United States, also uncovered a parallel rise in the directors' rating of their effectiveness in corporate ethics. In 2003, 85 percent of respondents rated their performance in ensuring ethical behavior as effective or very effective, a number that rose to 90 percent in this year's survey.

Although the popular imagination may see the lead director as a fierce guardian of board independence, the reality is much more subtle. Board independence is not an end in itself but a means to a better functioning board and, ultimately, greater shareholder value. Far from being an above-the-fray figure, today's lead director occupies a unique middle ground rather like the mythological character Janus, the god of doorways often depicted with two faces looking in opposite directions. Facing two ways at once, the lead director is an intermediary between the independent directors and management, acting as a conduit--in both directions--for communication, advice, and, sometimes, bad news.

Facing both ways takes some skill, according to Charles A. Haggerty, lead director of Pentair Inc. and former CEO/chairman of Western Digital Corp. "I have learned to keep the CEO in the executive session as long as possible so he faces whatever a director has to say at the table," he says. "This makes for much better communication."

Although a successful lead director needs many of the traditional characteristics of a good leader, the dual nature of the role and the unique dynamics of boards require a great measure of subtlety and tact, as opposed to the assertiveness and visionary daring often associated with strong leaders. Based on our conversations with directors and experience in board searches and director evaluations, it appears that if there is a dominant characteristic of successful lead directors it is the ability to maintain a fine balance between conflicting objectives and requirements in almost all areas of the role's responsibilities.

Understanding how that dominant characteristic plays out in the lead director's responsibilities is crucial for independent directors selecting a leader, for directors aspiring to be lead director, and for the executive directors, the CEO, general counsel, and senior management who will work with the lead director. Here are the key areas in which the lead director must exercise that sense of balance--and their conflicting requirements.

Subject matter expertise

Certainly all independent directors should know the company's industry and business as thoroughly as possible. However, the lead director should know it as no other director does. Moreover, that expertise...