Board independence: the necessary role for a board leader.

• Author: Franklin, Barbara Hackman
• Position: Putting In Place the Right Board for the 21st Century

INDEPENDENCE, defined in Webster's dictionary as "freedom from the influence, control, or determination of another or others," is as American as apple pie. When it comes to power, Americans have traditionally favored checks and balances. Our Constitution was constructed on that principle, and it is embedded in our culture.

That desire for checks and balances has now moved into the corporate boardroom, at least in large public companies. The shareholder activism which emerged forcefully in the 1980s pushed directors to become more independent of the CEO. Boards responded, albeit, unevenly. They began to exercise more of the statutory authority they already had, to focus more carefully on what was going on in the company, and to concentrate on the creation of value for shareholders. The independence trend came into full public view in the early 1990s as boards ousted CEOs in such high-profile companies as General Motors, IBM, American Express, and Eastman Kodak.

There now seems to be a general consensus that an independent board is a good and constructive thing for the enterprise. (Even most CEOs whom I know agree.) Implicit in this consensus, however, is the acknowledgment of a shift of power, with the board becoming an active check on the power of the CEO. As a result, more CEOs are seeking a different relationship with the board -- a partnership.

Board independence sounds good. But, talking the talk is easier than walking the walk.

To be sure, there are some current practices and trends which are moves toward institutionalizing board independence. Key among these are:

* Audit and compensation committees composed of independent outside directors. Compensation committees of public companies now are required by the SEC to make and sign a report to shareholders in the annual proxy statement. Some audit committees make a separate report to shareholders as well.

* Nominating and governance committees, composed of outside directors, which are setting criteria for director selection, recruiting new directors, controlling committee assignments, and putting into place processes for evaluation of board and individual director performance.

* Board evaluation of CEO's performance and a pay-for-performance compensation program for management.

* Outside directors meeting in executive session regularly without the CEO and other members of management present.

* The presence, increasingly, of a lead director or a non-executive chairman, who is to be the...