The next 30: that was then ... now, what's ahead? A lineup of accomplished governance players gamely forecasts important challenges and opportunities that await boards in the years to come.

• Author: Castellani, John J.

Investor reform: The next governance milestone

AFTER HALF A DECADE of historic, almost dizzying, changes in corporate governance, companies and boards are understandably wondering what comes next. They have worked diligently to restore confidence in the marketplace by generating reforms such as greater board independence, more transparency, and improved shareholder communications. This sea change has benefited companies and investors. Unfortunately, as we look ahead, there is a real danger that the shareholder activism that helped move those reforms forward will move beyond fixing what is wrong to changing what is right.

That activism was initially fueled by scandals and supported by responsible corporate leaders who wanted to demonstrate integrity and accountability. A certain level of activism is always needed, of course, because it can spark constructive dialogue. But the desire to continue to push for change--without stepping back and first gauging the effectiveness of the already dramatic reforms--seem to have stoked appetites for new, worrisome kinds of changes.

We are seeing more activism than ever, and much of it is focused on the wrong agenda. Many of the small cadres of newly energized investors have narrow agendas--Social Security reform, health care reform, environmental issues--that are unrelated to the long-term performance of companies. In the coming decades, they will continue to try to use boards of directors to make the changes in society that they can't achieve through federal or state legislation. Boards will have to find a model for operating in this activist environment while still achieving their primary mission--ensuring viable company operations that enhance shareholder value.

Effective boards will begin by accepting, however reluctantly, the fact that they and their actions will continue to be under a high-magnification microscope. Successful directors must ensure they pursue due diligence when conducting board business. At the same time, directors can expect small groups of investors with narrow interests to conduct very public, noisy campaigns for their issues, withholding votes on directors, including the CEO.

Future boards will have to be both tougher and smarter to do their jobs. They will have to grow thicker skin to keep from reacting to every demand that comes their way. They also will have to develop a greater political sophistication so they can avoid becoming mired in issues that could distract them from their main purpose.

In the longer term, boards must reform investors. That is, they will have to use their new political skills to remind investors that our economy is the envy of the world because of companies that are run by trained managers who focus on long-term performance. Boards will have to energize the majority of shareholders who are happy with the way companies are run, so the companies don't become gridlocked by the narrow agendas of a few.

If future boards fail to reform investors, they may be forced to pick the specific investors or the specific agendas to which they want to respond. That's a path that could lead boards to become the business equivalent of a New England town hall meeting.

[ILLUSTRATION OMITTED]

During the past five years, boards changed corporate governance for the better. In the next 30 years, the challenge will be to protect the positive changes, without allowing the activism to go off course and jeopardize a system that has worked so well for so long.

John J. Castellani is president of Business Roundtable, an association of chief executive officers of leading U.S. companies that constitute nearly a third of the total value of the U.S. stock market. The organization, which the Financial Times has called "the most influential chief executive lobbying group in the U.S.," has weighed in at key moments over the past three decades to react to and help influence the evolving nature of corporate governance.

BY JOHN J. CASTELLANI

Ten landscape-altering trends

HERE IS AN OPTIMIST'S VIEW of 10 trends that will shape boardrooms and the governance landscape in the years ahead:

1. Majority voting and the right of shareholders to vote against directors will become the norm, replacing the plurality vote standard in U.S. director elections.

2. Executive compensation will be brought into line by a combination of factors: enhanced SEC disclosure requirements, an advisory shareholder vote on compensation committee reports, and recognition of the need for internal pay equity.

   [ILLUSTRATION OMITTED]

3. Separating the roles of chairman and CEO will become more common at U.S. companies, encouraging boards to worry less about preserving power and more about developing and incentivizing the best executive talent.

4. The model of the imperial, celebrity CEO will be replaced by the stewardship model, with Reginald Jones unseating Jack Welch as the role model.

5. Sustainability and corporate social responsibility, formerly relegated to gadflies and special interest groups, will be recognized as key corporate governance responsibilities for which directors should be held accountable.

6. Shareholder communications and proxy voting systems will be revamped by the SEC to make better use of technology, reduce costs, increase efficiency, and improve a board's ability to identify and communicate with shareholders.

7. Shareholder resolutions will be overtaken by other forms of constructive engagement, and shareholder activism will become less confrontational, more responsible--and more effective.

8. The definition of beneficial ownership will become more complicated and problematic as stock lending and derivative investment strategies enable investors to separate voting rights from any economic interest in the underlying stock.

9. The spotlight will shift from the governance of companies to the governance of institutional investors, with a focus on how institutions should best fulfill their conflicting duties to maximize returns while acting as responsible owners.

10. Companies will come to recognize that corporate governance is not just a matter of regulatory compliance and accountability but a strategic means to lower the cost of capital, reduce risk, create value, and strengthen the long-term performance of the corporate enterprise.

    John C. Wilcox is senior vice president, head of corporate governance, at TIAA-CREF, one of America's largest institutional investors and a leading advocate for sound principles of corporate governance (www.tiaa-cref.org). He formerly spent 31 years...