A CEO looks at the director's role: the CEO should not try to be board members' best friend ... and other key principles of CEO-board relations.

• Author: Golub, Harvey
• Position: Board Dynamics - Cover Story

WHAT IS THE ROLE of a board of directors? Obviously, it must represent the interests of the shareholders. But how to do that well in a modern, complex corporation? How to balance appropriate oversight with meddling? How to get the most out of a board? I'll offer some observations on these points.

Some argue that the complexity of today's large companies demands that board members devote more time to their role. And the job is obviously becoming more time-consuming. But one reaches a point at which the more involved a director becomes in the details of the company, the less able he or she is to maintain the independence that is crucial to his or her role. A company can allow more time (and pay for that time), but to ask independent directors to take all the time that would be required for in-depth understanding of every important element of the company, and then pay them based on their true market value, would turn them into highly paid employees who would be all but impossible to attract. Rather than part-time directors able to exercise independent judgment on behalf of shareholders, they could become virtually full-time quasi-managers.

A board's proper focus

Let's take a step back and consider what shareholders actually need from board members: independence and mature judgment. Rather than expecting independent directors to master the details of a business, we need them to be able to see the big picture--and apply that knowledge to the decisions they are required to make.

What implication does this approach have for the way that boards actually function? It means that boards must be sufficiently familiar with overall corporate strategy--and engaged in shaping it--that specific applications of the strategy may not even require significant board debate. Some may be surprised to hear that, but it is important to keep in mind that corporate decisions are most often not made in an ad hoc fashion; they are made within a reasonably clear framework. Board members have to understand the strategic concepts being dealt with, so that the actual decisions that spring from the concepts flow logically.

Let me illustrate from my own experience at American Express. Early in my tenure, it was necessary to restructure the company, including divesting elements of Shearson, Lehman Bros., and other units. But board meetings never became a debate forum over any individual divestiture--except for some of the details.

Before it ever came to approve a specific move, we had engaged the board in detailed discussions regarding our brand strategy and its implications on what we would buy or sell or own. When it came to the point of making a specific divestiture, such as Lehman Brothers, there was no need for a detailed discussion of that specific decision. The strategy was already in place; it had been reviewed and understood, and we did not have to rehash it.

Shaping and supporting

The same principle applies to other issues. A good example is executive compensation, an important area for board over-sight. Most executive compensation plans...