What it now means to 'direct': being a director in an era of reform doesn't mean micromanaging. It means taking the high ground--and forging a closer partnership with the institutional investor community.

• Author: Troubh, Raymond S.
• Position: DUTIES OF DIRECTORS

WHILE WE MAY NOT always care to admit it, directors and institutional shareholders are natural allies. We both rely on honest numbers and explanations. We both want to be sure that management doesn't go off half-cocked on initiatives that haven't been fully thought out. We both want to make sure that management compensation is appropriate for the task. We both want to make sure that companies' legal and ethical standards are of high quality.

Directors and institutional investors jointly face a two-fold problem:

1. Pressure from shareholders and management alike to push the stock price up and to keep it going up; and

2. A very large imbalance between directors and management dealing with company-related experience, and the time available to directors to devote to company activities. As companies grow in complexity and sheer size, this problem will expand.

Where our missions may differ has to do with the long-term view of the enterprise. While we would like to see shareholders take the long view, we understand that the shareholder always has the option to leave the enterprise, and his or her interest may be almost exclusively in the near-term impact of events on stock price.

We also are aware that many corporate managers are equally interested in the near term. Managers do not have lifetime appointments. Only the directors have the responsibility to see that the enterprise is healthy over the long term. Directors represent not only current shareholders but also future shareholders as well as having a responsibility to employees. This may mean that directors take a more conservative view toward acceptable business risk.

Help wanted

Most of the time, the interests of directors and institutional investors are identical. Certainly information honesty is central to our respective roles. In this regard, institutional investors can be of great help to directors. We need that help. We need to forge a closer link--a link that to date has been very tenuous, at best.

Let us accept the notion that Enron was the economic equivalent of 9/11, so prevention of another economic 9/11 must be our joint burden. What went wrong in this and similar cases, and what can we learn from our errors? Can we really reform the atmosphere of greed and overweening self-interest that may erupt in the capital markets? Can we keep management focused on what is really best for shareholders? Can we work together to improve corporate governance, enhance transparency, retain investor confidence, and create value that lasts?

I have certain suggestions for accomplishing these worthy goals:

1. Prevent the CEO from being mesmerized by the short-term stock price

   This is a key to the partnership of independent directors and institutional investors. A lot of the appetite for short-term gains comes from pressure applied by unwise institutional investors. We shouldn't permit Wall Street analysts and big investors to talk the CEO into trying to create a record of 15% constant annual growth--a record that the Almighty or even Warren Buffett could not maintain. Management should be encouraged to run the business, not the stock. Shameless pressure by analysts and some institutional investors has pushed management to stretch quarterly earnings and to "make the numbers." How many convicted senior executives have told their subordinates, "We must make the numbers"?

2. Conduct a self-cleansing of our own boards, and do it quickly

   We directors must ourselves get rid of the laggards and weak performers. We don't want directors who are indifferent, deferential, not focused, or unwilling to attack signs of weakness. Self-assessment of boards should be rigorous and merciless. We don't need directors who are more interested in protecting their own deep pockets than in protecting shareholder interests. The boardroom should have less focus on D & O insurance and more focus on D & O courage!

3. Insist on having truly independent nominating committees

   We...