Your tip sheet for being a successful director.

What does it take to succeed in the boardroom? These leaders have shared plenty of advice in the pages of DIRECTORS & BOARDS over the past 30 years. Read on for their wisdom of the ages.

AUDITING THE NUMBERS

YOUR EVALUATION TOOL: Good financial accounting is important to the integrity of our markets, but it is also an important corporate governance tool. It provides the brightest light and the most objective, detailed, and textured portrait of managerial performance.

--Louis Lowenstein, professor emeritus of law and finance, Columbia University, "A Governance Tool that Really Works" [Fall 1997]

ASK THE TOUGH QUESTIONS: As I see it, the board's role is to act as an independent auditor of management--asking tough questions that management might not ask itself when the company is doing well and is a recognized industry leader. Monitoring involves more than looking in a rear-view mirror and asking management, "How did you do?" It involves asking management, in ways appropriate to each corporation's unique business and status: What are your plans for the future? How do you propose to achieve those plans? How do the results produced by those plans compare with the performance of other companies in your industry? Are you meeting your milestones along the way?

--John Smale, chairman, General Motors Corp., "The GM Board Guidelines: A Formal Codification" [Summer 1994]

AN ELEMENTARY RULE: In a world of increasingly sophisticated financial techniques, Enron's audit committee, as well as the entire board, seemed to have violated one of the most elementary rules of management: If you don't understand something, don't approve it.

--Murray Weidenbaum, director and professor, Washington University, "System Failure, System Renewal" [Summer 2002]

YOU CAN'T MICROMANAGE:

Effective audit committees recognize that they cannot micromanage the enterprise, and focus on what they can do well as overseers of financial integrity and risk management.

--John Olson, senior partner, Gibson, Dunn & Crutcher, "Ten Rules for Effective Audit Committees" [Fall 1999]

IS IT SUPPORTABLE?:

Any time a CEO defends a set of numbers that are not supportable, I lose my faith in the CEO at that time.

--Russell Planitzer, managing principal, Lazard Technology Partners, "Ground Rules for Great Board Meetings" [Summer 2003]

CHECK THE CONDITIONS FOR FRAUD:

AN EMPLOYEE IN A POSITION OF TRUST and who is very knowledgeable regarding the company's internal operations and accounting procedures has a significant opportunity to commit fraud. This opportunity may be further enhanced if the company is plagued by high turnover of key employees. Also adding to the opportunity quotient are factors such as:

* A dominant top management with little or no accountability.

* Minimal (if not nonexistent) requirements for executive disclosures or examination of executives' activities.

* A highly computerized operation.

* A company with related-party transactions.

* A company without an effective internal auditing staff.

* A company that uses several different auditing firms, none of which can see the big picture.

* A company that changes auditors frequently or hires inexperienced auditors.

* A company that has many surprises for the auditors.

These pressures can escalate to an even higher point of potential fraud when an executive/manager is in situations that prompt him or her to demonstrate favorable earnings in order to support projections, maintain the credibility of management, avoid a merger situation, or prevent the suspension or delisting of the company's stock. If these pressures have already given rise to litigation between management and shareholders, then there is an especially conducive climate for financial statement fraud.

--Howard Fielstein, specialist in forensic accounting, "Detecting Financial Statement Fraud" [Summer 1998]

BE COVERED:

The best liability insurance coverage a corporate board can have is an effective internal audit department.

--Herbert Miller, general auditor, Williams Cos. Inc., "Internal Audit's Safety Net for the Board" [Summer 1988]

KNOW FORECASTING I:

The one thing certain about a forecast is that it will be wrong. The value of a forecast lies not in being precise, but in its reliability in providing estimates that are close enough to guide the actions of decision makers. The art of using forecasts effectively lies in understanding how far off the forecast might be and why.

--George Bernstein, CEO, Laventhol & Horwath, "The Art of Using Forecasts Effectively" [Winter 1984]

KNOW FORECASTING II:

Management should prepare two separate sets of documents: first its plans, then the forecasts relevant to them. Planning and forecasting interact, but they should be treated separately. If the forecast is not satisfactory to management, they should change the plan, not the forecast; that would be like changing the weather forecast to make your picnic a success.

--J. Scott Armstrong, professor, Wharton School, "What to Ask About Management's Forecast: Seventeen Tough Questions" [Summer 1981]

INSPECT IT: Inspired by the collapses of Enron, WorldCom, et al., I've put together a few governance principles of my own:

* If it ain't broke, at least inspect it.

* If it looks too good to be true, it isn't true.

* There is no substitute for positive cash flow.

* Between reported revenue and reality may lie a GAAP.

* Pride goeth before an accounting scandal and a haughty spirit before bankruptcy.

* Expenses are for sure; revenues are for maybe.

* If it is too complicated to understand, it is too complicated to govern.

--Thomas Horton, longtime governance expert and DIRECTORS & BOARDS author, "Simple, Commonsense Governance Principles" [Fall 2002]

Your tip sheet for ... ADDING VALUE

MOVING THINGS ALONG:

The greatest satisfaction I have being an outside director is to see the growth and development of the corporations that I serve--to see the strategic planning being done in depth, to see that it's being thought through very thoroughly, to see it implemented, and to see the results come through as anticipated. And to see the growth and development of the management of these several corporations. You feel you're part of all of that.

--Reginald Jones, retired chairman and CEO, General Electric Co., "Personal Reflections on the State of the Board" [Fall 1986]

CEO GUIDANCE:

I don't think boards initiate very much, nor do they kill very much. How they guide the CEO through major business decisions is how they really add value.

--Herbert Baum, chairman and CEO, Quaker State Corp., "How Do Boards Add Value?" [Winter 1999]

CAJOLE: Boards have to support the chief executive, but they also have to cajole, they have to prod, they have to help the CEO be successful. Save me from a bunch of people on a board who are going to tell me what I want to hear.

--Thomas Donohue, president and CEO, U.S. Chamber of Commerce, "We Are Playing with Courage" [Winter 2000]

CONNECTIONS: One of the key roles for board members is to help the management acquire the alliances and relationships necessary for success.

--Regis McKenna, chairman, Gemini McKenna High Tech Strategies, "Boards of a Different Breed" [Fall 1995]

IMPETUS FOR ACTION I:

Negative disposition is now an accepted way of life in our most conservative and patrician companies. If it's a dead horse on your lawn, or a BCG "dog," or if it doesn't fit your current mission concept, get rid of it. Sell it, spin it off, write it down, liquidate it. Since the sale of corporate assets requires board approval, the directors are normally involved here and frequently provide the impetus for an action program, particularly when it increases the return on equity.

--Robert Lear, corporate director, "Getting the Board Behind the Value-Building Effort" [Winter 1984]

IMPETUS FOR ACTION II:

There is no more important trait among the excellent companies than an action orientation. Ready. Fire. Aim. Learn from your tries.

--Tom Peters and Robert Waterman Jr., authors of The Search for Excellence, "The Bias for Action," [Spring 1983]

Your tip sheet for ... ADDING VALUE

SELECT, ENDORSE, ASSURE:

A board basically can do three things. Number one is to select the chief executive. Number two is to endorse the chief executive's strategy--not write it but endorse it. This is not the business plan. It's the direction of the company. And third, to assure that the chief executive can put together a team to execute the plan that we have approved and deliver the plan in terms of financial results and in all other respects. That is all that you can do.

--Kenneth Roman, chair of the corporate governance committee, Compaq Computer Corp., and former CEO, The Ogilvy Group, "The Workings of a Model Board" [Summer 1998]

PROPER GROUNDING: Unfortunately, many companies, especially smaller ones, provide better orientation for employees in the mailroom than they do for directors in the boardroom. Many organizations send the message that directors should "learn on the job." This results in an unnecessarily steep learning curve for new outside directors, impeding board performance. Perhaps more corrosive, though, is that the message "learn on the job" is one that signals board work as more casual than serious. If you are a new director, what should you expect to receive from management? You should expect a tailored tutorial to ground you in the following:

* the drivers of the business;

* major strengths, weaknesses, opportunities and threats;

* the company's financial management and reporting;

* the regulatory and legal environments;

* the investment environment;

* and last but not least, the company's people and talent issues.

--Constance Horner, corporate director and guest scholar, Brookings Institution, "Creating and Sustaining the Strong Director" [Winter 2002]

Zeroing in on the Problem: Figuring out whether we've got a market problem or a management problem is probably the most difficult and subtle thing that we can do as board members.

--Ronald Celmer...