The Board In A Crisis Economy

The world is in financial turmoil, and America is in
the middle of a still-spreading economic contraction-some say it will be the
worst since the Great Depression. The $700 billion financial rescue plan is now
the law of the land, but we don’t yet know if it is enough or how long it will
take to right ourselves; some are talking 2010 and beyond.

Snap judgments are already being made by politicians about
where to assign blame. With the glaring exception of anyone associated with the
Bush administration, do not expect anyone within the Beltway to accept any
culpability for America’s
debacle.

What you can expect is that leaders in the private sector-and,
that will certainly include corporate board members-will figure prominently
among the suspects to be hauled in for interrogation before the "Peoples"
committees and subcommittees on Capitol Hill. Candidates of both major parties
have made it amply clear that the guilty will be admonished, judged, and
summarily punished-all in the course of the same afternoon, if possible. For
those able to escape actual prosecution, public spirited trial lawyers will
ensure the "guilty" are made to pay.

All of this may sound disturbingly Kafkaesque, but the
message is already coming through loud and clear: rampant greed, a lack of
regulation, poor corporate governance and oversight all helped to precipitate
this calamity. Only more, much more, regulation and strictly mandated corporate
governance can restore order in the face of a greedy capitalist calamity.

In fact, the verdict is already in. The American public
believes that the international market meltdown was the inevitable result of
poor management at many levels, including corporate boards sound asleep at the
switch.

Indeed, for better or for worse, boards are squarely in the
crosshairs.

Boards have already been under relentless pressure for
granting big pay packages to underperforming CEOs. Now, directors are coming
under fire for what politicians and the news media have convinced the public
was precisely the kind of lax oversight that led to Enron and the enactment of
Sarbanes-Oxley in 2002 and all that followed. Apparently, none of this
government-mandated governance was sufficient to keep the corporate "crooks" at
bay. But Congress in its wisdom will not be as lenient this time around.

With the world in crisis mode, how can boards navigate this
unprecedented terrain? Never in the past seven decades has there been such
urgency for management and boards to work together to achieve real transparency
and accountability.

What Should Boards Do
Now?

The CEO, in particular, and the board of directors must
project an air of calm, stable management. Senior executives and the board must
be in alignment during this difficult time. There are a number of strategic
moves that can and should be made make now.

If practical, consider establishing a special committee of
independent directors to help the company navigate the crisis and determine
remedies. The lead director should head this effort.

Ideally, a board-management crisis communication plan should
have kicked in by now. (If there isn’t a plan, it is not too late to create
one.) The board and management should be in daily contact, certainly with the
lead or presiding director and the special committee. The company should know
where to reach key directors (chairs of the audit and risk management
committees, as well) at a moment’s notice. Make use of additional layers of
communication, including videoconferencing, texting, conference calls and other
methods. Be mindful that all such records are discoverable.

The lead or presiding director should be taking a very
active role, passing key information to the rest of the independent directors
and relaying board concerns to management. Now is not the time for directors to
be out of touch.

Areas in which the board can take a leadership role:

Risk Management

• If the board doesn’t already have a risk
  management committee, create one, drawing from members of the audit committee
  initially. In a crisis, the risk committee should be meeting regularly, not
  just once or twice a year. It should appraise the whole board frequently. The
  entire board must be engaged in risk management.

• Conduct a comprehensive review of the company’s
  risk exposure, working with the CFO, comptroller and others. The full board
  could be liable for any management misrepresentations so there must be a policy
  of zero tolerance surprises or less than frank communication between management
  and the board.

• Install a risk-assessment process for the
  committee and board to follow. Some boards draw up a checklist, which the lead
  director and members of the committee use to query heads of business units.
  Again, the findings go back to the full board for oversight and action.

Expenses &
Compensation

• Eliminate all unnecessary board expenses and, if
  feasible, agree to a cut in director retainers in line with reductions in
  senior management salaries. Can outside board members afford to work for $1 a
  year, take a reduced retainer or increase common-share purchases during the
  crisis?

• Make executive compensation as bullet-proof as
  possible, adopting new, permanent criteria going forward. The public is furious
  at outsized pay packages, and the board can take steps to make sure the company
  is not in the line of fire. Conduct a full-blown review of senior executive
  pay, especially the top five officers and division heads. Scale back restricted
  stock grants; take a careful look at deferred compensation. Finally, lay out
  the amended plan publicly in simple terms for all constituents.

• Establish independent standards for any
  compensation expert working with the board. Toughen pay-for-performance
  metrics.

• Will the CEO agree to a new, reduced employment
  contract – not only during the crisis but going forward? In effect, the CEO can
  set a new standard, which can send a powerful signal to competitors and beyond.

• Will the CEO and senior managers agree to a
  reduced cash-only salary or a limited grant of common shares during the crisis,
  redeemable on a set date at the market price? Will they agree to purchase
  common shares on the open market with their own money or, if they already do,
  will they buy more?

• Be sure there are no hidden unpleasant surprises
  against company policy, such as nepotism or outstanding personal loans to
  directors or executives (banned under Sarbanes-Oxley for years).

• Review all executive perquisites, down to the
  smallest privilege, and treat them as line-item vetoes. Remove them if there is
  no good reason for them.

• Consider a clawback provision that enables a
  company to recoup incentive pay from a top executive who, in retrospect,
  actually failed to meet established performance standards due to subsequently
  discovered accounting errors or other misstatements for which he or she bears
  responsibility.

Board Structure &
Policies

• Install a non-executive chairman who has no
  connection with the company. Governance is moving in this direction, and CEOs
  who chair their boards and are in crisis mode are less apt to argue now. Boards
  can make a compelling argument for this arrangement.

• Consider asking a retiring director who is a
  strong contributor with needed expertise to stay on as a member of the board
  for an additional year, temporarily suspending age or term limits. NOTE: This
  shouldn’t be construed as a way to keep underperforming directors who are
  reluctant to retire.

• Review the D&O policy. Install a crisis plan
  and practice scenario planning.

• Engage in board-building:
  • Seek outside candidates who are comfortable with
    risk and crisis, recognize warning signs and aren’t afraid to ask tough
    questions. Recognize that desirable individuals may be running their own
    businesses and not have the time to take on board service. The search will be tough.
  • Attract candidates who are actively running
    businesses or who are, at most, only one or two years into retirement.
    Companies that ran into trouble have been criticized for larding their boards
    with consultants, longtime retirees and directors with little crisis
    experience.
  • Purge the board of directors who aren’t actively
    contributing.
  • Make it clear that the new governance policies,
    unless otherwise stipulated, are permanent. Directors who don’t agree with them
    should be encouraged to retire discreetly.

Boards should look upon the economic crisis as an
opportunity for a comprehensive scrutiny of the company’s corporate governance.
These actions must be fully disclosed to the company and beyond as new rules of
governance going forward. If they’re perceived as window dressing, everyone
will suffer, from management and the board to shareholders, customers,
competitors, employees and others. The loss in goodwill would be incalculable.

By word and deed, management and the board must establish a
shared mission and convey to all that they are in it for the long haul and
that, together with all constituents, they will weather this storm.