How to Be a Good Director

1he role of a corporate board member has never been more crucial and more confusing. What
exactly are directors supposed to be doing, anyway?
By CAROL HYMOWITZ
Staff Reporter of THE WALL STREET 1OURNAL
Talk to any corporate director and you are likely to hear the same reIrain: Our jobs are a lot
tougher these days.
They certainly should be. The Sarbanes-Oxley Act, which took eIIect in July 2002, and
subsequent rules proposed by two stock exchanges have resulted in dozens oI new rules and
procedures that have added to directors' duties. They include more regularly scheduled meetings
oI independent directors separate Irom company management, more careIul oversight oI
accounting by the board audit committees -- and more potential liability iI things go awry.
But amid all the new responsibilities and higher risks, there remains unanswered a simple
question: What makes a good director? Boards, aIter all, have learned over the past two years
what not to do. Now they need to Iigure out what to do.
A consensus is starting to emerge, and it involves being more inIormed, more skeptical and more
independent. But plenty oI questions remain. For instance, do active CEOs, long the Iavorite
candidates Ior board seats, have the time required to be good directors, or should the job go to
proIessionals who make board work their career? How can directors get all the inIormation they
need to understand a company's core issues? And how can they review a company's Iinancial
perIormance and assess strategy without taking on the jobs oI executives?
"Directors now are expected to play such a multiplicity oI roles -- with a lot more Iocus on legal
and accounting issues, not to mention being available to investors," says Robert Felton, a director
at McKinsey & Co. in Seattle who heads the consulting Iirm's North America corporate-
governance practice. "No one has thought enough about how doable this is, especially Ior
directors who have other big jobs and responsibilities."
Details, Details
Clearly, board members themselves don't agree on their role. Steve Reinemund, chairman and
CEO oI PepsiCo Inc., believes that "directors should be the CEO's sounding board. II they get so
absorbed in operating details, then they are doing management's job and can't provide a check
and balance to management."
But Pat Gross, a director at three public companies -- Capital One Financial Corp., Computer
Network Technology Corp. and Mobius Management Systems -- sees things a bit diIIerently. He
says that "the ultimate value oI a director is to step back and see the Iorest Irom the trees. But
now boards also need individuals who can roll up their sleeves and get into detail much more
than they used to."
As a member oI Capital One's audit committee, Ior example, Mr. Gross says he must be able to
question various accounting treatments.
"In the past, you could be comIortable iI a Iinancial report Iollowed generally accepted
accounting principles," he says. "But now you have to ask, 'What are the alternative treatments
and iI you adopt one oI these how would that aIIect the outcome?'"
Inquiry and Dissent
So what are the main attributes oI a good director?
Most experts agree that being willing to challenge company management may be the most
crucial qualiIication Ior a board seat. Directors at many companies disrupted by scandals,
including Tyco International Ltd., WorldCom Inc. and Enron Corp., had stellar credentials and
were well respected in their businesses and proIessions. They also Iollowed most oI the accepted
standards Ior boards, such as attending meetings regularly and establishing a code oI ethics. But
they didn't question enough and Iailed to see inquiry and dissent as one oI their obligations.
That leads to a second key qualiIication Ior being a good director: a willingness to do a lot oI
homework.
A typical director devoted 250 hours to board-related work last year, up Irom 125 hours in 1999,
according to the National Association oI Corporate Directors in Washington. "I'm betting it's
another 20 higher than that now," says Roger Raber, president and CEO oI the association.
Aware oI directors' increased workload, the directors association advocates that board members
with Iull-time jobs hold no more than Iour public-company seats. They and other governance
groups also recommend more educational sessions Ior new board members.
William George, the Iormer chieI executive oIIicer oI Medtronic Inc. and now a director at
Target Corp., Novartis AG and Goldman Sachs Group Inc. -- and an audit-committee member oI
the two latter companies -- says he spends hours preparing Ior board meetings.
"Every time I Ily to Switzerland Ior a Novartis meeting, I've got a pile oI material three inches
thick to read on the plane," he says. And since he became a director at Goldman Sachs in 2002,
he has spent time with the chieI Iinancial oIIicer and other members oI senior management to
Iamiliarize himselI with the company.
He and Iellow Goldman Sachs directors also held a 2 1/2-day oII-site meeting to discuss strategic
issues.
"Tackling anything in depth in Iour or Iive hours isn't really possible," Mr. George says. "When
you have a couple oI days, you have a chance to reIlect about issues."
Lewis Kaden, a partner at the law Iirm Davis Polk Wardwell in New York who advises corporate
boards and is a director oI Bethlehem Steel Corp., echoes Mr. George's concerns about the
magnitude oI the task.
Mr. Kaden thinks tougher regulation has lessened the chances oI Iuture scandals. "There's a
greater likelihood that someone will sound the alarm or ask the hard question that gets at a
problem beIore it gets too serious," he says.
Overwhelmed by Minutiae
But he worries that as companies become larger and more global, "it is very hard Ior directors to
get their arms around the organization enough to be able to ask intelligent questions." Moreover,
Iew companies have Iigured out how to organize data Ior directors so they are adequately
inIormed but not overwhelmed with minutiae.
As a result, Mr. Kaden says, "directors tend to perIorm better when they have to respond to a
crisis than they do monitoring the day-to-day activities oI their companies."
Mr. Kaden says that at Bethlehem, which Iiled Ior bankruptcy protection while he was a director,
"I had a background in pensions and health care and other issues Bethlehem Iaced, but it was still
Iairly daunting to get to the bottom oI critical choices."
Controlling the Flow
Still, extra hours are only part oI the equation. For instance, reading through reams oI reports
beIore meetings oIten doesn't yield the inIormation directors need to perIorm some oI their key
duties, such as choosing a successor to the chieI executive.
In part, that's because CEOs still control the Ilow oI most inIormation to directors. A recent
survey oI about 150 directors by McKinsey & Co. in association with the Directorship Search
Group, a search and governance consulting concern in Greenwich, Conn., Iound that a majority
wanted less packaged inIormation and more time Ior open discussions. They also said their
boards would be more eIIective iI they included as members more proIessional directors and
large shareholders.
The survey Iound agreement between directors and institutional investors on a number oI issues.
Both groups seem to support splitting the roles oI CEO and chairman. Investors more than
directors believe more reIorms are necessary, but both groups agree that CEO resistance and lack
oI director motivation are the biggest impediments to change.
Outside Meetings
To get around these challenges, directors need to be willing to meet outside oI the CEO's sphere
-- both with each other and with managers down the ranks. Only a Iew companies, however,
including General Electric Co. and Home Depot Inc., require directors to visit plants and oIIices
where they can talk with employees on their own.
Mandated private sessions oI outside directors encourage Iranker discussion among some board
members. Raymond Troubh, a director at nine companies, attended a pre-board meeting earlier
this year where Iellow independent directors began arguing about whether management could
achieve its sales Iorecasts, and whether they could trust the internal data used to justiIy the
Iorecasts. When the Iull board met the next day, the CEO and CFO were pressed Ior details.
"Would you testiIy beIore a congressional committee that this is your best judgment?" one
director asked, according to Mr. Troubh. The senior executives promised to take another look at
their Iorecasts.
But Mr. Troubh, who has a tendency to criticize directors who are unprepared Ior meetings, says
he has received poor marks Irom other board members Ior his outspokenness.
"I'm trying to modulate my Ieelings that other directors sometimes aren't perIorming," he says.
Directors at U.S. companies seem to be asserting their inIluence more than their European and
Asian counterparts, according to Korn/Ferry's 2003 Board oI Directors survey oI 1,362 directors
in 15 nations. Some 87 oI respondents Irom North and South American companies now hold
meetings without the CEO present, compared with just 7 oI respondents at German boards,
15 oI United Kingdom boards and 4 oI Asia PaciIic boards.
A Collegial Atmosphere
Still, as Mr. Troubh discovered, there remains a reluctance among directors everywhere to upset
the collegiality oI the boardroom. The best evidence Ior this involves the issue oI excessive
executive compensation -- which boards have been loath to tackle. Although the popularity oI
stock options dimmed in the bear market and bonuses have shrunk in the economic slowdown,
CEOs still command enormous pay packages regardless oI perIormance. Last year, despite the
downturn, CEO's total direct compensation at major U.S. companies zoomed 15 to a median
$3.02 million and is expected to increase again this year.
Perhaps the biggest challenge Iacing directors is Iinding new colleagues Ior boardroom duty.
"The demands |oI being a director| are higher, so some people who might have accepted a Iew
years ago are now declining," says Mr. Gross, the Capital One director. At the same time, boards
are pickier about whom they recruit. "We have to get the right mix oI people Ior committees and
the Iull board to be able to carry out all our roles," he says.
BeIore accepting a board seat, he says, he always asks himselI two questions. "I ask, 'Is there
something about my background and experience that will allow me to add some value to this
company, and am I going to learn something Irom this?'" he says. "When I've got two aIIirmative
answers, the Iit is usually right."
-- Ms. Hymowit:, a senior editor for The Wall Street Journal in New York, served as contributing
editor of this report.
Write to Carol Hymowitz at carol.hymowitzwsj.com