Chapter 11. The Boardroom of the Future

Jay A. Conger

Edward E. Lawler III

David Finegold

As we move into the 21st century, powerful forces are redefining the roles and activities of corporate boards. Chief among them are institutional investors who believe that a strong board can contribute to improved shareholder returns. No longer content to accept passive boards that tolerate mediocre corporate performance, major investors are demonstrating a heightened level of shareholder activism. They are demanding that boards assume a far greater leadership and oversight role than ever before.

A second force is the news media. More and more articles are appearing that closely examine boardroom performance—pushing directors into a very public spotlight. For example, periodicals including BusinessWeek, The Financial Times, and the Wall Street Journal now feature lists of the best and worst boards and in-depth coverage of decisions taken by boards. In part, this attention has been generated by the fact that boards themselves are generating more news. Their role in mergers and acquisitions, in determining often oversized executive and board pay packages, and in the firing and hiring of high-profile CEOs, has led the media to focus greater attention on the actions of directors. Boardrooms have also been the focus of numerous articles and investigations because of their actions and inactions in a number of high-profile corporate failures, most notably Sunbeam and Enron.

Watchdog groups dedicated to corporate governance are a third force. They now not only publicly target boards for poor governance but also publish best practice governance guidelines for boardrooms. These guides have set standards that many boards feel compelled to adopt.

In response to these forces, corporate boards in the United States began to experiment with some important new governance initiatives in the 1990s. A number of these initiatives have today become widespread practices among the largest U.S. companies. For example, many boards are now composed primarily of outside directors and have a profile that is more representative of society as a whole, they operate according to written guidelines, they meet regularly in executive sessions without inside directors, and they conduct formal appraisals of the CEO. Several of these practices have indeed improved boardroom effectiveness. We believe, however, that more important changes are needed in the way boards operate. Specifically, there are five important changes that we believe need to be made to transform boards into effective governance structures. An examination of each follows.