How to Be a Good Director

Talk to any corporate director and you are likely to hear the same refrain: Our jobs are a lot tougher these days.

They certainly should be. The Sarbanes-Oxley Act, which took effect in July 2002, and subsequent rules proposed by two stock exchanges have resulted in dozens of new rules and procedures that have added to directors' duties. They include more regularly scheduled meetings of independent directors separate from company management, more careful oversight of accounting by the board audit committees -- and more potential liability if things go awry.

But amid all the new responsibilities and higher risks, there remains unanswered a simple question: What makes a good director? Boards, after all, have learned over the past two years what not to do. Now they need to figure out what to do.

A consensus is starting to emerge, and it involves being more informed, more skeptical and more independent. But plenty of questions remain. For instance, do active CEOs, long the favorite candidates for board seats, have the time required to be good directors, or should the job go to professionals who make board work their career? How can directors get all the information they need to understand a company's core issues? And how can they review a company's financial performance and assess strategy without taking on the jobs of executives?

"Directors now are expected to play such a multiplicity of roles -- with a lot more focus 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 firm's North America corporate-governance practice. "No one has thought enough about how doable this is, especially for 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 of PepsiCo Inc., believes that "directors should be the CEO's sounding board. If 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 differently. He says that "the ultimate value of a director is to step back and see the forest from 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 of Capital One's audit committee, for example, Mr. Gross says he must be able to question various accounting treatments.

"In the past, you could be comfortable if a financial report followed generally accepted accounting principles," he says. "But now you have to ask, 'What are the alternative treatments and if you adopt one of these how would that affect the outcome?'"

Inquiry and Dissent

So what are the main attributes of a good director?

Most experts agree that being willing to challenge company management may be the most crucial qualification for 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 professions. They also followed most of the accepted standards for boards, such as attending meetings regularly and establishing a code of ethics. But they didn't question enough and failed to see inquiry and dissent as one of their obligations.

That leads to a second key qualification for being a good director: a willingness to do a lot of homework.

A typical director devoted 250 hours to board-related work last year, up from 125 hours in 1999, according to the National Association of Corporate Directors in Washington. "I'm betting it's another 20% higher than that now," says Roger Raber, president and CEO of the association.

Aware of directors' increased workload, the directors association advocates that board members with full-time jobs hold no more than four public-company seats. They and other governance groups also recommend more educational sessions for new board members.

William George, the former chief executive officer of Medtronic Inc. and now a director at Target Corp., Novartis AG and Goldman Sachs Group Inc. -- and an audit-committee member of the two latter companies -- says he spends hours preparing for board meetings.

"Every time I fly to Switzerland for a Novartis meeting, I've got a pile of 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 chief financial officer and other members of senior management to familiarize himself with the company.

He and fellow Goldman Sachs directors also held a 2 1/2-day off-site meeting to discuss strategic issues.

"Tackling anything in depth in four or five hours isn't really possible," Mr. George says. "When you have a couple of days, you have a chance to reflect about issues."

Lewis Kaden, a partner at the law firm Davis Polk Wardwell in New York who advises corporate boards and is a director of Bethlehem Steel Corp., echoes Mr. George's concerns about the magnitude of the task.

Mr. Kaden thinks tougher regulation has lessened the chances of future scandals. "There's a greater likelihood that someone will sound the alarm or ask the hard question that gets at a problem before it gets too serious," he says.

Overwhelmed by Minutiae

But he worries that as companies become larger and more global, "it is very hard for directors to get their arms around the organization enough to be able to ask intelligent questions." Moreover, few companies have figured out how to organize data for directors so they are adequately informed but not overwhelmed with minutiae.

As a result, Mr. Kaden says, "directors tend to perform better when they have to respond to a crisis than they do monitoring the day-to-day activities of their companies."

Mr. Kaden says that at Bethlehem, which filed for bankruptcy protection while he was a director, "I had a background in pensions and health care and other issues Bethlehem faced, but it was still fairly daunting to get to the bottom of critical choices."

Controlling the Flow

Still, extra hours are only part of the equation. For instance, reading through reams of reports before meetings often doesn't yield the information directors need to perform some of their key duties, such as choosing a successor to the chief executive.

In part, that's because CEOs still control the flow of most information to directors. A recent survey of about 150 directors by McKinsey & Co. in association with the Directorship Search Group, a search and governance consulting concern in Greenwich, Conn., found that a majority wanted less packaged information and more time for open discussions. They also said their boards would be more effective if they included as members more professional directors and large shareholders.

The survey found agreement between directors and institutional investors on a number of issues. Both groups seem to support splitting the roles of CEO and chairman. Investors more than directors believe more reforms are necessary, but both groups agree that CEO resistance and lack of director motivation are the biggest impediments to change.

Outside Meetings

To get around these challenges, directors need to be willing to meet outside of the CEO's sphere -- both with each other and with managers down the ranks. Only a few companies, however, including General Electric Co. and Home Depot Inc., require directors to visit plants and offices where they can talk with employees on their own.

Mandated private sessions of outside directors encourage franker discussion among some board members. Raymond Troubh, a director at nine companies, attended a pre-board meeting earlier this year where fellow independent directors began arguing about whether management could achieve its sales forecasts, and whether they could trust the internal data used to justify the forecasts. When the full board met the next day, the CEO and CFO were pressed for details. "Would you testify before 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 forecasts.

But Mr. Troubh, who has a tendency to criticize directors who are unprepared for meetings, says he has received poor marks from other board members for his outspokenness.

"I'm trying to modulate my feelings that other directors sometimes aren't performing," he says.

Directors at U.S. companies seem to be asserting their influence more than their European and Asian counterparts, according to Korn/Ferry's 2003 Board of Directors survey of 1,362 directors in 15 nations. Some 87% of respondents from North and South American companies now hold meetings without the CEO present, compared with just 7% of respondents at German boards, 15% of United Kingdom boards and 4% of Asia Pacific boards.

A Collegial Atmosphere

Still, as Mr. Troubh discovered, there remains a reluctance among directors everywhere to upset the collegiality of the boardroom. The best evidence for this involves the issue of excessive executive compensation -- which boards have been loath to tackle. Although the popularity of stock options dimmed in the bear market and bonuses have shrunk in the economic slowdown, CEOs still command enormous pay packages regardless of performance. 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 facing directors is finding new colleagues for boardroom duty. "The demands [of being a director] are higher, so some people who might have accepted a few 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 of people for committees and the full board to be able to carry out all our roles," he says.

Before accepting a board seat, he says, he always asks himself 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 from this?'" he says. "When I've got two affirmative answers, the fit is usually right."

-- Ms. Hymowitz, a senior editor for The Wall Street Journal in New York, served as contributing editor of this report.

Write to Carol Hymowitz at carol.hymowitz@wsj.com