New Year's Resolutions for the Boardroom

After an unprecedented year in business, directors striving for better governance in '09 might want to adopt these three proposals

By Beverly Behan

By any standard, 2008 was a jaw-dropper of a year. In the past few months we've witnessed things that seemed improbable just 12 months ago: the failure of Lehman Brothers, the fire sales of Bear Stearns and Merrill Lynch (MER), and the bailouts of AIG (AIG) and the U.S. auto industry. So what lessons can boards of directors take away from this annus horribilis? Here are some suggestions for New Year's resolutions that directors might want to consider:

Resolution No. 1: Engage the Entire Board in a Comprehensive Strategy Review

The world has changed in the past few months. If your board was really on its game, it would've made time on your board agenda in the third or fourth quarter for a comprehensive review of your corporate strategy. This doesn't mean a brief update from the CEO on "How might the financial crisis impact our business?" It means taking the time to get input from all of the directors on their perceptions of:

• where they see the company's strengths and weaknesses relative to competitors in this changed environment;
• what they see as the key challenges and risks now facing the company;
• what modifications they view as appropriate to the corporate strategy—and what concerns they might have about strategic implementation going forward into 2009;
• and what opportunities for the company they might see arising from the change in financial conditions.

Most CEOs vastly underleverage their boards on strategy issues. In tough times, it's tempting for a CEO to want to "tell" directors what changes will be made strategically rather than solicit their perspectives and expertise. However, if you have gathered a team of directors into your boardroom who have solid business experience and relevant backgrounds—and you've taken the trouble to educate them well about the particulars of your business—this is the time to realize the fruits of your investment and use the board as a helpful resource and valuable sounding board in a tough business environment.

This isn't to suggest in any way turning strategic decisions over to the board; strategy is the mandate of the CEO. However, CEOs who have made the effort to draw out board perspectives on key strategic underpinnings typically generate valuable new ideas from doing so and ultimately achieve genuine alignment between management and the board on strategic issues. That can be invaluable in a challenging business environment.

Resolution No. 2: Ensure that the Full Board Is Updated by Its Committees on Risk and Compensation Issues at Least Once a Year

Two key issues stole much of the governance spotlight in 2008: risk and executive compensation. In most cases, the oversight of financial risk issues is delegated to the Audit Committee or a special Risk Committee (Lehman Brothers, for example, actually had a Risk Committee, although it only met twice in 2006 and 2007). At least once a year, the committee with risk responsibilities should do a full-scale review of key risk issues with the entire board. To prepare for this session, the committee chair should send an e-mail or place calls to directors who are not members of the committee asking what they see as the key risks facing the company and which of those they have particular concerns about.

This way, the committee chair can ascertain that the working session will address concerns of noncommittee members. Moreover, this exercise often surfaces concerns on which the committee may not have been focused, yet which deserve attention.