Viewpoint January 26, 2010, 5:26PM EST

Restoring Trust in Corporate Governance

Boards of directors and business leadersmust undertake six essential tasks argues, Ben W. Heineman Jr.

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Editor's Note: This article is adapted from the executive summary of a policy brief just published by the Committee for Economic Development, authored by Mr. Heineman and endorsed by the Millstein Center for Corporate Governance & Performance at Yale's School of Management, the Caux Roundtable, and the Hills Program on Corporate Governance at the Center for Strategic & International Studies. The full brief can be read here.

The business community faces a crisis in confidence both in its own ranks and in broader society. Many are asking: How can corporations govern themselves more effectively—and truly be held accountable?

One answer is increased public regulation. The origins of the Great Recession include bad business decision-making caused in no small part by excessive and poorly structured corporate compensation. Not surprisingly, there are now energetic public policy debates about the governance both of the financial sector (with a variety of measures being considered to ensure safety and soundness) and of all publicly held corporations (with focus on an enhanced shareholder role and mandated compensation and risk processes).

But regardless of regulatory outcomes, boards of directors and business leaders will still have to make complex decisions that direct the destiny of corporations. In doing so, they must, in my view, discharge six essential, interrelated tasks which are the foundation for rebuilding trust in corporate governance and addressing the ultimate questions of corporate accountability which underlie the governance debates.

These do not fall under the category of "nice to do." It is profoundly in the self-interest of private sector leadership energetically to implement these six "must do's" in order to answer powerfully the legitimate criticisms of board and senior executive decision-making in recent years.

The six tasks are:

1) A redefinition of the mission of the company—and the role of the board of directors and the CEO to create durable value for shareholders and other stakeholders through sustained economic performance, sound risk management and high integrity

The most basic purpose of the corporation is for leaders to find a sound balance between risk-taking (innovation and creativity) and risk-management (financial and operational discipline) and to fuse this high performance with high integrity. High integrity means a commitment to law, ethics and values in order to attain affirmative benefits inside the company, in the marketplace and in global society, but also to reduce legal, ethical, reputational, public policy and country risk. The emphasis on short-term maximization of shareholder value should be reduced significantly.

2) A revamped internal leadership training process

Such a process should be built on these integrated essentials of performance, risk and integrity—and on a culture in which all are honored and exemplified. Corporate education and training for potential leaders must be broadened and transformed; growth assignments must include diverse roles involving risk and integrity issues, not just making the numbers in different environments.

3) A refocused CEO selection process

This most important board function should flow from a revised leadership development process and seek a broader set of skills appropriate to a redefined mission. The board of directors should explicitly articulate a redefined role when seeking a new CEO.

4) A restatement of fundamental but operational measurements for performance, risk, and integrity

These metrics should expresses the near, medium, and long-term corporate goals across all three dimensions in both financial and non-financial terms. The primary focus should be on clear steps that create sustainable value for shareholders and other stakeholders, such as employees and customers, essential to the company's well-being.