A U.S. corporate directors’ group this week recommended a slate of new governance principles for company boards, including better communication with investors on executive pay and improved oversight of business risks.
The recommendations by the National Association of Corporate Directors (NACD), an educational group for boards that has about 10,000 members, come as director effectiveness has been questioned by investors at many big U.S. companies hard-hit by the economic crisis.
The Washington, D.C.-based group said boards of publicly traded companies should put greater focus on four areas: executive pay, risk oversight, corporate strategy and transparency. Board members are supposed to be investor watchdogs who oversee management.
The recommendations are the result of 18 months of collaboration with board members, business leaders and government officials, said Kenneth Daly, NACD president.
The idea is “to challenge every corporate board and individual director to restore public confidence in Corporate America,” he said in a telephone interview. He said boards “need to be way more transparent and more aggressive in being able to describe what they do and why they do it.”
On executive pay, NACD said that boards need to make sure they are using the right measures to judge performance and that boards’ compensation committees, which set pay levels for top management, are sufficiently independent.
Risk oversight is another area that boards need to address, the group said. Financial firms, in particular, have been widely criticized for not properly managing risks and instead making the wild bets on the mortgage markets that contributed to the current economic turmoil.
NACD said boards may want to consider assigning risk oversight duties beyond the audit committee, which it said traditionally handles such oversight but is often the most heavily burdened board committee. It also said boards should improve oversight of how company management is handling risk.
Barbara Hackman Franklin, chairman of NACD’s board and a director at Aetna Inc. and Dow Chemical Co., said boards in general are functioning more effectively today and are more independent than they were before the Enron and WorldCom scandals earlier this decade. Those scandals ushered in a wave of new corporate reforms.
But Franklin said boards need to reevaluate themselves amid diminished public confidence in corporate America. She said NACD’s recommendations are meant as a road map, not strict rules, for boards as they examine their own performance.
“We’re not telling boards how to do some of these things,” she said. “We’re just telling them what the principle ought to be.”
(Reporting by Martha Graybow, editing by Gerald E. McCormick)
Was this article valuable?
Here are more articles you may enjoy.