Those Who Sit on Company Boards Face a New, Tougher Job Description (page 1 of 4)

The same question has been asked about missing-in-action boards and auditors of other companies - ranging from Enron to WorldCom to Tyco - where all-powerful top executives at times treated the business more like personal savings accounts than publicly-owned enterprises.

As a result, companies not just in the U.S. but abroad are facing a series of corporate governance reforms, both legislative (the Sarbanes Oxley Act passed in July) and regulatory (New York Stock Exchange proposals published in August).

The NYSE proposals would require, among other things, that corporate boards of NYSE-listed companies have a majority of independent directors; that listed companies have audit, compensation and nominating committees composed entirely of independent directors; that non-management directors meet at executive sessions without management present and that they appoint a lead director to preside at these sessions; and that shareholders approve all stock option plans (with some exceptions, such as "employment inducement" options).

In Britain, board reform has been no less pressing, going back to 1992 when a wave of corporate scandals resulted in the Cadbury Committee report which, among other things, recommended that boards of directors of public companies include at least three outside directors as members and that the CEO and chairman posts be held by different individuals.

In January 2003, another report on corporate governance was issued in the UK. Titled "Review of the Role and Effectiveness of Non-executive Directors" and compiled by former investment banker Derek Higgs, the report suggests a number of controversial reforms. These include, for example, that senior independent directors act as liaisons with shareholders at meetings between shareholders and management; that half a company's directors be independent non-executives; that an independent director chair the nominations committee, and that non-executive directors serve no more than six years on a company's board.

The Higgs report, which will be used as the basis for a new code on corporate governance, has many current chairmen and board members fuming. A number of British executives have vowed to ignore its recommendations.

Against this backdrop, Knowledge@Wharton last week interviewed Charles Miller Smith, chairman of the board of international energy company Scottish Power, based in Glasgow, and Robert Mittelstaedt, vice dean of executive education at Wharton and professor of management. In the course of his career, Smith spent 30 years with Unilever, the last five of which he was director of finance and a member of the Food Executive. He was appointed chief executive of ICI in 1995 and served as chairman from 1999 to 2001. He is also an advisor to Goldman Sachs. Mittelstaedt, before he was appointed head of executive education in 1990, founded, ran and sold a successful company in the medical industry. He currently serves on three boards of directors and served previously on three others. He is the co-author of a recent book entitled Knowledge@Wharton on Building Corporate Value.

The two men were asked to consider the changing role of boards of directors in what they say is becoming an increasingly volatile, litigious and risky environment. As Smith noted at one point during the discussion: "The social, political, and economic order will be so much more unstable in the next 50 years than it was in the last 50."

Knowledge@Wharton: In the UK, the role of chairman of the board and CEO are now generally held by different people, unlike the U.S., where it is estimated that in 70-80% of companies in the Standard and Poor's 500, one person wears the hats of both CEO and chairman.