Crisis prevention: how to gear up your board

Today's critics of corporate boardrooms have plenty of ammunition. The two crucial responsibilities of boards-oversight of long-term company strategy and the selection, evaluation, and compensation of top management--were reduced to damage control during the 1980s. Walter Salmon, a longtime director, notes that while boards have improved since he began serving on them in 1961, they haven't kept pace with the need for real change. Based on over 30 years of boardroom experience, Salmon recommends against government reform of board practices. But he does prescribe a series of incremental changes as a remedy. To begin with, he suggests limiting the size of boards and increasing the number of outside directors on them. In fact, according to Salmon, only three insiders belong on a board: the CEO, the COO, and the CFO. Changing how committees function is also necessary for gearing up today's boards. The audit committee, for example, can periodically review "high-exposure areas" of a business, perhaps helping to prevent embarrassing drops in future profits. Compensation committees can structure incentive compensation for executives to emphasize long-term rather than short-term performance. And nominating committees should be responsible for finding new, independent directors--not the CEO. In general, boards as a whole must spot problems early and blow the whistle, exercising what Salmon calls, "constructive dissatisfaction." On a revitalized board, directors have enough confidence in the process to vigorously challenge one another, including the company's chief executive.