BulletProofBlog the blog on crisis communications

Each week, Bulletproof Blog features exclusive interviews with thought leaders on issues of critical importance to companies and countries. This week, as directors of public companies continue to grapple with emergent issues affecting board scrutiny and accountability, we interview David Leach of ECG, an expert in linking compensation and governance with overall corporate strategy.

Given the current state of corporate governance, what should boards of public companies be doing now to demonstrate that they are leading corporate reform, rather than being led by it?

David Leach: The most significant task before boards of public companies in today’s environment is restoring shareholder trust. This populist movement afoot in the marketplace can sometimes resemble a lynch mob – and as a result, many companies just want to keep a low profile and bury their heads in the sand. Much like a taxpayer that is reticent of saying or doing anything to displease the IRS for fear that the action might trigger an audit, they are afraid to step forward.

Right now, there are many public companies that are behaving like private companies – and that sends precisely the wrong message. Today, good corporate governance means transparency. The boards that effectively articulate the underlying reasons for a particular course of action are the ones adapting best to the new paradigm. On executive compensation, for example, boards don’t have to slash pay; they need only explain why competitive compensation is essential to attracting the best talent available.

Also, boards shouldn’t wait for the government to tell them to implement reforms that they know are coming anyway. Taking proactive, rather than reactive, steps to enhance shareholder protection is what leadership on this marquee issue is all about.

As changes to the proxy process impact how boards of public companies are elected, how can directors best adapt to the heightened shareholder accountability – and, potentially, liability – that these changes will bring?

David Leach: Board members need to be the voice of the shareholders. That means developing an intimate knowledge of basic business practices and being willing to call out executive leadership if they believe something is amiss, rather than simply accepting their decisions at face value.  Board members need to be more willing to accept their own shortcomings than they have been in the past. They are typically very adept business people, but that doesn’t mean they are perfect. Identifying their weak spots through routine performance appraisals, or self assessments, and then working to improve in certain areas will send the message to investors that they take their jobs seriously and aren’t above bettering themselves to ensure they’re representing shareholder interests effectively.

What’s next with regard to corporate governance? What are the emerging issues corporate directors will have to effectively navigate in 2010 and beyond?

David Leach: The big issue for corporate governance in 2010 is risk assessment.  The Securities and Exchange Commission is expected to publish final rules this fall requiring all public companies to conduct a risk assessment of all their incentive compensation plans to ensure that they do not promote excessive risk taking that could have a material effect on the business. By next spring, I believe that most public companies will be required to disclose the results of these assessments in the Compensation Discussion and Analysis section of their upcoming proxy statements.

In addition, due to the far-reaching effects of the financial crisis, all public companies are going to be under increased scrutiny for the actions of a few bad actors. As a result, we’re going to see new rules and regulations applied across numerous industry sectors. For instance, the additional reporting requirements that are in store for financial services companies will likely soon be required for all public companies. The important thing for directors to remember is that everyone’s been tarred with the same brush. Whether it’s fair or not, all companies are going to have reflect a new set of priorities moving forward.

To connect with Mr. Leach, e-mail him at dleach@ecgcorpgov.com.

Larry Smith is Senior Vice President of Levick Strategic Communications, the nation's top crisis communications firm, and a contributing author to Bulletproof Blog. Connect with Levick on Twitter: @Levick.