CM: So are companies finally getting focused on reforming their boards? Nadler: I think that there was a period early in the first wave of the compliance phenomenon and the frenzy around Sarbanes-Oxley when a large amount of time was being chewed up as people worried about how they were going to avoid being out of compliance.

What's happening now is that there has been a dramatic change. I see it both in the attitudes that our CEO clients have toward their boards and the way they deal with them — they're concerned about them — and also in the dramatic pickup in consulting work that we have in terms of working directly with boards of directors.

CM: So what types of opportunities is this focus on corporate governance bringing to Mercer Delta?

Nadler:: It's a fast-growing area, but it's going to be limited, frankly, in revenue size, because the fact is that boards are only together so often. They meet only six to eight times a year, and then there are a couple of the committee meetings. So there's a limit to how much revenue potential there is. But it's profitable.

CM: So is the reform movement still advancing steadily in corporate governance today, or has it begun to abate?

Nadler: Well, we just did a joint study, which we're going to release in the next month or two, on the best practices of boards and CEO succession. We looked at 23 companies and were able to talk with the committees that managed succession.

And they see (for example, this is just one issue) that a succession used to be run by a CEO. Today, it's jointly run by the CEO and boards, and they now see a future where board members will be running the board, with the CEO providing input. So that indicates that the transition is continuing. It's not necessarily abating.

I think that the compliance-oriented intramurals have abated and will continue to abate. But there is something new around the degree to which board members feel that they are now accountable. Therefore, CEOs are realizing that they have an accountability to the board.

CM: What types of approaches are CEOs taking to energize their boards?

Nadler: Well, I think that there are two things. One is that we typically start with some form of board assessment that moves beyond just checking boxes. We're doing that probably with half a dozen boards now, where we're doing in-depth interviews as well as using different types of survey instruments to help the boards understand how they're performing now versus what they believe they should be doing, with input from both the board and management.

The other issue that comes up, and this is another indicator of change, is the rise of independent board leadership. We have this blue-ribbon commission, which I co-chair with Jay Lorsh. And the strong recommendation of the commission is that, given the nature of boards and their relationships to CEOs, there needs to be independent leadership of the board. It can come in two flavors, typically — either separation of chairman and CEO, or a lead director. We were agnostic; we are not arguing for separation.

But, in a number of the places where we've worked, they've instituted the idea of a lead director and, therefore, the chairman or CEO now has a partner in working with the board. In one of the situations working right now, basically, our clients are both the chairman and the lead director together, and, if anything, the lead director is more of the primary client in looking at the board assessment — which is a really big change.

CM: What is often the first order of business when you work with boards?

Nadler: Well, I'm heading off to spend two days with a board tomorrow, so I can give you a few thoughts. The first answer, the broadest generic issue, is that the rules of the game have changed. And people aren't sure what the new rules are. In any board, you have a range of people who are what I would call old-time, institutional, passive directors, who are there in the old model. Then there is the other extreme of people, who now want to micromanage the firm, which isn't right either. And then there are some people in the middle. And this breakdown varies issue by issue, whether it be strategy or CEO comp or succession or whatever.

So the first, biggest issue is figuring out what the new rules of the game are and where we should be engaged more as a board than as management, and where we should be engaged less. Sort of figuring out what's our work, because that question has never been really asked.

CM: In what areas do we see boards having greater interest?

Nadler: One of the big issues that boards are concerned about is how to get engaged in strategy. Most directors feel that this is where they could add the most value versus the operations. They believe that they could add the most to strategy, and meanwhile all the surveys show that this is one of the areas of least satisfaction. The other area that boards are trying to figure out, as I mentioned, is how to effectively assert themselves in CEO succession. CM: What about the middle-level corporations? Are you finding the same types of challenges?

Nadler: Well, I think that they have similar kinds of issues, frankly. We primarily work in the Fortune 500, and we've done some things in the next levels that still have the same elements to it. I think that the smaller companies feel the burden of compliance more heavily. You know, this Sarbanes-Oxley 404 stuff, etc., is more burdensome to them, and they have fewer resources.

CM: What can you tell us about the board's role in corporate crises?

Nadler: I think that the critical issue that plays out is that the board is in a unique situation. Ten years ago, you would have talked about various crises. Today, you have crises that inherently involve the CEO. And, therefore, we argue that the board really needs to be prepared to be able to step in when you have a CEO who, for one reason or another, is — let's call it — disabled. Disabled not meaning physically disabled, but because of regulatory or criminal or other things that mean that the CEO is now the subject of the crisis, not someone working with the board to manage it. This requires a different way of thinking about the board and being prepared ahead of time, obviously.

CM: How accepting are CEOs of some of these reforms?

Nadler: Well, they're accepting the idea that they work for the board. I mean, the view is: "I work for the board. I may be a chairman and call it my board, but the fact of life is that, particularly when the board starts to have independent sessions, when the board insists on a role in succession, when the board has a lead director, guess what? At best, I have to collaborate with the board and, in the extreme, I frankly do work for the board." And that's a different view than that of the old imperial CEO, which was: "It's my board, and basically they'll do what I say."   David Nadler is chairman of Mercer Delta Consulting. He is the author or editor of 14 books, including the recently published Building Better Boards: A Blueprint for Effective Governance.
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