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With the business dealings of large public companies under greater scrutiny than ever, experts say CEOs of midsized public and privately held firms should demand more than just regulatory expertise from their board members.

"These days, many boards are concerned with ’check the box’ compliance, which means that the company has adhered to all of its regulatory requirements," says Cindy Schipani, co-director of the Corporate Governance Project at the University of Michigan business school. "The requirements are important, but I’m concerned that executives are not using their boards enough as a resource to help develop corporate strategy."

A strong focus on accounting and corporate governance reforms, largely driven by the Sarbanes-Oxley Act of 2002 (SOX), has improved financial reporting and disclosure. However, some observers believe those tight governmental regulations have distracted many executives from paying needed attention to basic board-member training, as well as from voicing their own expectations about broader board contributions and performance.

For example, while one recent survey found that corporate boards had become noticeably more vigilant about compliance, those same directors were considerably less informed about company strategy. Of the 1,000 public-company directors polled, only 11 percent said they had a complete understanding of the company’s current strategic path. Fully 27 percent reported having only a limited understanding of overall business strategy.

Those numbers point to a great window of opportunity. During the 2005 Directors Education Institute, Securities and Exchange Commission Chairman William Donaldson said executives should be more proactive in communicating with their boards about key strategic goals, and directors should be more effectively engaged in helping the business reach those objectives.

"Boards [and executives] should begin with serious discussions about their vision for the companies they are serving," Donaldson said. "A precursor to this effort must be an intense and continuing examination of the dynamics of board meetings — a ’getting down to basics’ focused on the openness needed if the tough questions are to be asked and the answers are to be clear and forthright."

Changing roles mean changing expectations
Prior to the financial scandals of recent years, midsized-company CEOs often chose board members on the basis of family relationships, strong reputation in the community or successful experience running another business. In today’s environment, however, such criteria may raise red flags about director independence and depth of business-advising skills.

To address such issues, former Intel CEO Andy Grove says he established an expectation that each board member make at least one visit to either the company’s microprocessor production or manufacturing sites each year and report back to colleagues. He also expected board members to attend periodic seminars on technological and regulatory issues facing the business. The result, he says, is a board that can more effectively weigh in on management’s strategic decisions.

"Today’s expectations of boards and executives are a lot less ceremonial and a lot more activist," Grove told students during a 2004 guest lecture at the University of Pennsylvania’s Wharton School of Business. "I’m still trying to move closer to that picture where the board is a knowledgeable and involved partner with management in making key decisions."

While there is no universally accepted protocol for CEOs to define expectations of board members, most experts agree on the following five steps:

Set clear guidelines for board operations. While board meeting dates and committee assignments are usually clear-cut, many executives do not communicate their expectations regarding length of service, performance and board development. Leaders who take time to ensure that new and current directors understand these basics will benefit from a board that views its responsibilities at a strategic — not tactical — level.

Define the tone for board discussions. Lawmakers passed SOX legislation, in part, because the public believed directors of several high-profile companies had failed to challenge management on questionable accounting and financial practices. To improve board performance — and send a strong statement to investors and other company stakeholders — a savvy CEO will encourage frank board discussion on keybusiness issues.

"Directors need to feel free to speak their minds," Schipani says. "If they have questions, they must ask them. If deals are too complex for them to understand, they should push for more explanation. If needed, the general counsel should explain any legal and regulatory requirements, helping the board ensure that those are met. But CEOs should also encourage open discussion on big-picture issues, so that a focus on strategy isn’t lost."

Provide full background materials on the company and industry. Experts say it’s a mistake to assume that new — or even current — board members will have comprehensive understanding of your business or industry. With that in mind,any board orientation package should include more than just an annual report. Consider adding a current strategic or business plan, competitive market analysis, extended financial data from the past three to five years, a sampling of current corporate communications materials, and bios on key managers. If the company is in litigation, or is considering a merger or acquisition, also provide relevant briefings and source materials on those topics.

Seek diversity in professional backgrounds. In the wake of SOX, virtually all boards have beefed up their requirements for financial expertise in key areas such as the audit committee. While the ability to interpret and understand complex financial issues is important, Schipani says company leaders should match the credentials of board members with organizational objectives.

"If I were a CEO, I’d want people on the board who understood the particular issues relevant to my business," she says. "For example, if we were going international, we’d need directors who had some detailed expertise in how to manage that type of venture."

Develop effective communications tools between meetings. In the book Back to the Drawing Board: Designing Boards for a Complex World, Harvard Business School professor Jay Lorsch notes that most board members are "time-pressured part-timers who lack the knowledge they need to successfully oversee the companies they serve." For that reason, many directors have difficulty keeping track of weighty corporate topics from one board meeting to the next. To help resolve this issue, Lorsch suggests that CEOs set an expectation that directors take on an agreed-to level of "self-study" between meetings. He adds that the CEO and executive team can help with that assignment by providing interim reports to directors between regular board meetings.

By following these tips, you can do a better job of setting expectations for your company’s board of directors.