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Stephen Wallenstein
Director, Directors' Institute
Robert H. Smith School of Business, University of Maryland

Editor's note: Each month, we ask a Directors & Boards reader to comment on critical issues facing directors today. If you'd like to participate in this section in the future, please email Scott Chase.

How will the overall corporate governance environment change in the coming year for directors of publicly traded companies?

Directors are closely watching the SEC to see what it does. Any meaningful reform of proxy access would be the biggest single thing to occur, but it is not likely to happen until 2011. However, the SEC has recently adopted expanded governance and executive compensation disclosures that will apply to the 2010 proxy season that will greatly increase the disclosure levels of individual directors and director nominees, as well as the disclosure of consultant compensation. I am interested to see how the SEC continues to respond to the challenges of balancing executive compensation and risk in light of last year’s compensation scandals, as compensation committees may face more scrutiny.

Is it becoming more – or less – attractive to serve on a Fortune 1000 board?

It’s about the same - it would still be attractive to me. Fortune 1000 companies generally have good D&O insurance, as well as substantial support for the board’s activities. The risk in being a board member has not profoundly changed, with the possible exception of serving on a bank board, due to the increased time commitment and the challenges of extensive risk management oversight.

The Obama administration has been in office for a full year. Have you been surprised at how board service has evolved in light of the changes within national, regulatory, and legislative circles?

Other than for the financial institutions that received TARP funds, I am surprised that there have not been more changes, given that the system almost collapsed. Discussion of proxy access has been around for a long time, and the SEC has had several previous proxy access proposals, which they withdrew. The new proxy access proposal that has been circulated has been put off until next year. Some are relieved that corporate governance appears to have been put on the back burner, due to the more pressing issues of Iraq, Afghanistan, the economy, and health care. However, there has been some action. The house bill passed by a narrow margin but still has to get past the Senate next year. I don’t think board service has changed that much, unless you are a TARP participant. Corporate governance reform continues to be motivated by Enron and Worldcom and the passage of Sarbanes-Oxley.

Before the economy it was executive compensation and before that it was a sequence of challenging issues heading back to Sarbanes-Oxley, Enron, and on and on. What do you believe will be the next governance “hot button” that complicates the lives of directors and board members?

Proxy access will have the biggest impact on boards, as board members will have to be concerned more about activist stockholders and RiskMetrics, and worry about placating them. The danger is that such nominees will be responsible to shareholders with their own agendas. Generally, when a board selects a new member, they look at the existing skill set of the board members, and then think of necessary or complementary skill sets going forward. Even if shareholders propose a qualified board member, that board member may not have the skill set that the board needs at that time. Boards are getting better at asking “what do we need,” and are trying to be eclectic. The nominating committee is generally taking its role seriously.

The problem is that shareholders may nominate board members who have a specific agenda. If the board does not nominate the director candidate recommended by the shareholder, proxy access will be easier, because of email and the Internet. Will boards want to wage proxy battles against their shareholders? The primary shareholders that will nominate directors are activist shareholders pushing for a recapitalization or a sale of the company, with a focus on short-term profit, rather than the ideal composition for the board. Depending on the final proxy access rules, serving on a board could lose some of its appeal. My concern is with how board meetings would get conducted and how the current directors would integrate with those on the board that have an agenda. It takes some time for a board dynamic to develop, and if you put someone in with a specific agenda (for example, to sell the company), this will certainly change the atmosphere in the boardroom and may lead to more short-term thinking.

Other reforms, such as an independent chair, independent consultants, an independent risk committee, and the relationship between risk and compensation will be much easier for boards to work with.

This year your Directors’ Institute migrated to the University of Maryland’s Robert H. Smith School of Business. What are the key issues you will address at the Institute?

The key issues that we will address on April 7-9 at the Ronald Reagan Building & International Trade Center are Government Involvement and Corporate Governance as Wall Street Moves to K Street, Executive Compensation in Today’s Economic Climate, The Board’s Role in Strategy and Risk Management in Highly Uncertain Times, Managing the Liability Exposure of Directors, and What Directors Must Know About Financial Reporting. Because of our location in the heart of Washington, D.C., we have tremendous access to key regulators and policymakers, and we are looking forward to hearing their take on these compelling issues.

Stephen Wallenstein is Director, Directors' Institute, and Senior Fellow, Center for Financial Policy, in the Department of Finance at the Robert H. Smith School of Business, University of Maryland. He received his MA from Harvard and his JD from Yale Law School. He can be reached at swallens@rhsmith.umd.edu.