- The Washington Times - Monday, July 22, 2002

After a short recession, most economic data indicates that the country is ready to begin a new period of sustained economic growth. The housing market is strong, business inventories are down and there is a powerful combination of low interest rates and fiscal stimuli to provide the capital for business expansion and consumer demand.
Yet, our financial markets are in disarray, rocked by a series of scandals that have undermined their integrity. Icons of probity and competence have been knocked off their pedestals, including the accounting profession. Chief among those in whom the public has lost confidence is corporate leadership itself. It has gotten so bad recently that according to some polls, CEOs are now viewed as less trustworthy than politicians.
Such is the paradox of the American economy, which at this pivotal time in its history is both remarkably resilient and remarkably vulnerable: It continues to benefit from great gains in the 1990s, but unless the American investor regains faith in the integrity of corporate leaders and the markets, we could slip back into recession and lose many of these hard-fought gains.
So, how do we restore that faith? Since the collapse of Enron, many proposals for strengthening corporate governance have reconsidered the roles of various responsible parties corporate boards, management and sometimes regulators. Some of them suggest treating Enron-WorldCom-itis by giving boards of directors of public companies greater authority and imposing harsher penalties on them when they stumble in using it.
Greater board accountability makes sense, but we should hardly expect to prevent more Enrons and WorldComs simply by increasing penalties for directors. For better corporate governance, we need to reinvent the board-company relationship.
America is blessed with hundreds of corporate boards made up of experienced, public-spirited directors, but they are hampered by how the corporate board as an institution has evolved in this country. Accepting a board position today is a relatively low-paid, low-key undertaking, a sporadic, collegial exercise incommensurate with the weighty responsibilities of corporate governance.
Board members today have no support staff, so they rely heavily on what management tells them. Even those corporate officials (other than the CEO) who report directly to the board (typically only the internal auditor) have a dotted line relationship to management, are in effect hired by management and more or less allied with it.
If we take this unbalanced system and simply heap more responsibilities and liabilities on board members, it will collapse of its own weight. More work with more liability is not a formula likely to give boards what they need to improve accountability.
A more promising approach would be to give boards the tools they need to succeed. If we want to make CEOs and companies more accountable, we must demand that publicly traded corporations appoint strong chairmen independent from what and whom they oversee.
Here's what a truly independent board structure would look like:
Truly "outside" chairmen would have to be recruited more competitively, and therefore compensated more generously than current directors.
They would need small, independent staffs that would report to them alone. With support staff of their own, board chairmen could produce independent analysis of a company's financial books, tax returns and control-system data.
Independent chairmen would have to be more fully briefed than outside directors typically are today because they would run the board meetings. They would set the board agenda, not the CEO.
Since independence of the "outside" chairmen is mission-critical, close ties to management should be out of bounds. Perhaps some equity stake in the company, designed to align the chairmens' interest with that of the shareholders, could be appropriate, but other than that no chairmen should have any business arrangements with the company beyond their position as chairmen.
Alternatively, one could also give increased remuneration and staff for audit-committee heads as opposed to the chair of the board. But for the strongest possible corporate governance, the board members who command the most deference and most access to information, and who need the broadest scope and greatest independence from the company, are chairmen of boards. Redefining their recruitment and their role is the most promising place for reform to start.
American business is the envy of the world, and our business people have a great stake in ensuring that our economy grows and our country prospers. Since our capital markets are based on public trust, business faces an imperative to implement meaningful reforms to restore it. The best way to begin is to place strong, talented and above all, independent chairmen firmly at the helm of America's corporate boards.

Eugene Ludwig, former U.S. comptroller of the currency, is managing partner of the Promontory Financial Group.

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