The Single Most Important Lesson for Boards of Directors

Last Updated Jan 10, 2008 12:38 PM EST

Ever since the Enron-era scandals, boards have been becoming more independent, better-organized and tougher on management. Without a doubt, much of that has been necessary.

But the great risk is that boards overshoot their core mission and discourage executives from taking risks. This is the heart of the American style of capitalism--managers take risks with capital, people or technology. They see an opportunity in the market and they attempt to innovate in terms of products or services. Look at how Ivan Seidenberg is betting about $20 billion of Verizon Communications' money on building fiber optic to the home.

Boards, as committees, are risk-averse. They abhor chance. So if boards become too intrusive in management and demand too many reports and too much justification for every step, the net effect is that the company will stop innovating. It will settle down into complacency, which ultimately kills any company.

So getting the balance just right is exquisitely difficult. It takes real wisdom, particularly now that so many shareholder groups are demanding "accountability" from boards.

The smart people in this field say that the Sarbanes-Oxley era of formality and distance between management teams and boards is slowly giving ground to a more interactive model. Heads of audit committees mentor their chief financial officers. Chairs of nominating/governance committees take an active interest in the head of human resources. And the CEO knows he or she can reach out and seek informal counsel from directors who have specialized knowledge in technology, marketing, global markets or finance.

At your company, what have you found to be the most effective formula for the relationship between management and the board?