Report of the NACD Blue Ribbon Commission on Director Professionalism

It has been a full generation—a decade and a half—since the National Association of Corporate Directors (NACD) first published the Report of the NACD Blue Ribbon Commission on Director Professionalism. Yet some have called the report “prophetic,” and with good reason.

Throughout the past 15 years, a multitude of institutions and individuals have been offering advice on the subjects covered in this report: what boards should do, how directors should fulfill their responsibilities, who directors should be, and how boards and directors should be judged. With every passing day, the quantity of advice accumulates. What is it all about?

The big picture can look discouraging; despite all this good counsel, companies have borne the brunt and learned the lessons of a series of difficult events—from corporate bankruptcies that led to the passage of the Sarbanes-Oxley Act nearly a decade ago (2002) to the systematic financial collapse that led to passage of the Dodd-Frank Act in more recent times (2010).

The legacy of these new laws so far includes:

• New listing rules strengthening the governance requirements for listed companies at the New York Stock Exchange and NASDAQ
• Extensive new disclosure requirements in proxy statements about a variety of issues including compensation risk, director qualifications, consideration of board diversity, and leadership structure
• Mandated ethics codes and whistleblowing systems, and a more direct role for regulators in receiving and rewarding complaints
• Shareholder say on pay mandating an advisory vote on all pay plans at least every three years (with frequency determined by shareholders)
• Easier access to placing director names on the proxy ballot—a.k.a. “proxy access”.

The basic principles behind these new requirements appear in this report. Will these requirements insulate our companies from the problems they face? The answer lies in the application of sound principles of governance, which directors will find summarized in the following pages.

As with the original edition of this report, our recommendations remain forward-looking and “aspirational.” It remains imperative to follow sound aspirational goals. Failing to do so may result, as it has in the past, in more regulation. There is no risk in following aspirations, since the Delaware courts have recognized they do not create new legal liabilities.

Aspiration Defined

That aspirations create no new legal liabilities was decided in a series of landmark court decisions in Delaware in the complex and long-running Disney case over compensation paid to Michael Ovitz.

• In Brehm v. Eisner (2000), the Delaware Supreme Court cited Director Professionalism, and added that “Many of the recommendations of the Council of Institutional Investors, the American Law Institute and the NACD are desirable but are not mandated by our law.”
• In 2005, as a continuation of Brehm v. Eisner, in In reWalt Disney Co. Derivative Litigation (a decision upheld by the Delaware Supreme Court in 2006) the Chancery Court would clarify the distinction between aspiration and obligation, highlighting that, although aspirational standards are worthy, they should not be used as a standard of liability:

The Importance of Aspiration

The Disney decisions do not mean that aspirational principles are something directors can afford to ignore. No. Indeed, they are more important than ever. When good governance practices are not heeded voluntarily, they eventually become mandated. This was true for both Sarbanes Oxley and Dodd-Frank. Virtually all of the now mandated requirements were aspirational “best practices” long before they became legally mandated, having been ignored to the detriment of the economy.

In 2008, in the spirit of the long line of Delaware Disney decisions, NACD issued the Key Agreed Principles to Strengthen Corporate Governance for U.S. Publicly Traded Companies, based on principles advocated by groups representing management (Business Roundtable), shareholders (Council of Institutional Investors and the International Corporate Governance Network), and directors (NACD). The first of the Principles asserted “Board Responsibility for Governance,” explaining that “Governance structures and practices should be designed by the board to position the board to fulfill its duties effectively and efficiently.”

Director Professionalism remains a timeless guide to doing just that. Corporate America faces great challenges and needs many new solutions, but one thing has not changed: I still have faith in the power of good corporate governance. I believe that there are steps which can be taken internally—by corporations on their own—without mandates, to bring about change. NACD has grown in recent years. Why? Because thousands of directors want to learn what they must do, or what they should do, to perform their jobs better. You, as directors, have an opportunity to make the world better and I believe you can do it.

The need for continuing, voluntary improvement by boards cannot be underestimated. I personally believe that it is the key to corporate success over the long term. As I noted in my introduction to a previous edition of this report7, no matter how many regulatory rules may be issued, they can never cover all of the circumstances directors will face. Corporate governance reform is, and will remain, incomplete; there will always be gaps to be filled in by directors seeking to be professional. And, therefore, we urge directors to continue to use this Report, in this new edition, to guide them in the gray areas.

Ira M. Millstein
July 2011