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More Corporations Seek Lead Directors

In the wake of some high-profile corporate scandals in recent years, many companies are worried about their public image. They want to convince investors that management has everything under control.

The position of lead director was created to provide more corporate accountability. And it's catching on.

"A lead director is a 'first among equals,'" says David H. Blake, a professor at the University of California at Irvine.

To understand the role of a lead director, you have to understand a bit about how corporations work. In any corporation, there is a board of directors that represents the interests of shareholders (investors). The board is responsible for overseeing two things: the company's financial dealings, and the company's management.

In its role of overseeing management, the board hires and oversees the chief executive officer (CEO). The CEO is an employee of the company. They hold the top management position.

Blake says that historically, the CEO has often been the chairperson of the board. The chair is expected to guide the board. That means that the board, which oversees management, is headed by the top manager.

"It is like putting a fox in charge of looking after the chickens," Blake says.

These days, many companies want to put someone other than top management in charge of making sure the board operates effectively.

Some companies have dealt with this by saying that the CEO cannot be an officer on the board. However, CEOs are accustomed to filling the chair position. Many do not want to change their involvement.

Therefore, other companies created a "lead director" role.

Lead directors have no direct ties to management and usually have a lot of board experience. "The lead director oversees the board's operations and ensures that it carries out its responsibilities effectively," says Anthony Goerzen. He is a professor of strategy and international business.

Plus, the lead director position complies with new stock exchange rules. These new regulations require boards to hold meetings without management present.

Blake adds that there is another reason for using lead directors. Running a large company is becoming more complicated all the time. The CEO's responsibilities are much different from the board's responsibilities. By separating the two, one person isn't responsible for everything.

The lead director ensures that the board works on tasks that are not the CEO's role. These tasks could include planning for succession, setting a long-term strategy for the company's direction and others.

The lead director presides at board meetings when the chair is not present. They act as a liaison between the chair and the independent directors. They approve meeting agendas, schedules and information sent to the board.

They are available for consultation and communication with the shareholders (the investors). The lead director also helps the directors consider whether the CEO is doing what they want him to do, and whether the board agenda is covering the right points.

"A strong lead director helps to head off crises and to weather those that are inevitable," says Goerzen.

More and more companies are appointing lead directors.

"This is a growing trend. It makes a lot of business sense," says Blake. "It will and should continue to grow but it is not going to be 100 percent any time soon."

Goerzen believes the trend will spread to smaller companies, government-owned organizations and not-for profit entities. These organizations must also develop systems and procedures that will improve their effectiveness.

Board members, including lead directors, are paid for their involvement. The amount they are paid varies, depending on the size of the company.

Blake estimates that the range would be anywhere from $12,000 to $100,000 annually in the U.S. Some might also receive stock options as a reward if the company does well.

Directors typically devote about 10 to 12 hours a week to their board work. Lead directors might work a few additional hours.

Blake explains that board members and lead directors are elected for their broad business experience. Alternatively, they might have specialized knowledge such as accounting, finance or technology.

There is no direct career path that prepares you to become a lead director. "It is not something you apply for," he says. "It's a result of knowledge and effectiveness and compatibility in providing this direction-setting role."


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