The context for this change is the “new normal”, a term coined by economists that characterizes an environment of high unemployment, slow growth, consumer distress, overly careful investors and long-term owners who will seek growth where they can find it. This is a challenging environment in which to serve as a director.

Millstein sees the changes wrought by the Dodd-Frank Act as tectonic, making Sarbanes-Oxley look like child’s play. 

But directors shouldn’t wait until the final rules of the Act are written.  Rather, they should engage with their shareholders now.  He cited the fulsome letter that the Prudential board wrote in the proxy, introducing their thoughts on compensation. While Millstein believes directors should know what their shareholders think, he doesn’t believe that they have to agree with them.  “Explain why the board has a different view.  That seems to me perfectly rational.”

He noted that there was a huge amount to do in communication with shareholders and boards should get ready to engage. Now.

Gregory made these remarks on a National Association of Corporate Directors and Weil Gotshal webinar attended by hundreds of directors on Friday as boards try to gain a better understanding of the requirements that the new legislation that President Barack Obama signed into law on July 21, 2010.

“I want to emphasize that the theme within the legislation is that boards are the problem,” said Gregory.

Boards are well advised to recognize that the implementation of the legislation will fundamentally change their interactions with shareholders.  For directors who have eschewed any contact with shareholders, they must engage with shareholders in meaningful ways to elicit their support.  The sooner and more intelligently that they begin this dialogue, the better for them.

It’s the Lake Wobegon syndrome where 95 percent of directors think they’re doing a good job. CEOs see it differently.  According to work by Heidrick & Struggles, CEOs “almost universally confide” that they have one or two directors who provide wide counsel, offer advice on key issues and contribute both formally and informally to the enterprise.  That means that 80 percent of the directors are seen as not being very effective by the CEO.

The fictional town of Lake Wobegon, where “all the women are strong, all the men are good looking, and all the children are above average,” has been used to describe a real and pervasive human tendency to overestimate one’s achievements and capabilities.

CEOs need to see their boards as providing a competitive advantage to them and their enterprise. If board members are less effective, the board needs to replace them.  Without outside help, CEOs and other directors find it hard to ask less effective directors to leave.

CEOs need to ask, are they giving their boards the right tools to be effective.  Is management teeing up information for decision, providing the context and the why for the company considering it. Or, do boards get a firehose of information or worse yet, only the information that management want them to see? Are boards spending their time on the right issues?  Do boards have access to tools and advisors to make them more effective?

Boards are working harder than ever.  CEOs need to see to it that the board has the resources it needs to create strong work groups.

While the news is full of reports about shareholder concerns over the value their elected representative, the board of directors, bring to the enterprise, it turns out that CEOs have questions too.

It’s the Lake Wobegon syndrome where 95 percent of directors think they’re doing a good job. CEOs see it differently.  According to Heidrick & Struggles, CEOs “almost universally confide” that they have one or two directors who provide wide counsel, offer advice on key issues and contribute both formally and informally

Charles Elson, the corporate governance expert at the University of Delaware, traces the origins of  shareholder activism to the anger shareholders were feeling that they were being ignored.

The truth is that there are strong energized boards and business leadership dedicated to delivering durable long-term value through sustained economic performance, sound risk management and high integrity and through meaningful consultation with shareholders.  But the new book paints a dark picture because so little was known about corporate governance until the financial collapse.

Good directors should be concerned about ”Money for Nothing.”  If they thought the legislative changes were merely grandstanding efforts by politicians, they are wrong. Actions by the SEC and Congress reflect the general concern that governance isn’t being carried out effectively.

Good boards are stepping up to the new environment to demonstrate that they can make corporate governance more effective to serve the company, its shareholders and stakeholders.  It will take reevaluation and rededication.

In this era of transparency, everyone will be watching.  The public won’t settle for less than effective oversight.

Kenneth Feinberg managed to create a program that persuaded 98 percent of the 3,000 victims’ families of 9/11 to stay out of court and instead apply to his fund while dispensing the $7 billion that seemed to satisfy almost everyone. Then, last year, he took on the job of administering pay for the executives of the failed businesses bailed out by taxpayers.  Not only did he create a credible template but injected common sense in the way that executives are paid. 

Directors could take a lesson.

Who but Warren Buffett could describe the current practice of a fictional greedy CEO engineering the approval of his rich pay package  by engaging the compensation firm of “Ratchet , Ratchet and Bingo” to prove to the board that he is worth it?  Buffett,  the Chairman and CEO of Berkshire Hathaway  , takes $100,000 in pay and say he would pay the company to do the job.  “It’s a great job!”  However, while he’s been running Berkshire Hathaway, the ratio of top pay to average pay at public companies has multiplied roughtly 11 times, from 24:1 to 275:1.

As Steven Brill conveys in his excellent profile of Feinberg in the New York Times Magazine, Feinberg shows himself to be a straight shooter, independent and fair.

That’s what most shareholders are asking directors to be–independent and fair.

“ These days, it’s not unusual for a board member—typically the lead director or a key committee chair—to initiate the contact with RiskMetric’s research team.  It’s common for a director to lead the discussion, ” said Patrick McGurn, Special Counsel , RiskMetrics Group.

These discussions typically focus on an issue upon which RMG will make a vote recommendation rather than a rating.  “We’ve been encouraged by the broader response to the concerns we raise about governance,” McGurn said.

Many directors were hoping that concerns over executive compensation would melt away as the stock market improved, but the populist outrage over executive pay has only increased, which is reflected in the government’s growing intervention in the boardroom.

“Today, the government has its torso in the door, not just its foot,” observed McGurn.  If boards aren’t responsive to shareholder concerns, they place the company’s reputation as well as their own reputations at risk. “Investors expect boards to be more accountable because they see the directors as their elected representatives.”

With say on pay and proxy access all but deferred for the 2010 proxy season, shareholder petitionsand vote-no campaigns will be the focus.  “Every director looks at the results of the vote-no campaigns,” said McGurn “The directors who have worked hard and anticipated the issues will have an easier time.

“As Warren Buffet said, ‘when the tide rolls out, it’s clear who’s wearing a bathing suit.’ And the tide has rolled out.”

Said McGurn: “Smart boards that take control to improve shareholder engagement will be better positioned in this new environment.”

“This is a new era,” Sheehan told the audience at the National Association of Corporate Directors. “The financial crisis of the past year has resulted in the erosion of the trust of the American public in business.  We represent our members and beneficiaries but we also believe we are a proxy for the American public who invest in public companies.”

To restore trust, companies need to operate with transparency, acknowledge the role of the shareholders and demonstrate that management and directors are accountable.

“We may be seen as activist shareholders, but our interests are aligned,” said Sheehan.  “We want to see companies maximize their value.  If you do well, we do well for our 833,000 public school educators and their families.”