The curent issue of Newsweek features an interview with John Gillespie, one of the authors of Money for Nothing:  How the Failure of Corporate Boards Is Ruining American Business. The title alone is fairly daunting for directors who have served and are serving on boards.  Even if the public at large doesn’t read the book, the broad reach of Newsweek will brand boards as “inept.”

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.

How many professionals take on a highly visible thankless task for no pay not once but twice in the most challenging decade?

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.

Buyout firm founders are by nature risk-taking entrepreneurs.  By making money for their clients, they create a loyal following as has Guy Hands, founder of buyout firm Terra Firma Capital Partners.  In his holiday letter, he criticizes a system that has allowed “risk to be taken in the knowledge that, if things go right, bankers will take on average 60-80% of the profits generated through compensation and, if they go wrong, shareholders and ultimately the Government will pick up the costs.” 

Add to his remarks, those made recently by National Economic Council director Larry Summers, “there is no financial institution that exists today that is not the direct or indirect beneficiary of trillions of dollars of taxpayer support for the financial system.”

It would be wise for bank directors to consider these views when approving compensation plans.

The two studies cited in The Wall Street Journal remind directors that they should be both independent and “businesslike” when it comes to evaluating management.  Two new studies challenge the notion that companies that pay top price get top talent. Lucian Bebchuk’s Harvard study pointed out that the bigger the “CEO pay slice,” the lower the company’s future profitability and market valuation. Adding fuel to the fire is the study by finance professor Raghavendra Rau of Purdue who looked at CEO pay and stock returns for roughly 1,500 companies.  The conclusion of his study:  that 10 percent of firms with the highest-paid CEOs produce stock returns that trail their industry peers by more 12 percentage points, cumulatively, over the next five years.

Clearly, one issue for shareholders during the 2010 proxy season is how the board provided oversight for CEO compensation.  In 1951, legendary investor Benjamin Graham suggested that directors submit to an interrogation in order to justify “the generous treatment” they are asking shareholders to approve.  “The stockholders are entittled to be told… just what are the excellent results for which theyse arrangements constitute a rewarded and by what analogies or other reasoning the board determined the amounts accorded are appropriate.”

Surely such questions are valid 59 years later.

The two studies cited in The Wall Street Journal remind directors that they should be both independent and “businesslike” when it comes to evaluating management.  Two new studies challenge the notion that companies that pay top price get top talent. Lucian Bebchuk’s Harvard study pointed out that the bigger the “CEO pay slice,” the lower the company’s future profitability and market valuation. Adding fuel to the fire is the study by finance professor Raghavendra Rau of Purdue who looked at CEO pay and stock returns for roughly 1,500 companies.  The conclusion of his study:  that 10 percent of firms with the highest-paid CEOs produce stock returns that trail their industry peers by more 12 percentage points, cumulatively, over the next five years.

Clearly, one issue for shareholders during the 2010 proxy season is how the board provided oversight for CEO compensation.  In 1951, legendary investor Benjamin Graham suggested that directors submit to an interrogation in order to justify “the generous treatment” they are asking shareholders to approve.  “The stockholders are entittled to be told… just what are the excellent results for which theyse arrangements constitute a rewarded and by what analogies or other reasoning the board determined the amounts accorded are appropriate.”

Surely such questions are valid 59 years later.