But, back in 1998, Apria was going for more than a house cleaning when it selected Whitworth. The company was overhauling with an eye to making sure such improprieties would never happen again, and it used the vehicle that companies are increasingly coming to recognize as potentially the best risk management tool at hand–their own board of directors.

Thanks to SarbOx and a series of new rules from the SEC and stock exchanges that stress the independence and acumen of directors over all else, boards of directors are slowly being transformed into corporate ombudsmen, protectors of shareholder value rather than a rubber stamp for a CEO's employment and paycheck. At their best, they are a company's last line of defense against fraud, self-interest and executive hubris. "One of the most important functions a board has, its most important asset really, is that the board is all about the forest and not the trees," says Nell Minow, shareholder advocate and editor of The Corporate Library. "They have the luxury and the responsibility of being able to step back from the day-to-day operations of the company and that gives them a unique perspective and a mandate that makes them ideally situated for exactly the kind of overhaul Apria achieved."

At their worst, they are boards like those that allowed the Enrons and WorldComs of recent years–and ultimately prompted the need for reform. And given the high volume of shareholder litigation and claims against corporate directors and officers insurance coverage, there are more of the latter than the former.

THE 'HOW' IS THE TRICKY PART

That said, while there is now ample regulation as to what a board should do and be, there is no exact science on how a company actually goes about constructing such an exemplary board. Nor, given recent multimillion-dollar settlements against directors–$13 million in the case of Enron Corp. and $20.25 million in the case of WorldCom Inc.–are there as many potential candidates as there once were for the increasingly demanding and potentially dangerous job of director. "It is much harder to find a director," says Julie Daum, U.S. board practice leader at Chicago-based executive search firm Spencer Stuart. "People are limiting the number of boards they serve on because of the amount of time involved and their concern over liability."

So how does a company construct the ultimate board? The first challenge is to find the right mix of directors.

Customarily, CEOs were the most sought-after board members. The theory: Only another chief executive could stand up and credibly challenge a sitting CEO about a strategy or decision. But today CEO candidates are much less often on the A list–first, because few CEOs have the time anymore, and second, because corporate governance experts are no longer so convinced that chief executives are the force for reason that they were once considered. "The average directorship requires 25 days of service and most companies don't want their CEOs spending that amount of time away; they want them working for their company," argues Richard Leblanc, professor of corporate governance at York University in Toronto and co-author of the book, Inside the Boardroom: How Boards Really Work and the Coming Revolution in Corporate Governance. "While some people say only another CEO will stand up to a CEO in a boardroom, in my experience outside directors who are CEOs tend to be unduly deferential."

Minow agrees. "I'm not sure the 'usual suspects' is the way to go anymore," she asserts. "We've learned from past mistakes that people with fabulous resumes and great qualifications don't always do a good job. The fact that CEOs realize they have less time to devote to a board and then resist joining more of them actually is a healthy sign."

GOING FOR SKILL DIVERSITY

But if not CEOs, then who? While there is no such thing as a cookie-cutter board of directors, new governance rules more clearly define the skill sets for various committee heads: For example, the chair of the audit committee clearly must have serious financial chops, as in the case of a CFO or accounting firm partner. Spencer Stuart's Daum says the audit committee chair also must be "a businessperson; someone who just understands the accounting aspects would be a very narrow director." But Daum admits recruiting has become much more difficult, despite the guidelines. "Companies are struggling; they're looking in places they didn't before, but are not completely comfortable with that," says Daum. "For example, they're seeking outside directors from lower level management positions like the head of a business unit or division. While [it's] a wonderful opportunity for these people, you can't have a whole room of directors that never served on a board before. There's a bit of a balancing act at play."

"Ideally, you want to put together a board comprised mostly of independent directors with expertise in various areas, which makes them broad monitors of management," says Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware. "A good rule of thumb is to have a few of them with meaningful equity stakes in the company. The independence gives them objectivity; the equity gives them incentive."

Some companies are actually developing matrices to determine what types of director with which skill sets are needed at any juncture by the board. "A dream team board must be based on a competency matrix of skills that the board in its business judgment determines it must possess," contends Leblanc. "Since each company is different from an industry and strategy perspective, so are the competency needs of their boards. Even the perceived weakness of the CEO would be part of determining this matrix."

Nexen Inc., a Calgary, Alberta-based global oil and gas exploration and production company with $3 billion in 2004 revenues, worked with Leblanc in developing a competency matrix for its board. "We ended up with 11 different axes on our matrix, with competencies like exploration experience; marketing, because we have a large marketing arm; CEO experience; and safety, environmental and social responsibility, among others," says Sylvia Groves, Nexen's assistant secretary and corporate governance officer. "We use the matrix on an ongoing basis to evaluate our board or to add new board members, making sure their skills match up to our areas of greatest need."

Although Nexen's board has achieved a perfect 10 from GovernanceMetrics International, it seeks further improvement. "We would like a woman on the board–we have none at present–but the problem is finding women with a good grounding in the oil and gas industry," Groves says. Concludes Leblanc: "You want to fill the gaps. That doesn't mean that a person need possess most or even many of the attributes [needed], as long as they fill one that is not being filled by the others."

In Canada, companies are actually required by law (National Policy 58-201) to adopt some kind of formal process for assessing the needs of their board and the competencies of directors, says Leblanc, who is advising on the development of a series of questions for potential directors to ferret out their individual strengths and weaknesses. He has also heard rumblings of similar new rules surfacing south of the border. "Given the recent corporate scandals and the taint they have given boards, a more thorough nominating process would seem in order," he says.

Having a formalized process might also help in comparing the qualifications and actual abilities of prospective directors. Given the egos of individuals one typically finds on a board, determining their real competencies is easier said than done. "The devil is in how you approach candidates about their competencies," Leblanc concedes. "You want to do it in a way that is ego-enhancing, tactful and constructive." In a sense, a formalized system becomes good cover.

But it is not only a matter of setting up criteria for selecting directors and then evaluating them. It also matters where the name came from and who extends the invitation to sit on the board.

WHO PLACED THE CALL?

Patrick McGurn, executive vice president of Institutional Shareholder Services Inc., a Rockville, Md.-based adviser to large institutional investors on corporate governance matters, says it's important for the board and not the executive management team to drive the nominating process for directors. "One of the least-known new SEC rules governing new directors is what I call the 'director DNA disclosure,'" he explains. "The rule requires a company to disclose in its proxy statement the genesis of how the new director came to the board. For example, if the CEO identified the candidate or a recruiter found the director, the proxy must state that. This is important because it underlines the independence of the new board director. If the CEO pulled a name out of his Rolodex and tossed the card to the chair of the nominating committee, it's a scarlet letter on that director's head."

Others agree. "If a CEO brings on a director, that person is perhaps less likely to challenge the assumptions and business proposition and basic strategy of the company," says David Nygren, a partner in the corporate governance practice of Mercer Delta Consulting.

While more CEOs are limiting board service to their own companies, others are relinquishing their board chairman titles, following the trend in Europe where a non-executive chairman typically heads the board and a CEO heads management. But there is substantial disagreement among experts and executives about whether this practice will ever become the norm for the U.S. and whether it should. "WorldCom had a non-executive chairman and look what happened there," comments Theodore Dysart, a partner in the global board of directors practice at executive search firm Heidrick & Struggles International Inc. "There have been a number of other cases where there were egregious corporate governance failures with non-executive chairs."

Another problem: "Few American CEOs will accept the position of chief executive unless it also comes with the chairman's title," says ISS' McGurn. "There is just too much opposition at the moment to the formal creation of an independent chairman." Both Dysart and McGurn prefer installing a lead independent director or what is also called a presiding director–the case, for instance, at General Electric Co. "The point is to have one voice that represents independent directors, whom the other independent directors see as their leader," Dysart explains.

While companies may be getting pickier about who serves, executives are becoming less willing to serve at all. First and foremost, there is the risk of getting sued. Prospective directors are more proactive about determining the breadth and scope of insurance protecting them against a liability that can bankrupt them, and executive search firms now routinely include detailed information regarding the hiring company's D&O liability insurance policies. "There are details about the insurance in these packages that most directors never received before," notes Lou Ann Layton, national D&O practice leader at insurance broker Marsh Inc.

A LITTLE FROM SIDE A

Gregory Flood, executive vice president and COO at insurer National Union Fire Insurance Co., says board candidates are questioning whether or not the company sets aside separate insurance protection for independent directors. "A best practice is to purchase an excess Side A insurance tower above the limits of protection afforded by the traditional D&O policy," Flood says. "This way you don't have the inside and outside directors battling for limits of protection with the corporation."

Marsh's Layton concurs: "If I were a director, what I would want the package to indicate is the limits of liability, first and foremost, and whether or not they seem reasonable. Benchmarking is a good way to see if those limits are adequate for the type of company. Also ensure that the policy has separate limits of protection just for the directors that cannot be absorbed by the company or executives."

Likewise, D&O insurers are scrutinizing board makeup like never before, notes Robert Hartwig, chief economist at the New York-based Insurance Information Institute. "Several D&O insurers now subscribe to the services of board rating organizations like GovernanceMetrics International, while others have developed internal methodologies for objectively rating boards," he explains. "They're also looking at financial reporting information as required by Sarbanes-Oxley." In its D&O underwriting, National Union undertakes a full analysis of each board member's previous loss experience, especially as it relates to prior involvement in litigation. "If you've been a defendant in a securities class action, we know it, and it's a red flag," Flood says.

Serving on the board isn't just the golf games and fancy dinners it used to represent, either. Directors work hard for their compensation, although that compensation is higher these days. Just ask Frank Borelli, a retired CFO of Marsh who now serves as presiding director on the board of the Interpublic Group of Companies Inc. and as chair of the audit committee for both Genworth Financial Inc., a GE spinoff, and Express Scripts Inc. Borelli says both audit committees are putting in longer hours, up from an hour and a half per meeting a couple of years ago to four hours or more at present, while the number of times the committees meet has also doubled. He says this is true for the compensation and nominating committees as well.

So what's the secret to creating a board that not only meets corporate governance best-practice standards, but also truly protects shareholders' interests? On paper the Enron board looked pretty good: a former regulator, the head of the accounting department at Stanford Business School and a corporate turnaround specialist, among others. "The short answer to what went wrong is that they didn't probe deeply enough," says Dick Hanselman, former chairman and CEO of branded footwear marketer Genesco Inc. and a sitting director on three boards. "The board asked auditors and outside counsel, 'Does this pass muster?' and the answers they got back were apparently yes. The solution is to ask probing questions of auditors and lawyers, and now and then be a real pain in the rear end."

WIPING OUT COMPLACENCY

Shareholder advocate Minow agrees that "at the end of the day, glittering resumes don't guarantee the right dynamic in the boardroom." To her, the biggest risk factor with any board, ironically, is success. "Enron was awash in success for several years," Minow says. "When things are going badly, the janitor can suggest feng shui, and the company will start moving desks around. But, [when things are going well,] you want a board that is not intimidated or cowed or silenced by success. I can't tell you how many successful companies I've seen where directors felt if they spoke up it might all fall apart in some tragic way."