Governance Consultants: The Issue of Qualifications
H. Stephen Grace Jr. and John E. Haupert
DECEMBER 2006 - Today’s
increased focus on corporate governance means that boards
of directors, managers, and others need advice in the development
and evaluation of governance structures and processes. The
demand for these services has been driven by corporate managers
and boards interested in improving governance, satisfying
shareholders and regulators, and preventing lawsuits. On the
other side, judges, jurors, arbitrators, and mediators need
governance experts to help them understand the nuances of
governance practices and the way they relate to management.
Levitt’s landmark “Numbers Game” speech
of September 1998 called for boards to engage independent
professional and legal advisors. Levitt offered further
insights on the governance challenges facing boards with
“In Defense of Sarbanes Oxley,” an op-ed he
co-authored with Paul Volcker in the June 14, 2004, Wall
Street Journal. Levitt
and Volcker went beyond the earlier proposition that a breakdown
in “tone at the top” was the primary cause of
business collapses, and pointed to the breakdown in “corporate
checks and balances.” Inherent in these checks and
balances are the assignment of responsibilities, the requirement
for accountability, and the existence of consequences.
recognition of the value of professional advisors, and his
emphasis on checks and balances, has expanded the role of
corporate governance consultants. With this expanded role
comes the need to clarify the “qualifications”
that should be expected of those who would represent themselves
as qualified corporate governance consultants.
article establishes a set of expectations—a common
body of knowledge—for qualified corporate governance
consultants. This definition is made more critical by the
absence of licensing or other professional standards in
the field. The common body of knowledge requires working
with legal and accounting specialists, building on the professional
and academic literature, and drawing from the knowledge,
skills, and experience of executives and directors.
development of a common body of knowledge is neither novel
nor unique in the practice of business management. Almost
50 years ago, another group of business professionals addressed
a similar need. The Association of Consulting Management
Engineers (ACME), now known as the Association of Management
Consulting Firms (AMCF), recognized that the growing demand
for management consulting services led many people to enter
the field—some were qualified, others were not. The
ACME established qualifications for management consultants
in its 1957 publication, Common Body of Knowledge Required
by Professional Management Consultants.
mission of the ACME study was to closely examine the elements
of “managing.” The ACME study was built on well-understood
principles solidly embedded in business practices and business
literature. The ACME study did not consider the oversight
role of the board of directors and board committees a matter
of critical importance today. Nevertheless,
the ACME study provided an excellent framework for setting
out a common body of knowledge for corporate governance
consultants. The ACME study contributed significantly to
the discussion of management structures and processes that
Common Body of Knowledge: Overview of Basic Principles
type of education, training, experience, and other capabilities
should such advisors have in order to consult in the area
of corporate governance?
two basic components of the common body of knowledge (CBOK)
for qualified corporate governance consultants are: 1) an
understanding of, and experience with, management structures
and processes, and 2) an understanding of, and experience
with, governance structures and processes. Before addressing
these basic components, the CBOK addresses certain other
governance consultant must be able to evaluate the functions
of management and the board; a consultant must also be able
to evaluate the relationship between the two entities. A
corporate governance consultant must contribute to the development
of the governance structures and processes with the required
checks and balances.
governance consultants may benefit from experience with
noncorporate business structures. General partnerships,
limited partnerships, joint ventures, and other noncorporate
forms often present valuable governance lessons.
governance consultants should have a healthy suspicion of
“best practices.” Knowledge of what has worked
well for others can be useful; however, corporate governance
consultants must understand that the division of labor is
specific to each company. Widely different checks and balances
may need to be built into the governance structures of seemingly
similar entities. A company’s need for checks and
balances may also change over time.
governance consultants must be able to communicate effectively
with boards and management in addressing governance issues.
Today’s boards of directors are increasingly independent
and proactive. Some are now comprised of a majority of outside
(independent) directors, with either a lead director or
a nonexecutive chair. These boards are qualified to provide
oversight and are committed to doing so. Directors are now
charged by shareholders and regulators with establishing
and maintaining a governance system. The director’s
role is substantive, and a failure to do the job efficiently
and transparently can have serious consequences for the
director. While many professionals can contribute specific
knowledge to assist a board, board members expect corporate
governance consultants to be experienced with, and share
a deep understanding of, the range of issues facing boards.
Structures and Processes
corporate governance consultant must possess a level of
knowledge of, and experience with, management structures
and processes similar to that of an experienced senior executive.
This familiarity contributes to the consultant’s understanding
of basic management principles regarding organizational
structures, relationships, and policies.
understanding of “the structures and processes of
managing” and its constituent elements enables a consultant
to evaluate how “managing” is integrated into
a company’s governance structure and processes. This
understanding is built upon knowledge of, and experience
with, the act of managing, often defined by a three-step
procedure that includes planning, implementing, and monitoring.
(In the ACME study, these three steps were called establishing
objectives, directing the attainment of objectives, and
properly evaluate a company’s management, a qualified
corporate governance consultant must generally be knowledgeable
of the primary activity areas within a company. The ACME
study describes these as being: 1) research and development,
2) production, 3) marketing, 4) finance and control, 5)
personnel administration, 6) secretarial and legal, and
7) external relations. While all of the activity areas contribute
to operations, the ACME study describes the first four as
basic to getting work done, while the final three influence
the climate in which work is done.
each of these primary activity areas, multiple functions
and subfunctions must be understood. Each function and subfunction
has developed processes and procedures. Proper evaluation
can be very difficult, if not impossible, for those unfamiliar
with management or the activity areas. A qualified corporate
governance consultant must possess general knowledge of
each activity area as well as understand how the alignment
of functions and subfunctions may differ from company to
company, not only across industries but within industries,
within corporate families, and even within a single entity
organizational structure of a company is defined by the
manner in which it divides its labor into specific tasks
and achieves coordination among these tasks at a given point
in time. A consultant must understand both the formal and
informal organizations in place; an examination of the informal
organization may reveal a considerably different picture
that could impact the success or failure of governance.
There is a proper or logical location of each function and
subfunction in line with the economic and other considerations
that make up the company’s operational framework.
In addition, the emphasis placed on the various functions
shifts over time and with the nature of the business.
corporate governance consultant must possess the knowledge
and experience necessary to understand the following concepts:
Generalized sets of activity area charts, represented
as best practices, do not necessarily reflect the “ideal”
grouping of activities and functions for a specific company.
The activity area charts simply show a logical, but arbitrary,
grouping of functions. A consultant should understand
that each company organizes and integrates the various
activity area functions according to variations in markets,
products, methods, tradition, people, and many other factors.
There are no packaged solutions to management, and the
same is true for governance structures and processes.
Each company must be dealt with on its own merits, including
the manner in which the management structure and processes
have been integrated into the governance function. A consultant
should be familiar with the relationship between the management
structure and processes and the governance structure and
processes. A qualified corporate governance consultant
must be able to fit the general principles of management
or governance to the specifics of a given company at a
given point in time.
dynamics of the formal and informal structures within
an organization may determine where and how a management
or governance function takes place. For example, a corporate
governance consultant should be able to distinguish control
systems in a “management” sense from control
systems in a “board” sense.
Structures and Processes
deal of consideration has been given to governance structures
and processes in recent years, although the issue is not
new. Governance structures and processes have evolved over
time, and directors and managers must now be much more directly
involved and take responsibility for damages resulting from
a failure of governance oversight.
protection of shareholders’ interests is seen as a
primary responsibility of a board of directors. In addressing
this responsibility, boards must make sure that the governance
process is effective. This can be extremely complicated,
which is why directors have sought the assistance of experts.
This practice of retaining outside assistance must be handled
with care. A board cannot be too quick to rely on expert
assistance as proof that it has carried out its oversight
role. The board bears full responsibility for proper governance.
It cannot claim that the use of an outside expert was sufficient
to abdicate its responsibilities.
The selection of a corporate governance consultant and management
of the assignment must be handled by the directors, who
must evaluate the qualifications and independence of the
consultant. The directors must also set an agenda and timeline
for progress reports. All of the recommendations must be
evaluated by the board and accepted or rejected based on
hard facts. To do this properly, the directors must understand
governance and how to use the services of experts while
not relying upon them blindly.
the emerging consensus that “tone at the top”
is important to governance structures and processes, a consultant
must see the reality behind the façade. To be meaningful,
the tone at the top must be extended through a rigorous
set of checks and balances within an environment characterized
by transparency. (See James N. Clark, R. Hartwell Gardner,
H. Stephen Grace Jr., John E. Haupert, and Robert S. Roath,
“From ‘Tone at the Top’ to ‘Checks
and Balances’,” in the March 2002 CPA Journal.)
Unfortunately, in the cases of companies that have experienced
major governance breakdowns, their ethical code was attractive
on the surface but ineffective at preventing malfeasance.
(See H. Stephen Grace Jr., “Effective Governance in
an Ethicless Organization,” in the May 2005 CPA
Journal.) A rigorous set of checks and balances in
an environment characterized by transparency would: 1) encourage
everyone to work in conformity with the announced tone at
the top, 2) support those inclined to work according to
the guidelines, and 3) deter those who might be tempted
to go outside the guidelines. (See H. Stephen Grace Jr.,
“Building Ethical Behavior into an Organization: An
ESD Approach,” an address delivered at Baruch College’s
Ethics Week Forum on April 13, 2005. See also “How
to Make an Ethics Program Work,” co-authored with
John E. Haupert, in the April 2006 CPA Journal.)
one of the first things a corporate governance consultant
must determine is whether there is an ethical tone set for
the organization, supported by a proper set of checks and
balances. To do this, a consultant must understand and be
experienced with threats that undermine governance structures
and processes. Consolidation of power is a paramount threat.
If an individual or a small group of individuals within
an organization has too much power, they may be able to
shroud their activities and intimidate or manipulate others
to achieve their desired goals. Lord Acton captured this
danger in his now famous quote: “Power tends to corrupt,
and absolute power corrupts absolutely.” The opening
words in his essay “Nationality” (Home and
Foreign Review I, July 1862) discuss the tendency of
some individuals to see as a solution to a political crisis
the creation of an ideal “all-powerful” governance
structure. Even if these individuals have the best interests
of society in mind, governance structures that rely upon
concentration of power will ultimately fail, and at a considerable
cost to all involved. A system of checks and balances works
to counter efforts to concentrate power.
governance consultant should recognize that the checks and
balances required will vary between organizations and within
a single organization over time. Likewise, a working environment
characterized by transparency further helps counter efforts
to concentrate power.
corporate governance consultant understands the board’s
role in representing shareholders and serving as a link
between ownership and senior management. A consultant must
be familiar with the external financial reporting processes
and other corporate communications, including annual filings,
interim filings, proxy statements, other SEC filings, and
SOX requirements. A consultant must assess the board’s
processes for interacting with management, internal auditors,
and external auditors. Furthermore, a consultant must understand
the board’s responsibility to achieve legal and regulatory
compliance, including the development of corporate codes
of conduct. A qualified corporate governance consultant
must assess the corporate processes and board oversight
of systems for risk management, including internal controls.
of a board’s work is to ensure good governance takes
place through committees. A board’s primary committees
include the nominating/governance committee, audit committee,
compensation committee, executive committee, and perhaps
a compliance committee or risk assessment committee. A qualified
corporate governance consultant understands that committees
change over time depending upon their members and the issues
being addressed. A consultant should focus on whether the
committees are effectively discharging their primary functions.
must have meaningful experience working with boards and
show tact in the sensitive area of a board’s relationship
to management. Examples include the selection of new independent
and qualified board members and the question of whether
to separate the CEO and the chairman of the board positions
(See H. Stephen Grace Jr., “Reflections of a Non-Executive
Chair,” in The Corporate Board, May/June
important test of a governance consultant’s expertise
is knowledge of and experience with audit committee operations.
The audit committee is normally the workhorse of the board’s
oversight and control and, as such, is critical to the board’s
guardianship of shareholder value and ethical behavior.
The audit committee is responsible for ensuring that the
financial statements are timely and fairly reflect the company’s
economic or financial position.
corporate governance consultant understands the importance
of a board’s oversight and control systems at different
points in time. As a company grows or its operations shift,
the appropriate oversight and control systems may have to
change. Such systems go well beyond the income statement
and balance sheet and must focus on operating cash flows,
capital expenditures, and key value drivers. To do this
properly, audit committees must have qualified directors
and access to expert help. A consultant should understand
the succession and rotation of members of the committee,
how the committee should manage its relationship with outside
auditors and staff, and, most importantly, how the committee
ensures its independence.
corporate governance consultant must be familiar with compensation
committees. The compensation committee must review executive
compensation packages and determine whether a company’s
compensation structure ensures the shareholders of a satisfactory
return after any performance-based awards for management
and others. A consultant must be familiar with how options,
restricted stock, and bonuses should be handled and recognized
in financial statements. Finally, termination and retirement
packages for senior staff must be carefully evaluated. Compensation
arrangements must possess adequate transparency to withstand
investor and regulatory scrutiny.
broader in scope, but closely aligned with executive compensation,
is the need for the compensation committee to deal with
staff compensation. Not every company will need to focus
on nonexecutive issues, but there is a growing realization
by boards that this focus can bring about improvements.
If a committee needs to expand its work, a consultant can
advise on structural changes in the committee, staff support,
the costs and benefits of the expanded work, and other issues
that might be handled. These would include succession planning,
management contracts, union contracts, overseas allowances,
and the equity of benefit plans.
are other committees that might be required and other specialized
assignments that would require a governance consultant.
Organizations have formed new board committees, such as
risk assessment, employee and property security, and information
technology, to deal with emerging issues. They also use
ad hoc committees to deal with major losses, regulatory
investigations, and other serious problems. A qualified
corporate governance consultant can help boards wrestling
with alterations to their committee structure. A consultant
should have the knowledge to examine each new committee’s
function, its responsibilities, its size and knowledge requirements,
and its operating procedures.
corporate governance consultant must be able to communicate
findings in complete and understandable reports that committee
members and boards can easily understand. It is imperative
that boards and their committees be able to provide comprehensive
documentation supporting their actions if they are challenged.
corporate governance consultants should have the capability
to work on a broad range of issues that face today’s
boards. The following are two current issues that a qualified
consultant should be equipped to handle.
Shareholders, unions, activists, employees, and governments
seem to increasingly use litigation to redress the perceived
failings of a company, even those attributable to market
forces or other external factors. Plaintiffs’ attorneys
are often willing to take on even the weakest of cases because
companies often choose to avoid a lengthy, expensive case
by offering a substantial out-of-court settlement. Plaintiffs
often accuse directors of not providing the necessary oversight.
This is a particularly dangerous area for defendants because
they are charged with so many responsibilities for governance,
many of which are not clearly defined, that it is easy for
the defendant to look bad. Consultants experienced with
these issues can explain the roles played by management,
the board, or various directors in the events giving rise
to the litigation. The consultant’s communication
skills must be excellent, his credentials must withstand
careful scrutiny, and he must be able to serve as an authoritative
acquisitions, buyouts, and bankruptcies. Perhaps
the most important area in which directors are involved
are changes brought about by mergers, acquisitions, buyouts,
and bankruptcies. Because the results can have such a dramatic
impact, handling these changes requires objective and judicious
oversight by directors. These matters usually involve attorneys,
existing creditors, new lenders, investment bankers, rating
agencies, and regulators. While all of these parties should
be working toward the best outcome, they often have interests
to protect and may come to different conclusions. Ultimately,
the board must decide which direction to take to ensure
the best overall outcome for all the constituencies involved.
Mistakes made in dealing with fundamental corporate changes
are a major cause of lawsuits claiming directors did not
provide appropriate oversight. A qualified corporate governance
consultant can help prevent or mitigate the effects of such
litigation. A consultant can help directors understand their
responsibilities and deal with legal and technical issues.
A consultant can also help the board prepare documentation
to support its conclusions, assure the board that there
were no insider benefits or dealings, and confirm that compensation
for the parties involved was equitable and reasonable.
the Governance Consultant
selection of a corporate governance consultant must be a
well thought out process. For example, the board of directors
must decide how potential candidates are to be selected.
Typically, staff members develop a list of potential candidates
and recommend a selection. This may work fine in most cases,
but board members should be wary of independence issues,
particularly if a consultant has other assignments with
the company’s management. The board should also ensure
that the consultant has no conflicts of interest attributable
to a relationship with key staff, suppliers, creditors,
way to ensure independence and competence may be for the
board to make its own selection, using staff only for technical
assistance. The selection process can be difficult and time-consuming,
so board members may find it more efficient to appoint a
special committee or specific directors to manage the process
and recommend a candidate.
selection committee members must assure themselves that
any candidate has certain basic attributes that will help
ensure success. These include the background and experience
to evaluate the functioning of management and the board
as well as the relationships between them. The potential
corporate governance consultant should also demonstrate
an ability to relate and communicate effectively with boards
and senior management. Today’s boards will want a
clear understanding of what a consultant has done and is
recommending, as well as a clear delineation of possible
risks. In short, board members have the right to expect
qualified corporate governance consultants to be experienced
with, and share a deep understanding of, the range of issues
a board may face. This is what the special committee must
deliver when it recommends a potential consultant.
committee should also define the work to be performed, oversee
preparation of the consulting agreement, require interim
progress reports, and report progress to the full board
regularly. This committee must be able to evaluate the consultant’s
findings and recommendations and present them to the board,
making sure board members have a full understanding of all
of the issues.
the final analysis, the qualified corporate governance consultant
must possess the knowledge and experience necessary to evaluate
the governance structure and processes objectively. This
knowledge and experience, combined with an understanding
of governance under a variety of conditions and a familiarity
with integrating the management and governance processes,
give a qualified corporate governance consultant the credentials
to provide sound advice. A qualified corporate governance
consultant can guide directors and officers as they address
the problems specific to their company.
Stephen Grace Jr., PhD, is president of Grace &
Co. Consultancy, Inc., and a former chair of Financial Executives
International. John E. Haupert is a member
of the board of advisors of Grace & Co. and former treasurer
of the Port Authority of New York and New Jersey. The authors
benefited from the comments of Peter Howell, Steve Lilien,
Martin Mand, and Ronald Wilcomes, members of the board of
advisors of Grace & Co., and David L. Foster, partner
(retired), Willkie Farr & Gallagher.