I am sure that you, dear reader, have perused the headlines about CEO compensation, the subjects of which are usually…who is overpaid, who has or has not performed, vis a vis, shareholder value, who has benefited from the re-pricing of stock options…none of these reports are trivial. In fact, if anything, it should cause any serious observer of business and capital formation to reflect on these circumstances.

The Home Depot situation is not unique and is an overhang of long term incentives provided to CEOs in the late 1990’s. and early 2000’s. As this played out in 2005, Fortune 500 CEOs’ compensation rose between 25-30% last year while stock prices ticked upward by less than 10%. So, what is the market saying to Home Depot and many others?

Frankly, they are saying, “boards, do your job, look beyond compliance issues, get your house in order, communicate effectively with us, your shareholders and stockholders, and don’t act as if you are above it all.” The arrogance that Home Depot displayed at its recent annual meeting, where its independent board members were not in attendance, is such an example of what markets perceive as less than stellar behavior by those elected to govern the enterprise and represent the shareholders. Clearly, markets aren’t going to change their focus on evaluating performance and risk nor are regulations likely to loosen up. Boards must change the way they do business. Several boards are doing just that.

We live in a new era where compliance and perception of high standards of corporate governance are the expected norm.

It is an era that perhaps can be characterized by the continuing impact of Sarbanes-Oxley and the value of information available, its content and the speed at which it is transmitted. The debate over the societal value and the rigors of Sarbanne-Oxley marches on…transparency was, and is, one of its hallmarks, however costly. In a recent study of responding CEOs’, about 90% would rather be private than subject to short-term oriented markets and SarBox regulatory compliance. In fact, more regulation is forthcoming. The SEC, in this vein, is now pressing transparency of executive compensation and we expect that new disclosure rules will be adapted soon. By the way, the American Shareholders Association’s executive director, Daniel Clifton, found in a study that regulatory costs were under 5% of market capitalization but by 2002, the number had skyrocketed to nearly double digits. It has declined somewhat since then. If you ask most board members in a quiet moment, a vast majority believe that their companies are overregulated and the cost to do so is exorbitant.

Given these dynamics, how is it that a board of directors avoids arrogance and goes about governing effectively their companies and in doing so, “evaluating” the performance of its chief executive officer and its leadership team?

Regardless of method, my experience suggests, “not very well at all.” Few boards nor its individual members believe that they know enough about their companies to truly evaluate whether their chief executive is getting the job done, especially if one agrees that Wall Street, with all of its short item gyrations, is only one measure of a successful CEO’s reign.

Admittedly, board members have mentioned to me in private that they aren’t comfortable or knowledgeable enough to make critical judgments on their respective company’s business, competitive situations, risk and business model. They feel less than adequate and oftentimes demur to management on critical and oftentimes complex issues. If a board can’t evaluate these matters independently, I ask how are they to determine how their management is doing beyond the sign post of the financial markets. If they can’t or won’t “deep dive” on these matters, boards and shareholders are, indeed, in for a rough ride. As an old football coach pointed out, “you win with people.” Translated, that means the right leadership, with the right plan, incentives, resources and accountabilities – aligning CEO expectations with only stock options and “targets” works only when markets sense optimism valuing one future. Where is the crystal ball? No board has one.

To underscore this point, in another recent survey conducted by McKinsey & Company, board members are becoming more actively involved in trying to understand the companies they govern and become more involved in “their company’s core performance and value creating activities.” The survey pointed out that boards continue to seek knowledge about enterprise risk with less than half responding that as board members, they have a thorough and detailed comprehension of their company’s strategy. What this data suggests is that boards are becoming more demanding and that perhaps CEOs’ are doing a better job at briefing their boards but their board members still suffer for knowing less than they believe they should know in order to make cogent strategic decisions and to evaluate their company’s CEO and leadership team. Boards are working harder and are demonstrating independence – both admirable traits – but still feel they have a way to go. In this respect, boards are pushing to add relevant expertise…expertise that will challenge management…as new members are elected and others retire. As an aside, this, too, is a tough disciplined task for board nominating committees and takes real expertise to achieve a true functioning board with gumption. Most boards I serve seek board candidates who can stand away from critical issues and bring a different view, and are willing to debate the status quo.

The dilemma remains. Without true, in-depth insight, what options does a board have to evaluate their leadership team other than stock price? As public enterprises which are measured accordingly, boards seek performance and short-term results. That is why, in my opinion, we have experienced so much turnover at the top and is among the many complicated reasons that companies in search of performance have sought out acquisitions to enhance growth or have decided to pursue “strategic options” (NDC Health, PRG Schultz, among others in Atlanta this past year).

The prescription for boards appears to be a combination of tangible achievements, stock price being the easiest to measure. The hard work comes in defining other salient and appropriate measures. Every company faces marketplace challenges and the “tangibles” to be measured should be specific to the company’s unique circumstance. Too many boards still utilize generic and simplistic metrics to evaluate their CEO and hang their hats on high brow strategy statements and objectives. This makes it easy to dismiss their leadership when stock prices aren’t advancing.

In parallel to this effort is the board’s insistence on a plan of communication to the company’s key constituents: shareholders, employees, customers, vendors, et al. With this level of commitment, the road map for success becomes clear and the measurements transparent. CEO compensation with such a balanced scorecard will be easier to determine and defend. Assuredly, even with fickle markets, most will respond favorably if the company performs and has a prospect of relative future performance.

Chief executive and board arrogance has no place in today’s world. The option for public companies avoiding scrutiny is very limited. Recent research shows that there is a direct relationship that companies with the highest governance quotient are rewarded with enhanced valuation.

We, as stockholders, depend on you, dear board members, as regulations alone don’t, and likely won’t, create economic value. Are you doing the “deep dive” on value and know how your company’s management achieves sustainable advantage? That’s your responsibility. And it will take leadership courage to win back trust, the true currency of valuation.

By the way, Home Depot, with more than 30% of shareholder votes withheld for the reelection of 10 of its 11 directors, has decided to have its board available at its next annual meeting and will be more open to a discussion of its business and stockholder proposals. Bravo! Again, arrogance has no place in the executive suite or in corporate governance.