By Andrea Unterberger

Thomas J. Dougherty is the author of The Directors’ Handbook, a leading guide to corporate governance. The handbook, now in its 16th year, provides directors with up-to-date information and the insight they need to effectively lead their companies.

In the 2010 Edition, Dougherty takes a hard look at how reforms stemming from the regulatory crises of the last several years will impact director oversight. In his Foreword, Dougherty explores the forces that will result in an irrevocable shift of power in the boardroom. (Click here to read the excerpted Foreword in the Harvard Law School Forum on Corporate Governance and Financial Regulation.)

Dougherty, a partner at Skadden Arps since 1984, has been involved in countless jury and judge-tried cases litigated over the past 25 years, including defense of corporate actions and disclosures, proxy contests, hostile takeover cases, and numerous class action defenses. Dougherty has recently launched a video blog to track key corporate governance issues. The first of these blogs explores how recent reform initiatives will result in an irrevocable shift of power in the boardroom.

I recently caught up with Dougherty to ask about the latest edition of the handbook, and about the new challenges that directors face.

Before we get started, there’s something I’ve always wondered: Every year, The Directors’ Handbook features two cartoons of a board meeting, with new captions that are always clever and timely. How do you come up with them?

Well, every year I look at the most important developments for directors. In the first cartoon, I try to capture a key issue that directors are likely to face in the upcoming year, and the second considers what the directors’ reactions might be.

This year, the first looks at how proxy access could affect consensus in the boardroom, and the second looks at how directors will likely feel about how the changes will affect the nominating committee. Historically, the nominating committee has not had the same demands as some of the other committees, but it will now be potentially a more difficult role.  

The job of a director appears to be an increasingly daunting and thankless task. Directors are exposed to lawsuits, and there are increasing demands on their time. Why would anyone want to be a director? 

Because it’s also a professionally rewarding task. As I say in the book, it is the vision and vigilance of the directors that determine the future of the company. It’s very rewarding to be part of a crew that, through its vision and vigilance, can create jobs and value for people. That’s what the directors are there for, to reality-check management’s own vision and vigilance, and to look out for conflicts of interest. It’s taxing, but it’s rewarding.

Most directors aren’t versed in bankruptcy law. When a company is in financial distress and considering filing for bankruptcy, should the directors stay on or seek a safe exit?

Directors need to understand that there are different types of shock situations that they need to deal with, such as product recalls, a hostile takeover, or insolvency.

When there’s a question of whether a company can pay its debts, there’s potential that the director’s duties shift from representing the shareholders to a duty to preserve value for everyone involved.

I would hope that if a director found himself on two sides of a transaction, then he would get advice on how to manage that conflict. Similarly, if the director is dealing with a possible insolvency, then there is a particular process that must be activated, and the director should seek special purpose advice. Every situation is different, and directors need to be certain that they understand the shift in obligations and that they get the advice they need.

What is a potential pitfall that directors should be aware of? How can they avoid it?

One of the harder parts of a director’s job is processing highly judgmental input to the board. The board is often presented with assessments and conclusions on such issues as financial planning and audit output that come down strongly on one side or the other, and the directors are asked to accept those conclusions as black and white. However, they may not be.

Directors have to be willing to question such input. They have to constantly ask such questions as: How confident are you of that conclusion? Why? Has it been thoroughly vetted? What about the other side?

This is complicated, because a lot of time and resources have been invested in reaching the conclusions presented to the board, and there may be a tendency to defer to that work. It’s critical that directors resist going with the flow and ask the difficult questions.

What life lessons can a director turn to when performing his duties? In other words, are there any “golden rules” that the director learned back in kindergarten that would be applicable to the boardroom?

I’m not going to name names, but there have been a couple of times when I’ve heard a director say “Tell me what the disclosure would look like, and then I’ll tell you what we’ll do.” Those directors had it completely backwards.

Directors have to do what’s right, regardless of the outcome. They need to exercise healthy skepticism, and not try to figure out where the edge of what’s permissible might be.

In other words, you don’t want to do something that would look inappropriate, but you don’t start there. You don’t ask, what would look inappropriate? You start with asking “what is the right thing to do?”, and then go through the decision-making process to determine whether or not disclosure is necessary.

Tell us about yourself. How is your family? Any new projects?

My wife and I have two children that are grown and working, one as an entrepreneur and the other as an ESL teacher, and we also have two wonderful kids that we adopted from Ethiopia eight years ago that are also growing up quickly. One is now a freshman in college, and the other will head to college in the fall.

I have recently started up a video blog site to comment further on boardroom issues. The first topic has been the impact of proxy access regulation reform. I’m planning to tackle Recovery Disclosure Risk and Loan Loss Reserves in upcoming posts.

Thanks very much for speaking with us. We appreciate your insight on the world of the corporate director, and we look forward to following your new blog!

It’s been a pleasure.