If the past couple of weeks of annual general meetings (AGMs) around the world haven’t sent a strong signal to boards about the way investors and other stakeholders are feeling, it is hard to know what will.

Remuneration levels for CEOs and members of the C-suite have been a hot button issue for Barclays, Aviva, UBS, Citigroup, AstraZeneca, Shell and other companies. In meeting after meeting, investors stood up to challenge remuneration committees about their decisions and decision-making process. Stakeholders also asked some pointed questions about corporate social responsibility. With Apple and Foxconn on their mind, they asked about a wide spectrum of areas from global working practices to wages to conflict minerals.

Board members ignore this shift at their own peril.

Last year 60 Minutes and Jon Krakauer investigated Greg Mortenson, the executive director of the Central Asia Institute (CAI) and author of the best-selling, and, it seems, largely fabricated, Three Cups of Tea. They discovered that he had violated the trust of the people who donated money to the CAI and of those he was claiming to help. This past week Montana’s attorney general said Mortenson must repay $1 million to the CAI. He is allowed to remain with the charity, but can no longer serve as a board member, nor is he allowed to hold a position of financial responsibility.

This case offers some lessons about the role and responsibilities of boards of non-profits that are too important to ignore.

A good board can be hugely beneficial to the stability, growth and effectiveness of a non-profit. On the other hand, a bad or self-indulgent board can be a time-consuming distraction or a drag on scarce resources. In the worst cases, it can allow the abuse of funds and trust on a large scale, as seen with the CAI.

Non-profits come in all shapes and sizes. Some are small niche organizations that come from the passion of one or two people and have limited resources. Others are large, complex organizations with significant donations and operating costs that rival many global corporations. No matter the size or scope, the principles behind the board’s responsibilities are the same: Donors give money to an organization in the belief that their money will be used for a specific cause. The organization and the cause are at stake, and the ethical imperative behind the organization goes beyond the bottom line.

Non-profits require deliberate care and attention in building a strong, capable board, one that will ensure that the mission of the organization is honored in word and deed, and that the donated funds are used in responsible and careful ways. These boards have multiple “grounding and stargazing” responsibilities, from governance and oversight to fundraising and strategic planning. These responsibilities are made greater in challenging economic times.

Board seats of non-profits should be filled not simply by those who give the most money or even those who have the greatest passion for the organization or regard for the person running it. To do so discounts the seriousness of the role of a non-executive board member or trustee. A board should be carefully curated to ensure that the skills and abilities around the table will safeguard the health and well-being of the organization and its mission.

Who needs to be around the table and what skills should they have?

Governance

The board is about governance. It is about ensuring that the organization remains healthy, adheres to the mission and uses funds responsibly. Not every person who donates money, even sizable amounts, should automatically be given a seat at the board table. It is possible to honor donors and to value their input in places other than the governing board, including a separate advisory board.

Financial acumen

The board must have people who are financially astute and who understand the finances of the organization. Their role will include oversight functions, such as serving on the audit committee, as well as financial and strategic planning. The combination of financial oversight and planning is critical to a non-profit’s long-term strength.

Independence

Commonly overlooked is the value of genuinely independent board members. As with corporate boards, it is useful to have people who are neither donors nor beneficiaries and who bring true independence to the discussion and the oversight role of the board. One good choice for this role is an accountant who can serve as chair of the audit committee and in other oversight capacities.

Fundraising

Fundraising is a critical part of a non-profit’s existence. Having board members who take this role seriously is vital. However, a board member’s role is about more than fundraising, since the primary role of the board is governance and ensuring that raised funds are used as intended. Separate bodies can be created to ensure that there are enough people doing the necessary fundraising.

Relevant skills and abilities

A good board has members who have skills, abilities and knowledge relevant to the organization. This means that if the organization is building schools in Afghanistan, it needs board members who understand building, education and the country. These same board members can help bolster the skills and abilities within the organization. That often happens through mentoring and skills matching, where a board member is coupled with a full-time staff member to ensure that the organization has access to valuable, and sometimes costly, expertise, ranging from marketing to human resources.

Increasingly, public-sector responsibilities are being taken on by charities, especially as governments around the world are forced to cut back on services that they have provided in the past. As such, non-profits are touching the lives of more people every day. In the end, serving on a non-profit board is not about loyalty to the founder, personal agendas about the direction of the organization or the prestige that comes with sitting on the board. It is about ensuring that these non-profits are strong, capable organizations with integrity that honor those they are intended to help and those who have entrusted the money to fulfill their mission. Serving on these boards is about ensuring that organizations are sustainable and can help those in need for many years to come.

PHOTO: Greg Mortenson poses with Sitara “Star” schoolchildren in Wakhan, northeastern Afghanistan in this undated photograph released to Reuters, March 11, 2009. REUTERS/Central Asia Institute/Handout

Why is it that executive pay continues to seem so out of line with what common sense would tell us is justified?

We’ve seen a number of striking examples over the past several months of compensation packages that, when exposed to the light of public scrutiny, evoke a range of negative reactions, making people anywhere from mildly annoyed to genuinely appalled. The packages seem out of line with results, and pay ratios are striking. Recent cases are unbounded by sector or location and include AstraZeneca, Barclays Bank and Shell. So what happens in the boardroom that lets such a package emerge?

In most board structures, a remunerations committee is assigned to set the level of compensation and determine the components of the pay package that senior executives receive, including base pay, bonus, stock and privileges such as use of the company jet. In recent years this committee assignment has gone from fairly light to as time-consuming as the audit committee.

There are several factors at play as the remunerations committee and the board as a whole try to weave together pay packages.

Compensation consultants. Often compensation consultants are used to help determine the packages of senior executives. Although many make a sincere attempt to prepare a comprehensive view, taking into consideration peer groups, market pressure, and many other factors, they may not fully appreciate how such a package will appear to stakeholders. What they advise may seem fair in the vacuum of the boardroom or on paper, but oftentimes it does not reflect other realities and pressures on the company from stakeholders such as investors, employees and the community at large. Also, there is a real danger that consultants can become part of the problem, driving up compensation packages as they create an aura of ensuring that the CEO and senior team feel fairly compensated relative to their peer group – a sort of “keeping up with the Joneses.”

Personal feelings. Directors may have developed personal relationships with the CEO and senior team and feel as if they must give them a certain compensation to “save face.” Or the directors may feel that the work the executives have done and are being asked to do in the future is onerous and must be compensated in a predetermined way – a way the board is accustomed to and feels reluctant to stray from. This can be a slippery slope, or rather a speedy escalator, as each year the desire to reward and inspire means that ever grander packages need to be put in place.

A disconnect from today’s reality. Those of us in the boardroom can often feel we are in a soundproof room. Even though we come armed with a great deal of knowledge and information, it is hard to factor in all the input from outside voices or truly take seriously some of those voices. The conversation around the table about compensation may sound reasonable in the vacuum of that room, where big numbers can be bandied about, but it is vital that directors have a finger on the pulse of the market and consider how the pay package, or severance package for that matter, will be received by the wider world. Board members who have been through this process often express surprise at the response by the public and had little appreciation or understanding of the impact their decision would have on the company’s reputation.

A lack of direct accountability. To date, most board members have done their work in a “black box,” so the decisions they made went fairly unscrutinized. Even if there was any outcry about the package, the issue was usually not linked back to the board. As such, there was little accountability for individual board members; they did not have to deal personally with any backlash that came as a result of unpopular choices.

This is changing rapidly. The perception and accountability of the boardroom, and indeed the personal accountability of individual board members, has been transformed. Increasingly board members have to demonstrate why they have taken certain decisions or voted in a certain way, and remuneration committees are being asked to substantiate their choices.

Boards need to come to grips with compensation structures of their senior executive teams, and stakeholders need to continue to voice their concerns about compensation packages. CEOs and other members of the C-suite deserve fair compensation for running companies, particularly in demanding economic times, when only organizations with the best talent will survive and thrive. On the other hand, these difficult economic times call for judicious decisions about compensation packages that are more clearly linked to performance and demonstrate that board members are not tone-deaf in a soundproof room.

PHOTO: A gambler counts out cash while making a proposition bet on Super Bowl XLV at the Las Vegas Hilton in Las Vegas, Nevada, January 27, 2011. REUTERS/Las Vegas Sun/Steve Marcus

Most of the press will pick up the part about the absence of women board members, and that is vital — there is no doubt that women are severely underrepresented in the boardroom. The lack of women on boards, however, is a reflection of a wider problem with diversity: It is one of color, age, international perspective and more. The Facebook boardroom has virtually no variety, and that is a serious issue. Boards that don’t represent the stakeholders of the business and the environment in which companies operate are not able to do their jobs as capably.

A lack of diversity is not simply a problem of “optics.” In the modern world, it does look odd not to have it, but does diversity make a difference in real economic terms? Does it actually affect the bottom line? To my mind the answer is a resounding yes. We do not need diversity for diversity’s sake, but because diversity on the board contributes to the profitability of the business. Diversity of thought, experience, knowledge, understanding, perspective and age means that a board is more capable of seeing and understanding risks and coming up with robust solutions to address them. Businesses led by diverse boards that reflect the whole breadth of their stakeholders and their business environment will be more successful businesses. They are more in touch with their customers’ demands, their investors’ expectations, their staffs’ concerns, and they have a forum in the boardroom where these different perspectives come together and successful business strategies can be devised.

Some fear that too much diversity and independence of thought can be damaging to the cohesion of the board. Given the iron grip that Chairman and CEO Mark Zuckerberg has on the Facebook board, that may be a concern that is driving him. Yet for healthy boards with capable independent chairs, the very opposite is true. The modern board requires that there be room for open, constructive, dynamic discussion, with respect and regard for the people around the table. In my experience, the result is a more capable and better functioning board, one that can withstand the challenges of an ever-shifting landscape in which the organization it serves operates. Diversity then becomes part of the very DNA that marks a business as healthy and ready to face the future.

Healthy businesses need comprehensive diversity. Without it there is no independence of thought or action, and no way to hear what is happening outside of what would otherwise be an echo chamber. Also, diversity is not a static, one-time result that boards need to achieve, but one that poses a constant challenge of renewal. Good corporate governance in this sense also requires “turnover” in the boardroom so that organizations are capable of dealing with today and tomorrow.

In an ever-more-global business environment, diversity also has an international dimension that extends beyond gender, culture, age, etc. Every board needs to keep a finger on the pulse of what is happening around the world, and given the exceptionally global nature of Facebook’s business, the absence of international expertise is that much starker. International diversity is required to broaden a board’s knowledge and understanding of what is happening in the rest of the world and how this affects the environment in which the organization it serves operates. International diversity in this sense also means that the best boards will be able to be proactive in instituting these changes, striving to live up to the highest standards of corporate governance from around the world, not simply waiting for the world to force them to do so.

When I see a business with a board that has a preponderance of people with similar, if not identical, profiles, this is a signal that it is not a healthy business built for the long term. It is the canary in the coal mine — the warning that business fundamentals are not being looked after. If a board is not diverse, it makes me wonder about the business as a whole. If Facebook wants to continue to grow, now is the time when Mark Zuckerberg needs to be willing to release a little bit of his grip and open his boardroom to new voices and ideas.

PHOTO: People walk past the Facebook wall inside their office in New York, December 2, 2011. REUTERS/Eduardo Munoz

This news brings to mind an issue that comes up time and again when independent board directors gather: inactive, unproductive, distracting or simply “dead wood” board members. It is often discussed in hushed tones, but it is time to address it openly and frankly, and to look upon it as the responsibility of each of us as individual board members, rather than simply an issue for the board or the board chair to tackle.

There are a number of reasons that you should consider stepping off a board:

You’ve served too long.

There is a finite amount of time that anyone can serve on a board in a truly independent manner, yet a surprising number of “independent” directors have served for 30-plus years. The UK Corporate Governance Code‘s guideline on this issue sets out nine years as best practice. It seems hard to fathom that independence would stretch to 36 years, the tenure of Coca-Cola board director James D. Robinson, or 41 years, as is the case with Douglas G. Houser, a director on Nike’s board. Questioning their length of service is not a reflection on their abilities as board members, but rather stating the obvious: It is impossible to remain independent and to serve for that long.

Your expertise is no longer required.

Flux is an integral part of business. Innovative companies shift their priorities and direction routinely, in large and small ways. The object is to have people around the table who reflect the expertise needed for today and tomorrow. As the business changes direction, it may be that the reason you were brought onto the board no longer exists. It is not personal, and it can be awkward to say, but if this is the case, recognize the change and make room for someone else whose expertise is a better fit.

You’re not pulling your weight.

No one joins a board with the intention of going along for a ride. Work and personal circumstances change, and sometimes interest simply wanes. If you find you are missing board meetings or committee meetings, or are not engaging in, let alone beyond, what you are duty-bound or required to do, it is time to look again. If you are “phoning it in” by attending meetings but not reading your board papers fully or are not participating in the meetings you do attend, you can guess that everyone around the table has noticed. Be honest with yourself and exit gracefully.

You’re obstructively disruptive.

I am a strong proponent of healthy creative tension. It is vital to ask hard questions and to be confident about stepping up and taking an active interest in the discussion. However, there is a line. Your behavior should not be a distraction or deliberately combative. It is one thing to have creative tension; it is another to have an all-out war. If discussions become ego-driven, if your contributions are based on concern for your reputation, and if the best interests of the organization and its stakeholders you are there to serve and protect take second place behind that, you have outlived your usefulness to the company.

Your actions, inside or outside the boardroom, bring distraction or disrepute.

We’ve seen a couple of cases of board directors behaving in a way that taints everything in which they are involved. This runs the gamut from insider trading to saying things in public that are ill-advised or off-color. It could also mean being strongly associated with unfortunate decisions made by the board you sit on. If your personal or business actions are bringing disrepute to the company, if you have become the story and thus a distraction for the company, do the decent thing for the sake of the company and step off in short order.

No one wants to be the person everyone around the table feels is not contributing, and you never want anyone else to have to tell you that you have outstayed your welcome. Even worse, you don’t want to be the subject of shareholder activism about whom the things that are said ring true. Although humbling to admit, no one is irreplaceable, and the best service you can give is to step down and help encourage board refreshment. There are several mechanisms that can be put into place to make this process easier for boards to deal with, including term limits, clear job descriptions and regular board evaluations; but really, it shouldn’t take that for directors to figure out the right thing to do — and do it.

When it is time to go, don’t leave it too long, don’t wait to be pushed, step off gracefully, and finally, don’t try to “manage from the grave.”

PHOTO: BSkyB Chairman James Murdoch speaks at the BSkyB Annual General Meeting at the Queen Elizabeth II Conference Centre in central London, November 29, 2011.  REUTERS/Timothy Anderson/BSkyB/Handout

Managing from the grave

One of the big risks at a time of transition is that those who leave the helm of the company are tempted to “manage from the grave,” being more concerned about their own individual legacy than that of the company.

For example, BlackBerry maker Research In Motion (RIM) has finally rid itself of its founders’ disastrous co-CEO/co-chair setup. Yet the stamp of the old management team is still very much in evidence. The founders continue to have a strong presence in the company, with both remaining as board members, and Mike Lazaridis staying on to head a newly created innovation committee.

RIM needs revolution, not evolution, and yet it has chosen to replace its co-CEOs with a company insider, Thorsten Heins, one of RIM’s two chief operating officers. While this may provide some continuity, what RIM needs right now are fresh eyes and ideas.

RIM’s newly appointed independent chair, Barbara Stymiest, has been on the board for five years, and though she comes with strong credentials, she may be too closely associated with past failures to be truly independent. Only time will tell if the former co-CEOs and co-chairs can truly let go and give the company the freedom it needs to right itself. Also in question is whether the new CEO and the board can resist being deferential to the founders or the pull of past strategies. To make the decisive moves needed to stop a death spiral, they must do both.

In another case, Yahoo’s decision to hire a new CEO before refreshing its board may prove to be a real detriment to fundamental change, again demonstrating a desire to “manage from the grave.” Jerry Yang may have left, and several other board members may be leaving as well, but by appointing the new CEO itself, the outgoing board has set the company on a path that a new board with fresh perspective might not see as the best way forward.

Getting the sequence wrong

This brings into a focus a second risk: getting the sequence of renewal wrong. By choosing to appoint the new CEO before a new board takes over, Yahoo’s existing board may have made a fundamental error for the company.

By making this move Yahoo’s current board has lost a significant amount of trust not only in the investment community but also among other stakeholders. The new CEO is potentially less credible to the market, and the new board may find it hard to work with him — or worse, decide that he is actually not the right choice for the job.

Had a new board hired the CEO, it would have signaled that long-term chemistry and commonality of purpose and vision was in place. Instead, this CEO will always be perceived as “of the past board” and will have to work that much harder to build trust with the new board and investors.

Keeping the world in suspense

One last danger is worth highlighting: Both RIM and Yahoo have dragged their feet on making decisions and sending a clear message to the market.

RIM promised to make changes to its governance structure months ago, and by not following through quickly and decisively, it shook the faith of investors and made people irate. It will have to work hard to regain the trust that has been lost. Most worrying, the changes may be too little, too late, and the announcements so far have not done much to quell concerns.

Yahoo’s board continues to leave everyone in suspense as to how many and which board members will be leaving the board besides Jerry Yang. This unnecessarily compounds the uncertainty that already surrounds Yahoo. If the board knows who will go, it should make that clear now. If it doesn’t know, it had better decide fast.

So how can boards avoid these issues when managing through tough transitions?

Take responsibility for the future

Avoiding the repetition of past mistakes is a responsibility that rests with individuals. For those who step down, it means resisting the temptation to manage from the grave — taking some last decision that will bind the company beyond their tenure. For continuing board members it means having the courage to make a decisive break with the past. They need to learn and apply the lessons of the company’s past and not fall victim to them or carry them forward.

The board appoints the board, as it were, but this represents a significant opportunity if those doing the appointing ask themselves who will be the best people to help move the company into the future. It is a tough task, because in times of extreme upheaval it means admitting that perhaps their own actions have been detrimental. The board’s holdovers must ask themselves who can bring the skills and experience needed to provide the stewardship their organization requires in a difficult period of transition.

For incoming board members it means avoiding the danger of being “sold” accounts of the past and establishing for themselves a full picture of the company’s strengths and weaknesses. They should hear from every constituency — board directors, members of the executive team, employees, customers, and investors — and ask probing questions of all those they speak with. Armed with this knowledge and their own skills, they can weigh competing narratives of the past and learn from history rather than become its perpetual victim.

Start the sequence of renewal with the board

When whole swaths of a company need to be renewed, sequence is important. Since the board appoints the CEO, it first needs to look to itself for renewal, including securing trust if it has lost it. Only then will the CEO have a running start.

The process of board renewal prior to appointing a new CEO and executive team may take slightly longer when properly sequenced. However, if done right, it will send a clear message to investors and stakeholders that the board has gotten the message, that it is prepared for and capable of taking decisive action in the best interests of the company, and that its number one concern is the company’s legacy — not its own.

The board must be able to tell when it has put all the right pieces in place. It can then take a step back from the front line and let the newly appointed executive team get on with the job. Here, too, the balance comes in the knowledge that stepping back from the front line of crisis management does not mean disengaging from the responsibility of stewardship.

Managing transitions successfully

RIM and Yahoo are just two examples of companies going through difficult transitions. But many companies, both in and out of the news, are experiencing the same sort of upheaval. Managing transition is an essential skill that boards and their directors must possess individually and collectively. Only boards with the ability to grasp the opportunity presented by periods of transition will be able to lead from the front and avoid being managed from the grave.

PHOTO: A Research in Motion (RIM) sign at its headquarters in Waterloo, Ontario, January 22, 2012. REUTERS/Geoff Robins