The need for directors to possess this blend of knowledge plus independence is critical, given the increased technical complexity of most business activities and the rapid pace of change in financial markets and practices. BIS Review 57/2002  3  Finding such outside directors can involve a tough balancing act. Directors who are paid too little or who are kept at the perimeter of the corporate structure may be truly independent but have little incentive or insufficient knowledge about the organization to govern effectively. By contrast, directors who are paid well or who are fully integrated into the corporate structure may have the incentive and the knowledge to govern effectively but lack the desired independence to discipline incompetent or dishonest management. The risk is that as outside directors’ compensation increases, their independence may wane and, instead of functioning as watchdogs for shareholders, they may increasingly function as lapdogs for management. Getting the right balance of expertise and independence so that the board does not rubberstamp the decisions of top management is a major challenge. Another challenge in selecting outside directors is how to balance general business knowledge with specific industry knowledge and technical expertise in areas such as accounting, finance, and labor markets. Boards of directors clearly need individuals with a broad range of expertise. But as business problems evolve - and in large multinational corporations business inevitably changes - the range of expertise needed similarly evolves. Developing a well-rounded, appropriately balanced board of directors is a tough assignment.

In a world of instantaneous communication, interconnected markets, and more complex instruments and risks, effective cooperation between private and public sector players is vitally important for financial stability, both domestically and globally. At the same time, we must be certain that our joint efforts to ensure the safe and sound operation of our financial markets do not stifle the innovation and creative energy that are constantly improving how financial markets operate and the way firms do business. With these thoughts in mind, we must ask ourselves how, by working together, we can best meet the challenges to our financial markets posed by the loss of trust stemming from corporate governance breakdowns and misleading accounting practices at some prominent businesses. In answering this question, I am mindful of a basic reality. Namely, despite the successes of previous private/public sector cooperative efforts, additional issues that need our attention will always arise because of the open and dynamic nature of our financial system. As I noted, we have already begun to address some of the causes for investor scepticism. Still, we have much to do. I would like to comment on four broad issues: corporate governance, executive compensation, accounting, and disclosure. 1. Corporate Governance  Looking to the immediate future, I believe that one challenge for directors and executive management is to find outside directors who are sufficiently independent but still knowledgeable about and engaged in the business of the company on whose boards they will sit. Independence reflects qualities of objectivity, experience, insight, and force of character.