For months, boards of directors have been preoccupied with issues of governance and the accuracy of the next earnings announcement, rather than helping companies build sustainable value. The climate of business has turned defensive, reactive and risk-averse. Alan Greenspan, chairman of the Federal Reserve, spoke recently to Congress of "a pervasive sense of caution" in the business community. Regulators and investment analysts—not boards—increasingly set the corporate agenda.

Many directors resent the current obsession with compliance. They believe normality will return once companies meet the challenges posed by Sarbanes-Oxley in the US or Higgs in the UK. But the problem runs deeper. Many boards have lost sight of how they can contribute effectively to decision-making.

The pressure on boards and senior management to meet short-term financial and share price expectations has been building for more than a decade. Increasingly, mutual funds and institutional investors target short-term share performance. Holding periods for shares traded on the New York Stock Exchange have dropped to an all-time low of 12 months.

Performance expectations continue to be unrealistic. Analysts forecast that 69 per cent of companies in Standard & Poor's 500 will grow by 10 per cent or more a year. But our research finds that only one in 10 companies manages to increase real revenue and profits by 5 per cent per annum over 10 years. In other words, even the highest performers—a select few—will manage to achieve only half of what analysts expect from most businesses.

Faced with these pressures, boards are being conditioned to react to regulators and short-term "investors". The primary challenge for boards is to move from conforming to performing.

Effective boards discipline themselves to focus on how their company can build sustainable value. They pay close attention to long-term shareholders and keep fiduciary obligations in perspective. And they question their effectiveness as a board.

Boards should help formulate, not simply review, strategy. At Vodafone, for example, the board helps develop the agenda for a strategy retreat with senior executives, fostering debate on investment, options and returns. When boards ask critical questions early on, they are able to act faster. Vodafone's swift consummation of the Mannesmann acquisition demonstrates the value of such an approach.

Closer alignment between boards and top managers gives them confidence to focus on the right shareholders - those who are in for the long term. Gillette had missed Wall Street forecasts for 14 quarters in a row when Jim Kilts became its chief executive in 2001. Mr Kilts's refusal to provide specific earnings guidance triggered an outcry from analysts.

But he had the board's mandate to make long-term shareholders his touchstone. Internally, he set aggressive cost-reduction targets; revenue targets were below the old, unrealistic expectations but required market share gains. Two years later, in 2002, when free cash flow had doubled to $1.7bn, analysts changed their tune.

The failures of strategy, financial mismanagement and lack of integrity at the top of Marconi or Enron would not have been prevented by any of the new rules on corporate governance. Yet directors now risk over-managing their financial executives. A board's objective should be to encourage its chief financial officer to seek out the audit committee with problems.

The best way for boards to avoid outsiders imposing rules on them is to come up with effective self-governance. Managers receive performance reviews but boards have largely exempted themselves from such scrutiny.

Most of the controversial Higgs regulations have been removed by the Financial Reporting Council. Mr Higgs's most useful contribution to the debate—board self-assessment—should endure.

We have reached a turning-point in the relationship between the board, the management team and the investment community. The trajectory and character of companies in the coming years will be decided in large measure by how well directors and senior executives can regain initiative. When that happens, boards will be back in the business of building great companies.

Robin Buchanan is the senior partner of Bain & Company in London. John Donahoe is worldwide managing director of Bain