By Susan F. Shultz
Boards of directors have been transformed to a degree unimagined prior to Enron and Sarbanes-Oxley (SOX). Always slow to change, even in the face of regulation, boards of public companies have improved significantly since the Harvard study concluded in 2005. Our current economic crisis will further and dramatically accelerate the move to accountability, transparency and independence at the board level.
Yet, throughout this corporate governance revolution, the supply of directors has consistently increased.
The supply of directors has not decreased. Rather the supply of recycled directors has decreased. Also, the percentage of CEOs and retired CEOs per board has decreased. But, the myth that there are fewer available qualified directors is just that – a myth. In fact, when measured by engagement, commitment, independence and qualifications, the quality and the availability of directors have also improved. And, the average board size has decreased slightly.
Most appropriately, directors are serving on fewer boards due to capacity and edict. 56% of S&P 500 boards limit corporate board service by their directors. As recently as two years ago, only 27% imposed any limits.
The average amount of time required to meet board obligations is estimated to be 200 to 250 hours a year per board. If there is a key event, such as a merger or acquisition, an IPO or a restatement, the time required skyrockets. For example, during the hostile takeover of PeopleSoft, the audit committee met 80 times in 16 months. General Motors’ directors now have a minimum of one phone or in person each week. Citigroup directors are meeting twice a month, as do numerous other boards.
Traditionally, the majority of corporate directors have been drawn from two sources — active and retired CEOs. At the best boards, this model is passé. CEOs are sitting on only .7 boards compared with an average of two outside boards 10 years ago. When asked what they are looking for in future directors, S & P survey respondents cited a stronger need for relevant industry expertise than in past years. 57% of surveyed S&P company boards seek new directors with financial expertise.
For S & P public companies, 60% of director nominations came from executive search firms, 21% from non-management directors and 20% from insiders (i.e., the company CEO and other executives, controlling shareholders, management directors).
Less than a decade ago, it was common for directors to hold 10 or more public company board seats, such as Vernon Jordan on 10 boards, and the CEO of Bell South, who sat on 9 boards. Now, with fewer recycled directors, directors serve on a smaller number of boards per capita. And, the pool of directors is actually expanded, because the pool from which directors are appropriately drawn is broader. The quality of directors who are now serving is significantly enhanced – in terms of engagement, time, corporate governance knowledge, balance and relevance of experience, intellect and perception.
Today, we have an extraordinary opportunity to further diversify and build truly independent boards. Only 16% of all directors are women, and a mere 162 minority directors sit on the boards of the top 200 S&P companies. However diversity encompasses far more than gender and ethnicity – it includes discipline, age, experience, skills, intellect, expertise, geography, perspectives, education and culture. For example, over one-third of new board members are financial experts.
Too often recruitment has more to do with relationships, co-workers, golf buddies, or celebrity, rather than strategic value. Too often, recruitment starts with the person, not the need.
When recruitment begins with director assessment and focuses on the future – a matrix of talent, attributes and objectives; when each director position is profiled to complement existing strengths and fill in weaknesses; when the board has a choice of excellent candidates, great boards are the result. When such a process is in place, it validates the board, and it attracts the best.
Today, the NYSE requires companies to disclose the method of recruiting. Last year, 51% of companies disclosed the source of their new directors. As more companies reveal not only who, but also how directors are recruited, objectivity and thus independence will be the norm.
Independence has too often been considered a technicality, conveniently concealing a web of interrelationships and interdependencies where the allegiance has been to management and board colleagues, rather than the shareholder. At one Fortune 100 board, all the “independent directors” were former members of the same rowing club in college. Are three years away from a “conflicting” employment enough to ensure independence? What other subtle conflicts are built in?
Director Fees increased largely because the workload – and the risk – increased very substantially. It is not a function of supply. Average total compensation was $131,413. Pay must now be disclosed in its entirety. Directors who are diligent and constructive are still the best bargain in corporate America. The brain trusts are invaluable.
As a rule, we find out governance counts when something really bad happens. How do you know if you have a good board? You measure it – independently, confidentially and professionally. If there is no assessment, no accountability, how can shareholders know the board is effectively representing them and doing its job?
Accountability will come through meaningful evaluation, transparency through clear communication and disclosure, and independence through awareness and more objective and proactive recruiting.
Constructive independent boards are responsible for untold millions going to the bottom line. The value of a single idea, of strategic succession planning, of risk avoidance, the value of one mistake prevented, is incalculable. These are the stories that rarely get told. Or measured.
No doubt some sections of Sarbanes-Oxley are too restrictive. And, more regulation is inevitable. The hope is that directors will seize the initiative and drastically diminish the passivity that has allowed such violent economic abuse and helped set the stage for more regulation. The untold stories are of the thousands of committed, smart, value add directors who help avoid fatal mistakes and help their companies succeed.
Susan Shultz is President of The Board Institute to enhance boards by helping directors assess, educate, and benchmark their boards and committees. The content of The Audit Committee Index to improve audit committees was developed in cooperation with the Foundation of Financial Executives International. Her firm, SSA Executive Search International, recruits board members for public and private companies. She authored The Board Book, Making Your Corporate Board a Strategic Force in Your Company’s Success (AMACOM).