Board Trends Then and Now – Part 2

A review by Murray Parker: In February 1999, James Kristie, Editor Directors and Boards, addressed the Institutional Shareholders Services Annual Client Conference about board trends over the then-past 30 years.

At that time he noted six main trends that have now become common practice:

1. Outside Director Majority – is now a reality across all public companies today with at most three and preferably one inside officer seat, the CEO.
2. Smaller Boards – The 16 -25 seat behemoths of 30 years past have given way to 10 or less directors on current day boards.
3. Less frequent meetings – From historic monthly meetings, boards have progressed to an average of 6 meetings a year, some as few as 4; while communication outside meetings has increased.
4. Board Diversity – Women and ethnic minority participation continues to grow; now facilitated by the trend to reach beyond CEO’s to tap senior executives and functional specialists for board seats.
5. Compensation – From a time when only 4% of companies compensated their directors with some form of stock we have transitioned to the time when all board members have equity participation.
6. The Nominating Committee – has risen out of obscurity to now be one of the core committees along with audit and compensation.

Other Trends noted by Kristie as possibilities are now also commonplace:

• Formal CEO performance reviews are conducted by the board
• Boards review performance of their own
• It is the norm for the retiring CEO to leave the board and for many companies now, a requirement
• CEO’s and directors are required to have equity participation in the company
• Directors meet without the CEO
• Committee chairs and members are selected by the board, not the CEO
• The number of inside directors continues to decline; in many cases the only inside director is the CEO
• Written statements of corporate governance policy have become commonplace
  With widespread adoption of these evolutionary – but at times accelerated – changes of the past 30+ years, what issues and trends face public companies in the future?

First, one must acknowledge external regulatory influence from Sarbanes-Oxley (SOX) legislation. During recent years, boards and officers have been preoccupied with issues of compliance driven not only by rigorous – and some would say onerous – requirements of law but also by a genuine desire to avoid the highly publicized improprieties exemplified by the meltdown of ENRON. Directors have not wanted to appear asleep at the switch nor have they wanted to permit their integrity to be inadvertently compromised by actions of management.

Change has not come easily, but the work of implementing new standards is largely complete; allowing boards to re-emerge as a sounding board for management. They are once again able to focus on providing strategic direction. Not that compliance is any less important, but the processes are now in place for its maintenance. Directors can once again be architects for business growth.

In the same vein, Governance will recede as a hot button issue. Still a primary concern of the board, it will no longer be the obsessive focus of recent past. Processes are in place, boards have established a more proactive posture and management now expects more thorough probing. Having gained some comfort with these new roles and boundaries, boards will spend less time defining governance and more time providing it.

The remaining regulatory issue for boards is executive compensation. The recent SEC guidelines provide a pathway to connect executive compensation with performance. That leaves compensation committees with the dilemma of crafting controls for executive compensation in the face of an escalating competitive market for top executive talent.

A historic issue that will continue to linger within the awareness of the individual director is risk management. In spite of new systems and vigilance, there always remains an unknown risk factor, that nagging concern that something has been overlooked; something that has the potential to put the company and/or individual directors in jeopardy.

But let’s take a moment to peer into the future and examine new trends that are unfolding as companies and boards face new competitive pressures in a healthy global economy.

• There is a trend to globalize boards with US based directors that have substantial international experience. Growing global interconnectedness and fewer meetings have improved the feasibility of also including overseas residents on the board.
• Fewer outside directors will be active CEO’s for two reasons: 1) Companies are limiting the outside directorships their CEO can pursue as their primary job demands more attention. 2) Boards are seeking more specific functional experience to build an effective team that can address and formulate corporate strategy.
• The talent pool will expand as companies reach down the ranks of senior and business unit executives or functional specialists. Diversity will also increase in the broadening talent pool.
• However, filling vacancies will not be any easier for at least three reasons. 1) Larger pool or not, many candidates are reluctant to serve. They are exercising much greater due diligence about the companies recruiting them. 2) Candidates are also far more critical and objective about their ability to contribute. 3) The overwhelming reason why most candidates decline new seats is the lack of time.

Bottom line, the fun seems to be returning to directorships. I hear excitement and enthusiasm among directors for their business as they sink their teeth into strategy, innovation and competition. Historically, boards jumped-to only when there was a problem. Now, boards are more proactive strategic partners engaged in the long term success of the business. They are taking care to set the tone for the company and forging more productive relationships with management. The result will be healthier business and more long term value for shareholders; a true Franklin Covey win-win.

Resources:
1. Board Trends 1970’s to the 1990’s: “The More Things Change…” by James Kristie, Editor Directors & Boards.
2. Board trends for 2006: It’s back to the future… an interview with Theodore Dysart, Heidrick & Struggles.