Leading the changes and the serious considerations are the 56% of companies that are seeking out board members with specific experience. Similarly, nearly half (49%) are hiring outside or independent consultants, according tothe Board of Directors Compensation Survey conducted by Buck Consultants.
A very popular choice among those surveyed were the nearly 75% that have board members with financial reporting experience, notably, other companies’ CEO and CFOs. Of those that have not sought new members, 24% said they are considering doing so in the next year.
However that is not to say that the good ‘ol boy network of interlocking boards – where an executive of company A serves on the board of company B, and vice versa – is alive and well. In fact, only a fraction of the survey (10%) report having any remaining interlocks.
Board of Change
Even for those companies not looking to shuffle the makeup, change is still in the air. More than half of those surveyed (62%) said they are either considering or have recently realigned the membership of their board committees and 50% have or are considering increasing the frequency of committee meetings. Other examples of changes to board policies include:
- 47% – hold board meetings with company management present
- 35% – provide director education
- 17% – increased the number of meetings for the full board.
In addition, virtually all companies now have both audit and compensation committees and the median annual number of audit committee meetings has increased to six.
The changes come for a variety of reasons, most notably, the introduction of the Sarbanes-Oxley Act in 2002, continued shareholder concerns and broad changes in the US economic environment. However, the degree of change, and the specific solutions implemented by companies, are far from uniform. Some organizations have moved quickly to alter board practices, while others – particularly smaller and less mature companies – have taken a “wait-and-see” approach. Still, other companies appear content with their current practices.
“This initial response is a cautious one, indicating that companies are focusing on compliance with the new Act’s legal requirements. Results also show relatively small-scale adjustments to Board structure, practices and compensation rather than more contentious issues, such as the use of lead directors or formal CEO evaluations,” said Edward Speidel, a principal in Buck’s compensation consulting practice. He also noted that the survey showed most of these changes are taking place at larger, more visible companies (more than $1 billion in annual revenue) which are more active in introducing reforms, with the medium- and smaller-sized companies following behind.
With the changes, some companies have reassessed the compensation packages for outside directors, which has resulted in increases for some directors in cash compensation. Still most prevalent among these means are retainers, being paid out by 91% of those polled. Of those, 76% pay the entire retainer in cash, distantly followed by companies that pay retainers in varying combinations of cash, equity and stock options. Most companies (63%) pay retainers annually, however, a significant number (30%) pay them quarterly. Not surprisingly, the size of the company is also directly proportionate to the size of the retainer, with companies reporting annual revenues greater than $10 billion paying median annual cash retainers of $50,000 and those will annual revenues under $100 million paying median annual cash retainers of $17,500.
Further, many of the companies, particularly the larger ones, pay cash meeting fees that typically run in the range of $1,000 to $1,500 per meeting. In fact, 69% of companies now pay directors a per-meeting fee on top of an annual retainer. Not surprisingly, non-executive board chairmen often command larger annual retainers and/or higher per-meeting fees.
With the addition of stock option awards, Buck found the total amount companies pay their directors annually to range from $72,500 – among companies with revenues between $100 and $500 million – and $127,900 – for companies with revenues of more than $10 billion.
Buck Consultants surveyed 166 US companies, with a median revenue of $1.1billion, representing a mix of industries. Interested parties may obtain a copy of the study by contacting Michael Bendorf at (415) 617-3903 firstname.lastname@example.org.