Boards of directors are designed to look out for shareholders’ interests and challenge management. Past failures at some firms have put all boards under greater scrutiny.
We look at issues that confront boards, how one busy chief executive juggles his duties as an outside director for other companies, and how one local company’s board works. We also list the board members of prominent firms based here and their compensation.
The concept should be simple: The board of directors of a public company should be concerned only about protecting shareholders’ investments.
Yet recent scandals have brought to light questions of whether board members have protected management for their own gain, or neglected to keep an eye on management to the detriment of the company and its shareholders.
Now, because of corporate reform enacted by Congress, many boards of directors are facing radical changes as the deadline approaches to ensure their boards are independent of the companies they govern, and therefore are acting in the best interest of the shareholders they represent.
"The practices in the past have been that, oftentimes, the CEO and the senior management have a strong influence in who is selected to sit on the board, and those have never been considered very independent choices," said Tom Keller, a management professor in the W.P. Carey School of Business at Arizona State University. "Some of the troubles that publicly held companies have had in recent years, of the board not doing their job in terms of due-diligence and making sure that accounting practices are adhered to, have caused a lot of concern."
There is clearly a movement toward more independent boards, as mandated by the Sarbanes-Oxley Act of 2002, which requires boards to have more independent representation, Keller said.
"There’s been action taken by the government to try and increase the independence of boards and to make them more responsive to shareholders," said Amy Hillman, associate professor of management at ASU. "All corporations will be impacted, except for the smallest ones."
The Sarbanes-Oxley Act specifically targets membership on boards’ audit and compensation committees, requiring members to have no financial ties to the corporation.
"I do think these regulations are at least intended to produce much more objective, watchdog-type boards," Hillman said. "The jury is still out, obviously, whether these changes in the composition will truly affect the way boards do business. But they are certainly a step in the right direction."
Marilyn Seymann disagrees. The Tempe resident is president and CEO of her own company, M One Inc., a bank consulting firm in Phoenix, and sits on the boards of four public companies: Maximus Corp., Beverly Enterprises, Community First Bankshares and Northwestern Corp.
"I don’t believe you can legislate good governance, and I think it’s an attempt to legislate areas where basic ethics should be in place," she said.
The new regulations require directors to spend more time with the companies, and invest a lot more time understanding the boards on which they sit, Hillman said. Many directors, especially of Fortune 500 companies, serve on multiple boards and this could cause them to cut back on that responsibility, she said.
Seymann admits spending more time with the companies is a step in the right direction.
HOW IT SHOULD WORK
Boards of directors’ sole purpose is to make sure management is acting on behalf of the shareholders, Hillman said.
Any problems have usually resulted because of either one of two things: Boards not challenging management enough, or they were unaware of actions that were not in the best interest of shareholders, she said.
"They somehow are insiders, they know the management well, so they perhaps knew that something was going on that wasn’t in the best interest of the shareholders and did nothing to stop it," Hillman said. "Or perhaps at its most benign they were just unaware of what was going on when it was their responsibility to know that."
The size and makeup of boards varies from company to company, but general practices suggest that a board should include eight to 12 members, she said.
"If you get fewer than that, you don’t have the same level of expertise and the benefits of that many eyes looking at the company," Hillman said. "But if you get larger than that, it’s very hard for them to reach consensus on decisions. That’s why we see that most companies fall somewhere between that eight and 12 people."
Company officials play an important role on boards, but their numbers and influence should be kept to a minimum, she said.
"If you think about it, if I only come to a company six times a year as a director, I won’t have as much inside information as those managers do," Hillman said. "Generally best practices suggest between one and three insiders on the board out of that eight to 12. It wouldn’t be very prudent to have a board, for example, where the CEO was not on it, but there are times when it is important for the board to meet without management."
As boards fall under increased scrutiny, it’s getting more difficult to find qualified board members who want to serve, Keller said.
"A lot of people are saying ‘Now why would I want to be on a board and expose myself to that scrutiny?’ " he said.
PROBLEM WITH REFORMS
Sarbanes-Oxley isn’t going to stop people from defrauding shareholders because "you can’t legislate ethics and honesty," Seymann said. Instead, it’s creating additional costs and headaches for corporations, and directors are being distracted from focusing on the future of the corporations they govern, she said.
"Boards were just starting to get really focused on diversity and competence," she said. "Now everybody’s so totally focused on who they can get to chair the audit committee, who’s independent and was never with a tainted firm, and this and that and the other thing."
The mandate for more independence will improve some boards decision-making authority, but for many corporations, Sarbanes-Oxley is becoming a business strategy, Seymann said.
"I sit on four publicly held boards, and you spend so much time going through all of the legislative requirements, where you’re in compliance, where you’re not, who’s doing what, what’s the cost of doing this, that the reason you’re there as a board member is almost obscured," she said.
Seymann co-authored with Michael Rosenbaum, the former president of the Financial Relations Board, a book examining corporate governance, titled "The Governance Game: Restoring Excellence & Credibility in Corporate America."
She is forming a group that will include 10 high-profile directors who sit on the boards of several Fortune 500 and Fortune 100 companies, and whose purpose will be to seek out a diverse group of qualified people to serve on boards.
According to the 2002 Spencer Stuart Board Index, 12 percent of companies in the Standard & Poor’s 500 included women on their boards, with an average of 1.3 women per board. Also, three-quarters of boards had at least one black director, one-quarter had at least one Hispanic director and one-tenth had at least one Asian director. Minority representation was up dramatically since 1997.
There’s no shortage of qualified people to serve on boards, it’s just a matter of knowing where to look, Seymann said.
"We’re going to do peer-topeer director placement, so that we each sit on four or five boards, and each of the people on the boards we sit on sit on another four to five boards, so we know thousands of people," Seymann said. "We know thousands of very, very good women who are ethnically diverse, very qualified, major corporate people. They may not be CEOs, they may be one level down and have not gotten tapped yet."
America West Holding Corp.
Business: Airlines and travel
Officers on board: W. Douglas Parker, 41, CEO
Herbert M. Baum, 66, CEO, Dial Corp. John L. Goolsby, 61, retired, former CEO of The Hughes Corp. Walter T. Klenz, 57, CEO, Beringer Blass Wine Estates. Richard C. Kraemer, 59, president, Chartwell Capital Robert J. Miller, 58, senior partner, Nevada law firm Jones Vargas. Denise M. O’Leary, 45, private investor Richard P. Schifter, 49, managing partner, Texas Pacific Group John F. Tierney, 57, managing director, Castletown Financial Services J. Steven Whisler, 48, CEO, Phelps Dodge Corp.
Annual compensation for outside directors: $20,000, $1,000 for each board meeting and $4,000 for chairing a committee.
Business: Consumer products manufacturer and marketer
Officers on board: Herbert Baum, Dial CEO
Joy A. Amundson, a principal in Amundson Partners Inc. Joe T. Ford, chairman of ALLTEL Thomas L. Gossage, retired, former chairman of Hercules Donald E. Guinn, chairman emeritus of Pacific Telesis Group. James E. Oesterreicher, retired, former CEO of J.C. Penney Michael T. Riordan, former chairman and CEO of Paragon Trade Brands Barbara S. Thomas, interim CEO of Ocean Spray Cranberries Salvador M. Villar, CEO of California Commerce Bank, a unit of Citigroup
Annual compensation for outside directors: $35,000
Officers on board: Steve Sanghi, chairman president and CEO
Matthew W. Chapman, president and CEO, Centrisoft Corp. L.B. Day, president, L.B. Day & Co. Albert J. Hugo-Martinez, CEO, Hugo-Martinez Associates Walter Meyercord, CFO, Rioport.com
Annual compensation for outside directors: $13,000 retainer and $1,600 for each meeting attended.
PF Chang’s China Bistro
Officers on board: Richard L. Federico, CEO
F. Lane Cardwell Jr., former president of Eatzi’s Market and Bakery. James G. Shennan Jr., general partner, Trinity Ventures, a venture capital firm R. Michael Welborn, executive vice president, Bank One Kenneth J. Wessels, former CEO of Dain Rauscher Wessels M. Ann Rhoades, president of People Ink Lesley H. Howe, former senior partner with KPMG Peat Marwick, LLP
Annual compensation for outside directors: none
Boards of directors are facing more guidelines to ensure they act only in the best interest of stockholders.
Limiting membership on a board's audit committee to individuals with no ties to the company.
Board members must spend more time examining company boards they serve on.
Insist on open and honest communication between directors and management.
Know they are empowered to disagree constructively with management when necessary.
Draft and implement guidelines for an active monitoring role for board members and a strict, unalterable focus on ethics.
Maintain a fully involved nominating committee that strives to remain independent in selecting directors.
Fortify the oversight abilities of the audit committee by adding financial management perspective and experience.
SOURCE: Securities and Exchange Commission, Korn/Ferry International