Changes to Corporate Board Governance
By Stan Krejci

“It’s become almost a full-time job!” is an oft repeated statement made today by serving members of corporate boards of directors.

The world of directorships has become heavily focused on the issues of corporate governance and is still influenced by the ENRON, MCI-Worldcom and other corporate debacles, the continuing threat of litigation by Federal and state governments, and the implementation of Sarbanes-Oxley legislation. The impact of governance issues has pushed boards into new directions, placed significant demands and constraints on board members, and altered the relationships between the company chief executive and members of the board. Overlaying the issues of governance is the matter of board independence and how to ensure that outside directors are in fact truly independent.

How have corporate boards changed? What are the new trends in corporate governance?

The implantation of Sarbanes-Oxley has placed tremendous pressure on board members to focus a great deal of attention on the financial aspects of a public company. Because the amount of time has increased exponentially in terms of board preparation, review of financial and other strategic information, and non-board meetings, the average number of hours for board service has grown from 125 to well over 200 hours per year. Board members who want to provide quality service and expertise to their boards are finding that this increased time requirement limits the number of boards on which they can serve. The average number of boards on which individuals serve has dropped from four to two although some individuals, those who are retired or have sold their businesses, serve on more than four boards. Thus, some board members are truly finding themselves “fully employed.”

Because of these increased time commitments, boards of publicly traded companies are informing their chief executives that serving on one outside board is the maximum number. Boards want their chief executives to stay focused on their own businesses and to be cautious about exposing themselves or their companies to another company’s liabilities or to issues that may require serious additional meeting commitments. Most chief executives believe that serving on another company’s board broadens their own understanding and perspective of board effectiveness. To that end, chief executives often encourage their own junior executives to serve on corporate boards to gain insight into board management and interaction as a part of career enhancement.

The average size of boards has been reduced to a more manageable nine to eleven members, down by five members. More importantly, the number of insiders has decreased from five to one or two, generally the chair and the president. Consequently, the boards are now comprised primarily of independent, outside directors, who bring strong entrepreneurial skills, strategic vision and planning, financial expertise, and corporate leadership and operational talent.

There has been a change in compensation methodologies. Today, because there is so much additional work required of a board director beyond the formal board meetings, such as committee meetings, increased pre-board meeting preparation work, additional meetings with the chief executive officer and other board members, board phone calls, etc., compensation has been significantly increased in base retainer compensation rather than on a per board and committee meeting attendance basis. The impact of Sarbanes-Oxley has caused an increase in compensation for the audit committee chair and for other committee chairs as well.

Companies are looking for board members who themselves have built businesses and will bring that entrepreneurial experience to the board as well as leadership and management skills. Many companies want business leaders who have a strong interest and knowledge of strategic planning, financial management, and other critical operating functional skills. Because of the increased time commitments, companies are looking for executives who have recently retired and/or sold their business but still retain that entrepreneurial energy and can offer those “been there, done that” experiences.

One of the important changes, especially for the publicly traded companies, is the issue of Directors’ and Officers’ (D&O) liability insurance coverage. Director candidates, as a part of their own “due diligence,” are asking to see the D&O policy, not just a summary. They want to know who are the insurance carrier and the broker. Board candidates’ lawyers are being asked to review these policies before the candidate makes a final commitment. One of the critical issues related to D&O insurance concerns a change in carriers: Will the new carrier willing to support actions that may have occurred under the prior carrier’s policy period?

Board candidates are willing to sign “Confidentiality Agreements” so that they can review more confidential documents of the company, such as the strategic plan, the audited financial statements, potential legal issues, and critical banking and financing activities. Candidates want to know that the company is in “good health,” both financially and strategically. They want “no surprises” to confront them when they do join the board.

Most candidates believe that the changes in corporate governance over the last five years have been extremely important for companies and stakeholders, especially the codification of the duties and responsibilities of directors. None of the changes has appeared to deter an individual from serving on a board of directors of a publicly traded company as long as the potential board member has sufficient time, interest, and energy to devote to the company.

In the end, it is up to the company’s Nominating Committee or an executive search firm working in partnership with the Nominating Committee to find candidates for membership on the company’s board of directors. Recruiting for board positions is becoming more and more challenging. In addition to meeting the company’s criteria, candidates must be willing to serve in an ever-changing business world where expectations and responsibilities continue to expand.

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Stan Krejci leads The McCormick Group’s Board of Directors’ Services Practice Group, which addresses critical issues of corporate governance and assists in board development and membership selection. He was a member of the Landmark Systems Corporation Advisory Board of Directors and served on the boards of directors of Goodwin House, Inc., Pragma Systems, Inc., and Professional Solutions, Inc. In addition, Stan has held leadership positions with the Alexandria Symphony, Association for Corporate Growth (D.C. Chapter), Canadian-American Business Council, the Campagna Center, Northern Virginia Community College Educational Foundation, Paul Public Charter School, and the Tower Club. He has a Bachelor of Arts in Political Science from Northwestern University and a Masters in Business Administration in Financial Management from The George Washington University.

The McCormick Group is a national executive search consulting firm that since 1974 has delivered high-qualified candidates to fill key positions across a diverse range of industries and all functional disciplines. As the largest independent executive search firm in the Washington, D.C., metropolitan region, The McCormick Group has superior knowledge of Federal Washington and its deep commitment with both the area’s and nation’s business community and non-profit sector.

For further information on how The McCormick Group can assist with Board of Director related services, please contact Stan Krejci at 703.841.1700 x268 or by email at skrejci@tmg-dc.com.