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04 Feb. 2010 | Comments (0)

As companies continue to deal with the repercussions of the financial crisis, finding directors to fill the seats on many public company boards is becoming more difficult. In fact, in its 2009 U.S. Board Index Spencer Stuart found that 48 percent of  respondents to its survey said it took three to six months to recruit new directors while another 25 percent said it took six to nine months. Only 11 percent said the search took less than three months. What has made the search process more menacing is that 57 percent of Spencer Stuart survey respondents reported that one or more [caption id="attachment_324" align="alignright" width="150" caption="Julile Daum, Spencer Stuart"]Julie Daum, Spencer Stuart[/caption] directors left public boards in the past 12 months with more than half due to retirements. The challenge for many boards is that there were fewer new directors (those who haven’t served on any boards) joining boards in 2009 – 333 vs. 380 in 2008, according to Spencer Stuart. So basically many of the directors who are filling the many vacancies tend to be active executives with board experience. Only 16 percent of the new independent directors are first-timers on outside public boards, which is by far the smallest percentage in recent years, according to Spencer Stuart. At the same time, the Spencer Stuart Board Index reported the following on corporate governance changes ahead of proposed legislative and regulatory reforms:
  • Majority voting: Sixty-five percent of boards in 2009 report they require directors who fail to get a majority vote from shareholders to tender their resignations. That figure was 56 percent in 2008.
  • Director term limits: One-year terms for directors are the norm for 68 percent of the S&P 500 compared to 38 percent 10 years ago.
  • Independent leadership: Half of all boards have only one insider, the CEO, which is up from 44 percent in 2008. Also, 37 percent separate the chairman and CEO roles compared to only 20 percent 10 years ago.
The Conference Board Governance Center’s 2009 Directors’ Compensation and Board Practices Report, which is due out later this month, focuses on the changes in board composition and compensation practices. It states, “Changes in board composition and functions, on the one hand, and compensation practices, on the other, appear correlated to a certain degree. More precisely,  growth in director compensation, which has been observed for years across industries and revenue groups, may be the outcome of the expanding time commitment expected today from board members, as well as the potential exposure to liability resulting from more rigorous compliance requirements.” Additionally, the report finds that “in contrast to previous years, during which total director compensation rose in most of the 22 industries covered by the report, the most recent set of findings reveals that median total compensation remained flat in 16 industries, declined in two, and increased in only four.” Also, it states, “Most companies have between eight and 12 board members, little variation in the number of directors exists from industry to industry, and boards tend to grow larger as corporate revenue increases.” To find out more about the trends in board composition and governance, I reached out to Julie Daum, the practice leader for Spencer Stuart’s North American Board Services Practice. She said that while the job of director is much more time-consuming and carries a lot more liability than in the past, there are quite a few eligible candidates in the director pool thanks to an increase in retirements. My Q&A with Daum follows: How difficult do you find it matching potential board members with public boards I today’s volatile climate? Is it a buyer’s or seller’s market as far as directorships go? It is more difficult than it was in the past. Potential board members are more hesitant to join boards now. As well, companies are restricting the number of boards members can sit on at the same time. [As for the market], it depends on the background of the candidates. If you are a CEO or CFO, it’s a seller’s market. According to the 2009 Spencer Stuart U.S. Board Index, boards are becoming smaller, more independent and older. Are there more or fewer potential board candidates out there compared to even two years ago? Why do you think this is so? Overall, I do not think there are more, but it also depends on the category. For active CEOs or CFOs, there are fewer available. However, there may be more retired CEOs. If you are thinking about the board positions being a full time position, most people who are retired are receptive to that. Since more people are retiring earlier, that pool of candidates hasn’t shrunk. Do you find interlocking directorates becoming a thing of the past? Have they created barriers to those trying to break into the director ranks for the first time? Most companies are careful not to have interlocking directorates. People don’t want it to look like they pre-existing relationships on boards. [As for barriers,] it’s exactly the opposite. Now, if boards are perceived to be interlocking, they are looking for a pool of candidates of people they don’t know. What kind of challenges do you see nominating and governance committees facing today in light of the increased liability? I do think it depends on the criteria a board sets. They really have to rank and vet prospective board members than they did in the past. It is more difficult to find directors now because of the increased liability and the time commitment of boards. Of the top governance issues facing boards (executive compensation, board’s role in corporate governance strategy discussion, director recruitment, CEO succession planning), which one do you think will take most of the agenda in 2010? I think they are all important. CEO succession planning is always important, but it depends how close you are to a succession. But if I had to pick just one, I would say executive compensation because it is the hottest topic this year. This new disclosure requirement for boards by the SEC will have an impact over the next year for boards recruiting new directors.
  • About the Author:Gary Larkin

    Gary Larkin

    Gary Larkin is a research associate in the corporate leadership department at The Conference Board in New York. His research focuses on corporate governance, including succession planning, board compo…

    Full Bio | More from Gary Larkin

     

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