Governance Changes Resulting from the Sarbanes-Oxley Act

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DECEMBER 2005 - Lead directors are becoming standard in boardrooms, and active CEOs and COOs are becoming reluctant to serve as directors, according to a recent study of boards of directors for S&P 500 companies conducted by the executive recruiting firm Spencer Stuart.

Despite calls for more independent chairmen, less than 10% of all S&P 500 boards have independent chairmen. The CEO is still chairman on 71% of S&P 500 boards, and on 140 boards where the CEO is not chairman, 67% are not independent. On the other hand, boards recognize the need for lead (also called presiding) directors. A total of 94% of all S&P 500 boards now have a lead director, compared with 85% last year; only 36% of companies reported having this board position in 2003.

Active Senior Executives Continue to Decline Director Positions

Given the increasing time commitment required for board service and a perception by some of greater financial and professional risk, recruiting active CEOs or COOs as directors is becoming more difficult, although companies prefer them. Active CEOs on average now serve on less than one outside corporate board, down from two in 1998. Active CEO/COOs account for 32% of new board appointments, down from 53% in 2000. Spencer Stuart concludes that because of this, boards are increasingly turning to either retired CEOs or active executives at the next level down (e.g., division and subsidiary presidents) for directors.

A long-term trend toward boards with fewer directors continued during the year. The average board size in 2005 was 10.7 directors, as compared to 12 in 1998. Two-thirds of S&P 500 boards now have between nine and 12 members.

Women Underrepresented

Twelve percent of boards still have no women. While 20% of newly appointed directors are women, the total number of women on S&P 500 boards remains the same as last year, 15%. Fifty-eight S&P 500 companies, or 12%, have no women on their board. A total of 43% were technology firms, and the state with the highest number of boards without women was California, with 29%. Sixty-two percent of boards without a woman director had annual revenues below $4 billion.

Board Composition

The survey shows that the most visible result of SOA in terms of board composition was an immediate increase in the number of new independent directors. Although appointments of new directors increased immediately after the passage of SOA, they have generally returned to traditional levels. Annual appointments of new independent directors rose from 278 in 2001 to 401 in 2002, 393 in 2003 and 443 in 2004. In 2005 the number of newly appointed directors dropped by almost 25%, to 333.

A total of 98% of boards have identified at least one financial expert, up from 91% last year and 21% in 2003. S&P 500 companies identified 908 financial experts on 468 boards in 2005, compared with 832 in 2004 and 146 in 2003. The percentage of designated financial experts on boards has increased to 18% of all board members, up from 3% in 2003. A total of 48% of boards have identified more than one expert. It is anticipated that the number of financial experts will continue to rise.

The study found no discernable shift in the demographic makeup of audit committees since the passage of SOA, although the act requires the presence of a financial expert on the committee. A total of 59% of audit committee members are active or retired CEOs, presidents, chairmen, or other senior corporate executives, a similar percentage as in past years. Interestingly, active or retired CFOs comprise just 6% of the total, and among new members to audit committees, accountants comprise just 3%.

Director Compensation Continues to Rise

The survey found that director compensation continued to climb, with the average annual retainer in this year’s study at $56,550, a 14% increase over last year’s average of $49,727 and a continuation of double-digit increases over the last few years. In addition, equity compensation remains a significant component for many boards. Among the 104 S&P 500 boards in a supplemental survey that disclosed the cash value of stock grants or stock options awarded to directors in addition to the cash retainer, average total compensation per director (including committee compensation) was $136,360. The average equity award portion of total compensation was $86,375. The comparable figures for the 80 companies that disclosed this information in 2004 were $135,420 and $87,144.

In conducting the survey, Spencer Stuart extracted information directly from 478 company proxies, researched company websites to determine what organizations say about corporate governance, and conducted a separate survey to assess corporate governance issues not recorded in proxies. The full study is available online at www.spencerstuart.com.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



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