Changes Resulting from the Sarbanes-Oxley Act
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.
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
Senior Executives Continue to Decline Director Positions
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)
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.
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.
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.
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.
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
Compensation Continues to Rise
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.
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.