Corporate Governance

How Corporate Governance Changed From 1986 to 2010


When looking at a snapshot of corporate boards today vs. one from 25 years ago, it's surprising to see how much has changed in board composition and governance. There are far fewer inside directors; more companies split the roles of chairman and chief executive officer; boards are smaller and more diverse, with older members; and boards meet less often. Still, these developments may ultimately seem modest as the impact of recent laws and regulations shapes board composition and boardroom dynamics over the next five years.

Spencer Stuart has tracked board composition, structure, and compensation for 25 years in its annual Spencer Stuart Board Index (SSBI) report. In its 25th edition for 2010, the firm looks at the evolution in board composition and the growth of board independence. In 1986, Spencer Stuart analyzed 100 randomly selected companies. Today, the SSBI analyzes the proxies of all 500 companies in the Standard & Poor's 500-stock index and includes a survey of board practices. In 1986, the independence of boards was not an issue. Spencer Stuart wrote then about their "outside/inside composition."

Indeed, a substantial number of directors considered "outsiders" at that time would not qualify today as independent. The average board size was then 15, with a three-to-one ratio of outsiders to insiders; the average board now has 11 members, with a five-to-one ratio of independents to nonindependents. In 1986, the CEO was the sole insider on fewer than a handful of boards. Today, the CEO is the only insider on more than half of all S&P 500 boards. The 1986 index did not address the separation of the chair and CEO roles; the percentage of female and minority members; functional backgrounds of directors; majority voting; succession planning; or board self-evaluation. These issues had not yet surfaced.

Today 40 percent of boards split the chair and CEO roles. Outgoing CEOs who have made the transition to board chair account for just over half of these situations, but 19 percent of all S&P 500 boards now have truly independent chairs. As recently as five years ago, only 9 percent of S&P 500 chairs were truly independent.

Mandatory Retirement—At a Later Age

Matters of concern to shareholders have changed dramatically, with majority voting and succession now important issues. Seventy-one percent of boards have adopted majority voting, and directors who fail to secure a majority are forced to offer their resignations. Nearly all boards (99 percent) responding to the survey say they discuss CEO succession at least once a year. Surprisingly, however, 14 percent of boards still do not even have an emergency succession plan. Twenty-five years ago succession was not an issue that was surveyed.

Seventy-four percent of boards have instituted mandatory retirement rules for directors—a valuable tool to assist in board turnover—vs. 58 percent in 2000. However, retirement age is rising. Seventy-nine percent now set it at 72 or older, vs. 37 percent that did so in 2000. Nineteen percent set it at 75 or older, compared to just 1 percent in 2000.

Nearly all boards (96 percent) now conduct annual board performance evaluations—and 26 percent of this group evaluates individual directors in addition to the entire board. Seventy-one percent of boards today also limit outside board service by directors to try to ensure that they have the requisite time to devote to the board.

One thing hasn't changed: Boards still prefer active CEOs as directors. The difference now is that boards are finding it difficult to recruit active CEOs for director spots. More than 50 percent of CEOs in the S&P 500 serve on no outside boards. Only 26 percent of new directors in 2010 are active CEOs, vs. 53 percent a decade ago. Boards are having to look elsewhere for talent and are recruiting more retired CEOs, more divisional presidents, and more functional leaders. Boards also say they are searching for women and minorities, who remain insufficiently represented. Forty-four percent of the boards we surveyed say they are looking for women directors, yet only 21 percent of new directors are women, and 10 percent of boards still have no women. Forty-seven percent of boards are seeking minorities, yet only 12 percent of new directors are minorities.

Demand is strong for directors who bring specific expertise. Forty-nine percent of boards surveyed want directors with a strong financial background, 48 percent are looking for an industry background, and 37 percent seek international expertise. Nearly 20 percent are searching for regulatory, risk, technological, or marketing expertise.

Board Retainers Doubled in 25 Years

Despite the fact that corporations face an era of increased attention to governance, boards met more often in 1986 than they do now. The average number of board meetings 25 years ago was 11; today it is 8.

Changes in director compensation reflect boards' increased responsibilities. In 2010, the average board retainer is near $80,000. In 1986, the average board retainer was just over $20,000 (about $40,000 in today's dollars). Total director compensation now averages $215,000 annually, with additional compensation for leadership of board committees. Total average compensation for a board today is $2 million per year, with 57 percent paid in equity (43 percent in stock and 14 percent in options). On average, an independent chair receives an additional $166,810; a lead director $23,653; and committee chairs $11,692.

Government-mandated changes in corporate governance this past year are just starting to play out. Disclosure requirements from the Securities and Exchange Commission (SEC), unveiled in December 2009, have already led to much greater transparency in this year's proxies, as well as more robust discussions in the boardroom regarding board leadership structures and composition. The SEC's proxy access ruling in August 2010—although delayed until spring 2011—will ultimately have additional implications for director elections and board composition.

Even without regulatory and legal changes to board governance, a director from 1986 would barely recognize a contemporary board. Boards' responsibilities are broader, their impact on strategy larger, and the burden on directors greater. Perhaps the biggest shift has been to alter the dynamic between the board and the CEO, which will likely become more pronounced as shareholders exercise newly expanded rights. Shareholder communications to explain board policies and decisions, always an important issue, may become a driving force in governance of the future.

Julie Hembrock Daum leads Spencer Stuart's director recruiting efforts and is the co-leader of the North American Board and CEO Succession Practice of Spencer Stuart, the leading executive search firm in the boardroom.

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