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December 16, 2003
Board Pay, Board Say
    by William Baue

Two new reports assess the past year for directors of corporate boards, examining issues such as director pay, workload, and independence.


Responsibilities for directors on corporate boards grew this year mostly due to the Sarbanes-Oxley Act of 2002 and increased shareowner focus on corporate governance. Unsurprisingly, directors believe their pay should increase commensurately, according to the What Directors Think Research Study from Corporate Board Member magazine, a yearly survey of directors’ opinions. However, their pay actually fell this year, according to Board Practices/Board Pay from the Investor Responsibility Research Center (IRRC), a yearly external evaluation of boards.

Board Practices/Board Pay examines the S&P “Super 1500,” or the nearly 1,500 companies in the S&P 500, MidCap, and SmallCap indexes. Specifically, the study’s scope encompasses 12,065 directors at the 1,275 US companies that held annual meetings between January 1 and July 31, 2003. For the first time in five years, total remuneration for a typical director dropped by 4 percent in 2003 to approximately $102,000, according to the study. This decrease was triggered by a 22 percent decline in the average value of stock option grants.

“Increased scrutiny and criticism of stock options for directors have clearly had an impact,” said Alesandra Monaco, deputy director of IRRC’s Governance Research Service, who led the study. “Companies are using other types of stock-based compensation more, to keep the interests of the shareholders and directors aligned.”

Several companies, including American Express (ticker: AXP), Bank of America (BAC), General Electric (GE), Temple-Inland (TIN), and Waste Management (WMI), stopped granting stock options to non-employee directors in favor of long-term stock awards. The average annualized value of total long-term stock awards increased by seven percent in 2003, and the prevalence of companies employing this method of director compensation increased from 24 percent last year to 28 percent this year. As well, the value of directors’ annual retainers, measured in cash and unrestricted shares, rose 10 percent over the year to about $32,000.

The fact that directors are busier is reflected in the What Directors Think survey returns: between April and July 2003, Corporate Board Member sent out 10,000 questionnaires to directors and received only 875 replies, a response rate of 8.75 percent. Four-fifths of respondents (80 percent) felt directors should be paid more in light of added responsibility of recent governance reforms.

The survey also documents directors’ increasing workload. Almost three-quarters of respondents (74.9 percent) are spending more hours per month on board matters compared to last year. More than two-thirds of respondents (67.4 percent) attributed longer full board meetings to the effect of Sarbanes-Oxley. An overwhelming majority of directors (83.9 percent) also believe that the risk inherent in the position has increased since the advent of Sarbanes-Oxley and new exchange listing requirements.

When corporate governance reform represents more work, more risk, and less pay for directors, it is not surprising that they are reluctant to support other governance reforms. While many corporate governance advocates support the separation of CEO and board chair positions, less than half of the directors surveyed (43.4 percent) support this progressive measure.

However, the Corporate Board Member survey also shows that directors recognize the importance of good corporate governance, as measured by published governance ratings. Almost two-thirds (64.3 percent) of respondents believe that publicly available governance ratings will attract investors, and almost four-fifths (79.6 percent) believe these ratings will increase director’s focus on governance. These directors are evenly divided on whether governance ratings will affect stock value.

The IRRC report delivers good news for corporate governance advocates. The study reports that 83 percent of companies have a majority of independent directors, up from 78 percent in 2002 and 72 percent in 1999, before the wave of corporate governance scandals. The average board now consists of 69 percent independent directors, up from 66 percent in 2002 and 62 percent in 1999.

Independence is also increasing on board committees. According to the IRRC report, almost 80 percent of audit committees and compensation committees are now fully independent, up from 56 percent in 1999 for the former and from 70 percent in 1999 for the latter. While nominating committees are sprouting up, with nearly 90 percent of companies having one, only 57 percent of these committees are fully independent. Most encouraging is the growth of committees assigned with corporate governance responsibilities, up to 75 percent this year from 40 percent just last year.

 

 
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