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
Several companies, including American Express (ticker: AXP), Bank of America (BAC), General
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.