Boardrooms lose their appeal
By James Cox
USA Today
Headhunter Russell Reynolds recently went to three companies with candidates for their empty board seats. All three of his prospects wound up getting offers. That's when it got weird.
One wouldn't accept until he sat in on two board meetings to convince himself the other directors were up to snuff.
The second sent a team of financial experts to the company recruiting him. They took a week to go over its accounting procedures before he agreed to join.
The last candidate, a CEO, accepted a seat on the board of a healthcare company. But she was overruled by her own board and told to stick to the business she was being paid to run.
The once-clubby boardroom is a lonely place these days. The deluge of corporate scandals has made directors harder than ever to find. Candidates are begging off because it's too much work, and with the number of lawsuits against companies and directors exploding, too risky.
Search firm Christian & Timbers says that before the Enron scandal unfolded, it typically contacted 25 people to find two good candidates for a board vacancy. Post-Enron, the same search requires reaching out to 100 prospects.
The liability issue is real. Shareholders and bondholders filed 485 class-action securities fraud lawsuits last year, up from 109 just two years before.
Past shareholder complaints usually named the target company, its CEO and other key executives. Now, big pension funds and other institutional investors are naming board members, too, arguing that accounting improprieties and other shenanigans couldn't take place if directors were on the ball.
McKinsey & Co. surveyed nearly 200 directors in May and found that 25 percent had turned down or quit a board seat in the past year at least partly out of concern for personal legal liability.
Historically, plaintiffs' lawyers have settled most cases within the limits of a company's coverage, but that might not be so in the future, as angry shareholders cast a wider net for deep-pocketed villains. As a result, some directors want companies to supplement their insurance with expensive individual policies for each board member.
Apart from the added legal risks, board jobs just aren't as much fun these days, despite their reputation as the ultimate networking opportunity.
The average outside director now spends 175 to 200 hours a year on meetings, travel and preparation — per directorship. That's up from 100 hours in 1999, says Roger Raber, president of the National Association of Corporate Directors.
Not that there aren't rewards. Director pay, rising about 11 percent a year for a decade, now averages $152,626 in stock, options, cash and pension contributions at the 200 largest public companies, according to compensation specialists Pearl Meyer & Partners. Perks also have been extravagant — lavish dinners and entertainment, first-class air travel, foreign junkets disguised as corporate fact-finding missions.
But many directors look forward to shedding their reputation as rubber stamps and fat cats who lap up handouts.
"You don't want to just show up and collect your check anymore. There's too much risk in that," said Robert Felton, head of McKinsey's North American board governance practice.
Washington's crackdown on corporate misconduct should force directors to be more diligent, vigilant and accountable. Rather than answer to prosecutors later, board members are likely to be more assertive when dealing with top management.
One danger is that directors get too aggressive, attempting to dictate to management rather than performing an oversight role. But some CEOs say they relish a board that can ask tough questions and bring different perspectives and expertise to the job.
"If your board members aren't pushing back, you've got the wrong board," says Jeff Rodek, CEO of Hyperion, a business software maker in Sunnyvale, Calif. He adds: "It's not always comfortable."
Some chief executives wonder if their boards are up to the job, says Edward Snyder, dean of the graduate school of business at the University of Chicago. "CEOs tell me privately they've got people on their boards who don't know what they're supposed to be doing and can't move into the active mode once they have an issue."
Sensing a void, Snyder's school has joined the Stanford University law faculty, and the University of Pennsylvania's Wharton business faculty in forming the Director's Consortium, a three-day finishing school for board members. Its first class is Aug. 21-23.
Directors at many companies are already moving to take control of governance tasks previously left to the CEO, including deciding who will join their ranks as a director.
"It used to be our contact was always the CEO at the hiring company," says Theodore Dysart, a recruiter at search firm Heidrick & Struggles. "On 50 percent of the (director) searches I'm doing right now, the head of the nominating committee has taken charge of the process."
The most coveted candidates for boards are the most elusive: CEOs of other companies. In the early 1990s, chief executives of big public companies served as outside directors on an average of three boards. The average is now close to one outside board per CEO.
Recruiters are focusing on other kinds of candidates. Among them:
• Chief financial officers and the heads of stand-alone business units at big companies.
The idea is to snare young executives on the CEO track before they actually get there.
Hyperion, for instance, just added as a board member John Riccitiello, chief operating officer at software company Electronic Arts. "Lowering your sights in terms of title is not lowering your standards," Rodek says. "John's going to be a CEO one day, no doubt about it."
CEOs, says Reynolds, the headhunter, "are the hardest to get, and you have to stand in line. So our job is to figure out who the next head of GM or American Express is going to be and get them on a board prior to becoming CEO."
• University presidents, retired military brass, hospital administrators, well-respected doctors and theologians.
"The real worth of a director isn't so much the knowledge of a particular subject like accounting or finance or technology," Reynolds says. "It's really common sense. Do they know enough to say, 'If it looks too good to be true, it probably is'? Too many directors don't."
