Who Are Directors?

Who Are Directors?

S&P 500 firms have about 11 directors each. So who occupies these 5,500 or so board seats? Virtually anyone can be a board member, but to believe that this is the reality is being very idealistic. Those nominated by a firm's management or board's nominating committee are the ones who eventually become directors. Therefore, if you don't personally know the firm's CEO or a current board member, it is extremely difficult for you to become a director. According to the 2001 Korn/Ferry Annual Board of Directors Study, about two thirds of current directors say that the CEO/chairman has the most influence in identifying new directors. [8] Of course, there are other ways to get a board seat. If you are a university dean/president or a politician, you could be viewed as a respectable figurehead. A board may therefore solicit your candidacy. If you are not figurehead material, you would probably need to be identified by an executive finder, such as Korn/Ferry or Heidrick & Struggles, as a viable director candidate. However, getting a recommendation from these finders is tough. For example, Korn/Ferry states that a person would have to possess 10 to 20 years of experience in a business leadership role, be a current COO or CFO of a large company, or be one of the top 15 executives at a very large corporation in order to be considered a viable director. [9] Finally, a shareholder could submit a proposal to obtain a board seat, but unless he or she is well known or wealthy enough to launch an expensive campaign, this route may actually be the most difficult. We'll discuss shareholder proposals in more detail in Chapter 11, where we discuss shareholder activism.

You may think that a person getting a director nomination means that there is only a good chance that he or she will eventually get the directorship, but it's actually more like a sure thing. In the annual elections for board seats, an overwhelming majority of board-nominated directors win ” generally going uncontested. Why is this? Usually, shareholders don't show up to vote or return their proxy votes by mail. When shareholders do vote, they often follow the suggestions of management or the board. [10] This being the case, it's not surprising that boards end up being comprised of current and former business leaders ”often CEOs from other firms. They also include current or former employees , academics , bankers, university presidents , and even politicians . According to the 2001 Korn/Ferry Study, 91 percent of Fortune -listed firms have a retired executive serving as a director, 83 percent have an executive from another firm, 56 percent have an academic, and 52 percent have a former government official. [11] With regard to gender and race representation, the data seems somewhat promising . Seventy-four percent of the boards have a woman director and 65 percent of them have an ethnic minority, with African Americans sitting on 41 percent of our nation's boards. However, with a cynical viewpoint, compensation expert Graef Crystal once stated that a board could be generalized as "ten friends of management, a woman and a black." [12]

The Board's Functions

What are directors supposed to do? In general, the board of directors is charged with four broad functions:

  1. Board members hire, evaluate, and perhaps even fire top management, with the CEO being the most important. While they are evaluating management, they must also monitor the firm's performance.

  2. Members vote on major operating proposals (e.g., large capital expenditures, acquisitions, etc.).

  3. Members vote on major financial decisions (e.g., issuance of stocks and bonds , dividend payments, stock repurchases, etc.).

  4. Members offer their expert advice to management. In executing these functions, they are supposed to represent the interests of the shareholders. Given the immense importance of the responsibilities that the board members bear, it would seem that the shareholders have powerful agents working on their behalf .

Further, the board has subcommittees. In fact, a lot of the important board work gets done at the subcommittee level, which subsequently goes to the full board for approval. Some boards have an executive committee, a finance committee, a community relations committee, and so forth. Perhaps the subcommittees most common to all boards are the audit committee (according to the Korn/Ferry study, 100 percent of all boards have this subcommittee), the compensation committee (99 percent of all boards have this), and the nomination committee (73 percent of all boards have this). [13]

The audit committee is charged with the responsibility of finding an outside independent auditor for a firm's accounting statements. It must make sure that the auditor will do its job objectively. The compensation committee is supposed to design the executives' compensation package. The most common procedure used by a compensation committee to design compensation contracts is to benchmark its firm and its CEO against other firms and CEOs, and offer a comparable or slightly better compensation package for its own CEO. The nomination committee is charged with the task of searching for and nominating potential directors to run for an impending vacant board seat in the annual shareholder elections . Finally, we should also mention that a separate stock options subcommittee has gained popularity with boards in recent years , probably due to the controversy surrounding the incentive.

While a board's roles in a corporation seem ideal, especially to ensure that shareholder interests are being met, there are some potentially serious problems with boards. Some reasons include a lack of board independence from the CEO, directors who don't have the time or expertise to adequately serve their roles, and even members who do not have a real vested interest in the firm.