Board directors and executives clearly are feeling the combined effect of the new rules, regulations and increased attention from the media and shareholders. Directors’ jobs have become more time-consuming and vulnerable to litigation and harbor — according to some — greater risks than anytime in the recent past. These factors make it harder for companies to find directors who are qualified — and actually willing to accept the job.
CEOs are under pressure from their own boards to sit on fewer boards, and more stringent independence guidelines are shrinking the number of eligible candidates. The result is that the available supply of directors has decreased and competition has stiffened for the increasingly hesitant, limited number of potential directors who have the desired credentials. Companies are finding that they have to look beyond the classic director profile — active CEOs — to other executives further down in the management team and the organization who have the needed time and expertise.
Who will serve?
Arthur Martinez, retired chairman and CEO of Sears, who currently sits on the boards of Martha Stewart Living Omnimedia, PepsiCo, Liz Claiborne, International Flavors and Fragrances and the Federal Reserve Bank of Chicago, comments: “The best pool of potential candidates is retired CEOs. They have the intellectual engagement and interest to be dedicated board members — and time on their hands to dedicate to a board commitment now that they no longer are CEOs.”
There is no doubt that retired CEOs often make excellent directors. The pool of new directors also is likely to include more line executives and functional experts below the CEO level. These line executives and functional experts are likely to be younger than the traditional pool of directors. In addition, “professional” or “plural” directors — former senior level executives who do not hold an executive post, but whose careers now comprise several part-time directorships — likely will become more prevalent.
As a result of the Sarbanes-Oxley Act’s requirements for financial expertise, we already are seeing a spike in demand for directors with strong financial backgrounds to serve on audit committees. The directors who staff these will be active CFOs, retired CFOs and retired senior audit partners, as well as some younger experts in finance and accounting. Companies clearly are looking for financial experts. In fact, nearly half of Spencer Stuart’s current board searches are for audit committee members. Even companies that already have financial experts are seeking additional talent — in part because some current audit committee members are stepping off the committee due to the additional time commitment and perceived liability.
However, we may find demand and supply out of kilter, since many CFOs and CEOs with financial backgrounds who are interested in sitting on another board are unwilling to chair an audit committee, even though they are eminently qualified to do so.
A note of caution
Directors are rightfully wary. Board service requires nearly twice as much time as it used to, according to some estimates. D&O insurance premiums are climbing sharply. Directors are worried about their professional and financial liabilities. One need look no further than the media’s coverage of the Enron board members to understand why. Many directors are feeling extremely cautious about joining new boards and even continuing on boards for which they have been long-time members. Some are at a loss when it comes to the point of answering simple questions such as: Should I join this board? Should I remain on this board? How do I choose between one board and another?
According to Blythe McGarvie, who currently serves on the boards of Accenture, where she chairs the audit committee, The Pepsi Bottling Group and Wawa, the changes spawned by the new legislation should not be that stark for companies with strong standards of governance in place. “At good companies, most of this work was already being done. What’s changed is that there is better documentation,” notes McGarvie. That said, McGarvie acknowledges that the documentation and “going through the checklist” adds significant time to the process. She does not feel that the risks have changed much for directors, rather that “the level of awareness surrounding these risks has increased, which has raised directors’ alarms.”
Tips for new directors
- Make sure you understand the role of a director versus that of a manager.
“The board of directors has a primary duty to safeguard the interests of the company’s shareholders and uphold corporate integrity. You do this by advising the company based on the information it provides you. You can and should challenge and inspect the accuracy and forthrightness of this information. But you should not find yourself getting involved in the day-to-day operations of the company,” recommends McGarvie.
- Get to know the business.
The sooner you understand the business, the more qualified you will be to perform your boardroom duties. Insist on a proper, formal induction into your role as director. Then, do all that you can to get to know the business. Go to its stores; attend a training session for new employees; visit a plant. You will find out a great deal about the business by meeting its employees, its customers and seeing how the company works — things that cannot be gleaned by remaining strictly in the boardroom.
- Understand what drives the business.
Is the company motivated by shareholders? Single-minded in its need to satisfy customers? Driven by profit? Focused on fulfilling a mission? Getting a sense of the driving force behind the company’s strategy will provide you with critical, often unwritten information that will be instrumental to your oversight responsibilities.
To join or not to join
Historically, directors joined boards for a number of reasons, including real income, prestige, public recognition and the perquisites that accompanied a directorship. However, recent events and the resultant watchful governance climate have diminished some of the traditional rewards.
As such, evaluating whether to join a specific board can be confusing. Both Martinez and McGarvie offer sound advice. When sizing up a board opportunity, McGarvie asks herself three key questions. “First, can I contribute to the success of the company? Second, will I learn something from this?” Third, “Is the company ready to do what needs to be done?” If the answer to all three questions is not a resounding yes, McGarvie declines.
In short, directors must feel confident that there is something they can gain from being on the board and something of value they can add. For example, do you bring a perspective or set of functional skills that will benefit the company?
“Executives should have a list of questions or criteria by which they filter and evaluate potential director positions,” recommends Martinez. “But once they have satisfactorily answered all of these questions, directors — and companies — must be certain that the value equation is beneficial for both sides.”
We suggest asking the following:
- What is the company’s — and the CEO’s if he/she is a newcomer — track record for value creation?
- Who are the company’s major shareholders? How long have they held their respective stakes in the company?
- What are the company’s corporate governance processes, such as board charters, mission statement, defined roles and responsibilities and directors’ decision boundaries?
- What does the annual report convey about this approach?
- How many committees does the board convene? What are the responsibilities of those committees?
- How does my background fit with the company’s strategy or business model?
- How do my skills complement the existing board?
- How proactive is the board in its director training, performance evaluations and ominating process?
- How many independent directors sit on the board? How does the board define independence?
- What is the expected workload or time commitment?
- What are the liabilities and D&O coverage?
- How are directors compensated?
Before joining any board, potential — and sitting — directors must be comfortable with what McGarvie calls the tone at the top. “You can tell who is serious about regulation and who winks at it,” she explains. “The CEO and executive team must be willing to do the right thing.”
Martinez concurs. “The CEO should want exchange and dialogue from directors,” he remarks.
Making the commitment
Given the mandated process requirements and liability risks, directors are wise to evaluate the boards they join with care. But they should not let caution steer them away from all board commitments, as executives stand to benefit personally and professionally from board involvement. Despite the added time for documentation and process, both McGarvie and Martinez find the experience of sitting on boards other than their own as invaluable chances to learn, network, broaden their insight and cross-reference with other companies.
“Some people are active in the PTA or go to soccer games with their spare time,” says McGarvie. “I serve on boards. It’s my way of giving back to the community.”
About the authors
Julie Hembrock Daum is the leader of Spencer Stuart’s North American Board Services Practice.
Carolyn Eadie is a member of the European Board Services Practice and co-leads the firm's global Financial Officer Practice.
About the contributors
Arthur Martinez is the retired chairman and CEO of Sears.
Blythe McGarvie is president of Leadership for International Finance & Enterprises, a Williamsburg, Virginia firm offering global perspective to clients helping them achieve profitable growth.
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