With new accountability rules and more independent voices than ever before, corporate directors have received a lot of attention in recent years. But how much have things really changed? And is it still worth your time to serve?
The good news: a seat on a corporate board is still a prestigious—and often profitable—career milestone. The bad news: as a director today, your actions, responsibilities and liabilities are under the microscope. The rules and regulations have changed in recent years, as have expectations.
“When I was first invited to serve on a corporate board in 1984, it was a country club environment, where like-minded people of like backgrounds and like experience got together to nod favorably at what management was doing and encourage them to keep doing it,” says Admiral Bobby R. Inman, USN (Ret.), BBA ’50. Inman is currently the lead director at Massey Energy and has served on numerous public and private boards. During those “country-club” days, most CEOs wanted feedback from boards only to reinforce their own thinking; attempts to offer direction on strategy were perceived as “intruding on the prerogatives of management,” notes Inman, who is on the faculty at the LBJ School of Public Affairs.
Fast-forward 25 years, and C-level executives like Lynn Utter, president and COO of Knoll North America, now look to their boards for exactly that type of guidance. “I view our directors as an excellent sounding board and source of counsel. Some of our most valuable board meetings occur when there is open discussion and debate,” says Utter, BBA ’84, who serves on the board of WESCO International.
Today, directors inhabit a dual position as both cheerleader and watchdog, helping to guide the health of companies, shape fiscal and corporate strategy, and, in the case of public companies, protect shareholder interest. Boards have become more diverse and more powerful; are more likely to consist of independent directors and contain more committees; and face more rules and regulations than ever before.
But with all these changes—and considering that board composition varies depending on the size of a company, whether it is public or private, and the industry it competes in—the basic essence of a director’s role remains largely straightforward.
“The fundamental responsibilities of a board include hiring a CEO, evaluating senior executives, approving compensation programs, working with external and internal auditors, and approving corporate strategy and mergers and acquisitions,” says William H. Cunningham, a professor of marketing and former president of the University of Texas at Austin, who is also chairman of the board of Lincoln Financial and presiding director at Southwest Airlines.
STRATEGY VS. COMPLIANCE
This top-level strategic role is sometimes diluted by the need for directors to focus on complying with myriad regulations, which include tightened controls enacted by the SEC in 2009 after the meltdown of the financial markets, and the Sarbanes-Oxley Act, which was passed in 2002 in response to the infamous failures of Enron and other high-profile companies.
Among other things, Sarbanes-Oxley introduced new standards of accountability for boards of directors at public companies, making them susceptible to large fines and prison time for accounting crimes. The legislation also added significant bulk to directors’ auditing and internal control responsibilities.
“Sarbanes-Oxley has created a lot of changes in board service,” says James Huffines, BBA ’73, an executive with PlainsCapital Bank and chairman of The University of Texas System Board of Regents who has served on corporate boards for more than 25 years. “Board members are forced to focus more of their attention on disclosure, compliance and risk management. And there is more scrutiny on board activities, including how often the board and its committees meet, the charters of those committees, and the type of information that is shared. It can be a struggle to focus on long-term planning and adding value for shareholders and not getting bogged down with day-to-day numbers and compliance,” Huffines says.
Many veteran board members say that both the day-to-day compliance and the strategic roles of board service post-Sarbanes-Oxley have become much more time consuming. The increased use of committees to drill down on specific business functions and ensure compliance means directors who sit on those committees devote even more hours to board service.
“It used to be that the general board made all the decisions,” says John Massey, LLB ’66. “But today, one board may have several sub-committees—audit, compensation, compliance, investment, risk management, legal and governance, among others. Sometimes you spend more time on committee work than you do on the general board meetings.”
Massey is a senior executive with asset management firm Neuberger Berman and has served on more than 40 different corporate boards since 1973.
“Because of the complex regulatory environment boards face today, directors have a lot more work to do, which limits the number of boards that active executives have time to serve on,” adds Cunningham.
Gone are the days when active CEOs could rack up directorships, he says, noting that while he was president of UT Austin and chancellor of the UT System in the ’80s and ’90s, he served on four large, publicly traded boards—something that would not be possible now. C-level executives of public companies today usually serve on only one or two outside boards.
That is the case for Sue Gove, BBA ’78, who is executive vice president and COO of Golfsmith International and a member of the board of directors of Autozone, where she serves on both the audit and nominating committees.
“Most quarterly board meetings for public companies require a minimum of two full days now,” Gove says. Being an audit committee member means additional meetings because the committee frequently examines press releases and earnings statements, as well as quarterly and annual SEC filings. “It is quite a juggling act to balance today’s board responsibilities with the pressing issues you face at your own company,” she says.
As a result, many boards now include more directors with flexibility—such as retired or semiretired senior executives who might be consultants or fund managers—than active C-level executives.
However, Gove believes it is important for boards to maintain a balance. “As an active COO, I bring a unique perspective to the board because I am face-to-face every day with Sarbanes-Oxley and other business issues that are relevant to Autozone,” she explains.
One of the biggest changes to come from Sarbanes-Oxley is the increased presence of independent directors—those who are not employed by the company on whose board they are serving. Publicly traded companies must now have more than half of their board members designated as independent, and non-independent (or inside) directors may not serve on the compensation or audit committees.
“It is very rare to find more than a few inside directors on a board now,” Inman says. “At Massey Energy, CEO Don Blankenship and president Baxter Phillips serve on the board, and the remaining seven directors (including me) are independent outsiders.”
It is also not uncommon to have the CEO be the only insider, he adds, citing SBC, Fluor and Temple-Inland as companies that adopted this model while he served on their boards.
The idea is that independent directors bring an outside perspective to the board and are better equipped than inside directors to be objective about business concerns since their livelihood is not directly tied to the corporation.
“The role of an independent director is to push insiders hard and make sure shareholders are getting the right answers and that strategic plans are all in alignment,” Huffines says.
There are, however, other considerations to the independent director trend—something academics are currently researching.
“While many institutional investors and corporate oversight bodies feel that independent directors provide superior oversight, these directors also need the detailed information that inside directors possess from their involvement in the firm’s activities,” says Laura Starks, chair of the Finance Department and an independent director for TIAA-CREF. “In addition, outside directors may not have the same time and commitment as insiders because of their other responsibilities.”
Researchers are also debating just how “independent” independent directors really are. “A lot of directors who on the surface are independent may have long-term connections to senior management—maybe they went to business school together or belong to the same golf club,” says Jay Hartzell, associate professor of finance.
It’s perfectly reasonable to tap people you know for board service, he says, but scholars want to determine whether those directors who are “networked” to top management have a positive or negative impact on the board’s effectiveness.
“It is possible that corporate managers may be more forthcoming about company details when their board is populated with directors they are comfortable with. But on the flip side, it could be harder for directors with close ties to management to be objective about CEO compensation or succession planning,” Hartzell says.
Independent directors are under the microscope today for all these reasons, but many active board members see it as a nonissue.
“Independent directors take their role very seriously, whether they are connected to the CEO or not,” says Huffines.
In addition, the increased practice of having nominating committees fully vet potential board members before bringing them to the full board has cut down on the clubby atmosphere of old.
“CEOs are still able to recommend board candidates—and there is nothing wrong with that—but the standard practice now prevents undue influence over director selection,” says Cunningham, who notes that John Hancock recently added three directors to its mutual fund board, two of whom were recommended by an independent consultant and had never met Cunningham or any of the other directors.
Not everyone, however, believes a seat on a board of directors today is a markedly more complex and risky place. While all directors have undoubtedly felt the impact of Sarbanes-Oxley, some veterans say it is not such a big game-changer.
“Conventional wisdom says directorship is a lot more complex now than it used to be, but I just don’t buy that,” Massey asserts. “The duties, responsibilities and functions of a board member were just as serious when I began serving 37 years ago as they are today.”
A public company director’s primary focus is protecting shareholders—and that has always been the case, adds Starks. “The recent SEC regulations have imposed a number of new requirements for boards, but they have not changed the fundamental fiduciary duties of a board member, which is to watch out for shareholder interests,” she explains.
In some senses, the changes enacted by Sarbanes-Oxley and the SEC merely put into law strategies that smart businesses were already employing. The majority of public companies functioning in an honest and forthright fashion have not had to scramble to comply with new board mandates, Cunningham says.
“For example, the audit and compensation committees must now be made up of all independent directors; you can’t make loans to the CEO; you can’t backdate stock options—most good companies had these protocols already,” he explains.
The consensus as to whether the risks for directors have increased—and indeed whether they are real or just perceived risks—seems to be a gray area. Could decisions made during a contentious merger result in a director losing his or her seat? Do directors face reputation risk because of increased scrutiny? Will directors and operators insurance protect them from potential litigation?
“Directors are much more accountable now than in the ’80s and ’90s,” Inman believes. “If a company experiences a significant, unexpected drop in performance over a quarter, it is likely to get an instant class-action lawsuit from shareholders.”
Most litigation against directors stems from violations to fiduciary responsibilities. Generally, directors may be sued for taking advantage of their position on the board to benefit ahead of the shareholders—by, say, trading on insider information. But this isn’t new.
“If you’re a crook, they’ll get you—and they would’ve gotten you before,” says Cunningham.
Although Cunningham agrees that the SEC and the Justice Department are definitely watching boards with a sharper focus, he still feels the risks are less dramatic than some people claim. “If you make every effort as a director to make the best decisions possible, you should not be that prone to risk,” Cunningham says, adding that he has never been sued successfully.
DO YOU HAVE D&O?
If the fear of lawsuits has not necessarily sent directors running for the hills, it certainly has them scrambling to make sure they are well protected by directors and officers (D&O) insurance, a type of coverage that handles the financial risks directors face if they are sued.
“I’ve heard veteran directors say that the first time someone is asked about being on a board today, their response should be, ‘How good is the D&O policy?’” says Hartzell.
But this cynical view about the need to protect oneself does not jive for Massey, who feels that directors do not face more risk today than they did in the past.
“I don’t agree with that viewpoint. The most I ever got sued in my life was serving on boards in the ’70s and ’80s,” Massey says.
His reasoning? Companies no longer tolerate some of the controversial practices—such as intentionally discriminating against minorities and women—that often resulted in litigation in the past.
Lawsuits have also decreased since the laws regarding stock buybacks (when a corporation buys its own shares to, say, reduce capitalization or provide shares for employee option plans) were settled.
“Back in the ’60s and ’70s, whenever a company announced a stock buyback it would almost always spark a strike suit against the directors, alleging some type of fraudulent motive or attempt at stock manipulation,” Massey explains. “When I was a director of Mary Kay Cosmetics in the mid-1970s, we were a frequent strike suit target. None of these suits had merit, and none of them would be filed today.”
Massey also feels that the level of risk and complexity on boards today has not changed because of Sarbanes-Oxley or the SEC, but rather is subject to the changing winds of political and economic approaches.
“Board climates are driven by what has happened in the economy and by who is in charge politically and what they are trying to achieve. Depending on whether you have a right-wing or left-wing administration in power, the regulations can swing wildly in one direction or the other,” he explains.
Whether you embrace the theory of increased risk or not, the upside to serving on a board is still great. Compensation—often in the form of equity—is nice, but it is not what draws most executives to board service. Rather, it is the opportunity to engage in high-level strategy, make a difference in the welfare of a company and its stockholders, and gain valuable business experience and networks.
“My career has been dramatically enhanced by all of the boards that I’ve served on,” says Massey. “I am a much better businessman and I’ve been able to contribute more to society as a consequence.”
By Amy Partridge