The majority of public company executives say finding qualified directors to serve on boards has proven more difficult since the enactment of Sarbanes-Oxley, as shareholder lawsuits have raised concerns about director liability.
That’s according to a survey commissioned by Chicago-based Grant Thornton, which found that roughly two-thirds of senior financial officers of public companies think it's harder today to recruit directors due to SOX and concerns about personal legal risks.
Nusbaum
"Sarbanes-Oxley was a needed watershed event in corporate governance, but along with the greater protection of investors, there are increased time requirements for directors," says Ed Nusbaum, Grant Thornton chief executive officer. "But an even greater obstacle is the fear of litigation."
Sixty-five percent of senior financial executives of publicly held companies polled believe it's more difficult today to recruit directors. The survey included chief financial officers, controllers and treasurers from 101 U.S. public and private companies with revenues ranging from less than $100 million to more than $2 billion.
That the process of recruiting directors has gotten tougher is supported by a recent white paper by executive recruiting firm Korn/Ferry International. According to the paper, titled “Winning the Race for Independence in the Boardroom,” director candidates who meet independence and professional requirements "are harder to find, and competition for qualified individuals is fierce.” (see box at right for the white paper).
Griesedieck
“I think if a company is trying to recruit active CEOs [as outside directors], it’s gotten significantly harder,” says Joe Griesedieck, vice chairman of Korn/Ferry International and co-author or the white paper. “Generally speaking, it's the time commitment that makes it difficult.”
But private companies don’t appear to be struggling with the same challenge. The vast majority of executives from privately held companies (78 percent) haven't found director recruitment to be a problem. “[T]hat's not so surprising since most privately held companies don't face the regulatory oversight that their publicly held counterparts do from Sarbanes-Oxley and other regulations or the threat of class action shareholder lawsuits,” notes the Grant Thornton poll.
“Seven or eight years ago, if you went to a lot of CEOs and asked them to serve on a private company board, most of them would've said no because they liked the idea of a public company,” says Griesedieck. Today, however, “Private companies have good governance practices, but they don’t have the scrutiny of the public market,” which may make serving on the board at a private enterprise more attractive.
A Smaller Pool
Another factor making it difficult for companies to find outside directors is the fact that many companies now limit the number of outside boards their CEOs can sit on, and some don’t allow their CEOs to serve on any outside boards. “CEOs are as busy as they've ever been fighting for their own jobs,” says Griesedieck.
In some cases, he says, directors may put in as many 35 days a year attending meetings in person or by phone. “People are asking themselves, ‘am I really interested enough in this company to put in the time?’” says Griesedieck.
Bornstein
Jeffrey Bornstein, a partner at Kirkpatrick & Lockhart Nicholson Graham and a former assistant U.S. Attorney, agrees that director posts have gotten far more demanding post-Sarbanes-Oxley. “I think what we’re seeing is that there’s far more responsibility placed on outside, independent directors than ever before,” says Bornstein. “Companies used to have people serving on six or eight boards—that’s not the practice anymore. If someone is serving on three or four boards, it’s considered to be a lot.”
As if that weren’t enough, Griesedieck says, “the liability issues raised by the WorldCom case caused people to say, ‘for what I get paid and what I have to put up with, do I want to put my net worth at risk?’” In that case, a group of former WorldCom directors had agreed to contribute $18 million out of their own pockets to settle a class action lawsuit brought by investors.
While Bornstein says his firm hasn’t seen any clients having trouble filling board spots, he notes that the recruitment process has changed. “Our clients haven’t reported problems finding people to serve on boards,” says Bornstein, “But the recruiting practices are different today. There’s a smaller pool of people.”
FINDINGS
Though Compliance Week was unable to redistribute a copy of the study, "The Senior Financial Executive Survey of Current Issues in Financial Reporting," which was commissioned by Grant Thornton, several statistics were release by Grant Thornton last week:
Standards—85 percent of the CFOs favor uniform global accounting standards.
Principles—89 percent support adoption of a principles-based approach to accounting standards.
Models—79 percent think the current reporting model needs to be updated.
Expensing—76 percent agree stock options should be expensed.
Non-Audit Services—74 percent consider it appropriate for an accounting firm to do both audit and tax work for a company.
Big Four—77 percent believe that there is too great a concentration of public audits by the Big Four accounting firms, which audit 97 percent of public company revenues.
Big Three?—63 percent see a "realistic chance" that one of the Big Four firms could fail within the next three years, and if it that happens, 78 percent don't think the other three firms could adequately handle the business.
Source: Grant Thornton
“In the old days, you found people you knew and who you felt were competent,” says Bornstein. “Now companies have to find people willing to take on added responsibilities, who have certain qualifications—you need a different mix of talent, expertise. And directors need to commit more time; it’s not just showing up for a meeting once a quarter.”
The Gatekeepers
Potential directors' heightened sense of caution has been reinforced by comments and actions at the Securities and Exchange Commission, which has emphasized its focus on "gatekeepers"; namely, the lawyers, auditors, research analysts, and directors who guide public companies.
In a speech last September before the UCLA School of Law, former SEC Division of Enforcement Director Stephen Cutler outlined the Commission's enforcement program as it pertained to the themes of Sarbanes-Oxley. In that speech, Cutler mentioned "the fundamental significance of gatekeepers in maintaining fair and honest markets," and noted that independent directors would be under particular scrutiny. "Over the next year, we intend to continue focusing closely in our investigations on whether outside directors have lived up to their role as guardians of the shareholders they serve" (see "Former SEC Enforcement Chief Outlines Strategy," in box above, right).
Bornstein at Kirkpatrick & Lockhart points to that SEC focus when it comes to director recruitment. “The SEC has said in a number of different contexts that one of their focuses is on looking at gatekeepers and holding them responsible; in this context, gatekeeper means board members,” he says. “Companies have to be more careful in terms of who they pick.”
But Bornstein and Griesedieck say companies shouldn’t despair. There are still ways to find good directors.
Griesedieck at Korn/Ferry advises companies to look beyond CEOs to fill out their boards. “Generally, it’s great to have a CEO or two, but if you load up your board with CEOs, I think you’re making a mistake,” says Griesedieck.
Other candidates he says companies should consider include COOs, division presidents, and in some cases, human resource executives. “If they’re senior enough, particularly since companies are interested in retaining and attracting talent, HR executives could be helpful,” says Griesedieck. In addition those executives often provide operational expertise that CEOs lack. “It’s a great opportunity for those people to get board experience, and for companies that are using their boards more actively for strategic and operational issues, the narrow expertise that [non-CEOs bring] can be very helpful,” says Griesedieck.
But more importantly, he says, when recruiting directors, companies need to first consider how they want to use their board. "Do they want to engage them strategically, or get them involved in operations?" says Griesedieck. "That will help them define the ideal makeup of their board.” Other factors to consider include industry, company size, and where a company ranks within its industry relative to its peers. The bottom line, says Griesedieck, is “be realistic about it, be deliberate about it and you’ll probably get what you want if your expectations are in line with reality.”
“We tell prospective clients, you have to accept the reality of who you are,” sys Griesedieck. “Companies’ expectations have to be realistic in terms of what they can attract. You build a world-class board step-by-step—you add one really good director, and they're a magnet for the next one. It doesn’t happen overnight.”
According to Bornstein, “The best way to retain good directors is to create a corporate culture that not only empowers, but rewards honesty and transparency and that really takes the mandates of SOX and the other compliance-related laws and incorporates them into the corporate culture in a meaningful way.”
“If companies create that kind of environment, it is far more rewarding and far easier for directors to exercise their role in providing oversight,” says Bornstein. In other words, ditch the checklist approach to compliance.
“If you have a good company and you try to do the right thing, it becomes known, and people want to join the organization and help it to meet its mission,” Bornstein says.
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