All in favor of giving yourself a raise, say “Aye.” U.S. corporate boards paid directors a record average of $251,000 last year, the sixth straight year of increases in the S&P 500 since the government began requiring disclosure and amid yet more evidence that corporate governance is deeply in need of repair.
The issue isn’t whether these folks deserve that much for about 250 hours of work. (And hey, it’s chump change next to the $26 million that Lloyd Blankfein got for running Goldman Sachs (GS).) But rising director pay is yet another symptom of the general dysfunction in U.S. corporate governance. Even with increased regulation, the fundamental problem remains largely unchanged: The chief arbiters of how companies are run are those who serve on boards themselves.
No wonder their average pay is rising. So is the average tenure of directors, and the average age. Centuries of human history (or a quick look around the playground) show the power of group think, especially when the members look and sound the same. Why should directors be any different? The only thing that’s hitting fresh lows in the boardroom these days is turnover. S&P boards had only 291 openings among the 5,184 board seats in 2012; a decade earlier, 401 seats changed hands.
Until shareholders, regulators, and even CEOs force a more robust process for how boards are run, the perks are only likely to get better. The easiest fix: term limits. Not only are U.S. directors spared the quotas and legal pressures that increasingly face their brethren in other parts of the world; they get to linger as long as they want. So guess what? Even as CEO turnover and industry disruption accelerates, boards are voting to increase the retirement age for directors or to do away with that hassle altogether. Friendly faces are more likely to agree that someone who joined the board as independent director back in 1974, such as, say, Howard E. Cox Jr. at Stryker (SYK), still has the skeptical eye of an outsider almost four decades later.
The cost for shareholders is high. Even with their billions, such activists as Bill Ackman or Carl Icahn have the resources and bandwidth to target only a few boards. The rest are left largely untouched. Rules that give shareholders say on pay or the power to vote in directors sound great in theory but still require a gargantuan effort to implement. Most investors want to make money. They’d prefer that boards be well run on their own.
The only guaranteed way to refresh thinking and at least force some new voices into the debates around pay and other issues is to make people leave. Politicians deal with term limits. CEOs have learned to live with mandatory retirement ages. (Then they can go serve on boards.) Great people will get snapped up to new board appointments. Lackluster members can be edged out while saving face. Meanwhile, companies will get more opportunities to bring women and global players on to their boards, as the U.K. has managed to do with its six-year limits.
Is it the perfect solution? No. But the upward trends in pay, tenure, and age in the boardroom reflect the central reality that shareholders need a better process to keep boards focused on who they serve.