Corporate Boards May Finally Be Shaping UpJudith H. Dobrzynski
When IBM's board met on July 27, it faced a full agenda: consideration of a raft of rescue measures designed by Big Blue's new chief executive, Louis V. Gerstner Jr. So it's telling that directors still took time for a separate issue that's not nearly as critical: changes in the boardroom. Besides adding a director--Emerson Electric Co. Chairman Charles F. Knight--the board created a "directors and corporate governance" committee. Headed by James E. Burke, the retired Johnson & Johnson CEO who led the search for Gerstner, the panel will nominate directors and begin regular communication with investors.
The move speaks volumes about the changing corporate milieu. Last winter, critics blasted these directors for waiting so long to hold former CEO John F. Akers accountable for IBM's dismal performance. Now, they're reaching out, trying to show that they do have shareholders' interests at heart. "This is music to my ears, assuming it happens. It shows they really are serious about corporate governance," says Richard H. Koppes, general counsel at the California Public Employees' Retirement System (CalPERS).
Other companies, too, are getting serious about governance, as two new studies confirm. Both Korn/Ferry International, which polled 327 large companies, and Spencer Stuart & Associates, which canvassed 55 of the biggest companies, say that boards are getting smaller--heading toward the dozen members experts believe is optimal. At IBM, for example, though 4 of 18 members recently retired, only Knight was added. Smaller boards can more easily discuss issues. And individuals in small groups take responsibility more personally.
Both studies also show that boards continue to cut insiders in favor of outsiders, and they're starting to add foreign members. These are obvious pluses, given the need for director independence, and the increasingly global economy.
It's those outsiders, in general, who comprise both compensation and audit committees. But many nominating panels still include an insider--nearly half of Spencer Stuart's sample. Korn/Ferry found that although search firms and large shareholders suggest board candidates about twice as often now as in 1988, other board members and the CEO still supply directors about three-quarters of the time.
Thanks to prompting from CalPERS and the United Shareholders Assn., IBM delegated the job of selecting directors to its compensation committee of all outsiders early this year. Contrary to speculation that Gerstner would be allowed to select newmembers of the board, Big Bluesays the committee picked Knight.Boards are starting to gain independence for another reason: More companies are paying directors partly in stock, or at least extending that option. Only one surveyed, Primerica Corp., remits the entire fee in stock. Still, if the trend lines continue, outside directors will have more and more reason to identify with the shareholders they represent rather than the CEO they oversee. CEOs see this coming: According to Korn/Ferry, 82% of the CEOs surveyed believe that "pressure from institutional investors will cause corporate boards to become increasingly critical of management performance."
"SOMEONE'S WATCHING." Where, then, do reformers go from here? They're likely to keep plugging on such issues as independent nominating committees, payment in stock, and splitting the job of chairman and CEO, or at least designating a lead director, such as Burke at IBM. But now that change is afoot on these procedural fronts, unhappy investors will, like Gerstner, probably pay even more attention to performance. "My sense is that we've had a fairly wide impact on director behavior, and the question is how do you keep it up," says Sarah A.B. Teslik, executive director of the Council of Institutional Investors. "You want every board to know that someone's watching them."
That, no doubt, will take both vigilance and savvy. Investors are likely to demand more information about boardroom practices, to seek more data about individual directors and their boardroom contributions, and to push boards to enlist members with few other directorships, instead of name-brand CEOs who are already overextended.
The emphasis on performance certainly worked at IBM. And, unlike procedural initiatives, that is something even governance cynics can't belittle.