Answering SOX's Wake-Up Call

The discussion at Directorship’s July Roundtable, “Recruiting the Post-SOX Board,” ran the gamut from the weakening of the old-boy network to the value of CEO versus non-CEO board members. It was led by veteran board watcher Theodore Dysart, and board denizens James Unruh and Philip Lochner, who agreed that the Sarbanes-Oxley Act of 2002 was more than a wake-up call for boards. In addition to regulatory issues, newer environmental factors, the rapid pace of mergers, and the rise of shareholder activism are driving fundamental change. The result is greater demand for directors who possess equal parts stamina, experience, and courage.

Breadth vs. Depth
Boards have been busy addressing the demands of SOX and the circumstances that brought the legislation about. “Constructive criticism rather than disruptive force is what led us to make some further changes in the board makeup,” said Unruh, who serves on a number of boards, including that of Tenet Healthcare, a Dallas-based operator of hospitals caught in a maelstrom of controversy following charges by the federal government of overbilling for Medicare (which it answered by paying a hefty fine) and disclosures of wrongdoing at a New Orleans facility in the aftermath of Hurricane Katrina.

“I think we have a very supportive board, but we are still a company that is still working through our issues. So the current approach is to recruit directors based on a skills inventory of what is represented by our existing board members,” he said. According to Unruh, experience in specific situations plays more of a role today, given the increase in mergers and acquisitions and the influence of private-equity investors. What cannot be overlooked, or its effect minimized, said Unruh, is chemistry. Because of the increased independence that board members are supposed to show, the old-boy network is disappearing.

Being able to withstand heat is also an important recruiting factor for Unruh. He said conviction is an underrated but critical characteristic when facing difficult situations: “Do board members have the courage to stay the course when they believe that it is in the best interests of the company, or do we take the easy way out and sell to a private-equity firm just because they’re knocking on our door?”

Lochner, a member of numerous boards, including Monster Worldwide and CMS Energy, countered that his preference is for candidates with more general or diverse backgrounds. “So often when a board looks for somebody, it may [reflect a] current problem that the board is dealing with,” he said. “But if someone’s going to serve for 20 years, and that’s certainly not unheard of, you have to ask yourself whether that problem will be the critical issue for the next 20 years.”

A good board member can make a difference in a short time period, too. In one instance, according to Heidrick & Struggles’s Dysart, a board member was able to make an impact after serving just 48 hours. He had resigned noisily after his first board meeting because he thought corporate management wasn’t up front about how dire the company’s financial situation was. In this instance, Dysart said, the director “exercised what I think directors have as their only option, which is to resign noisily. That takes a lot of courage as well.”

As important as breadth and depth of experience is the ability and time to do the work, said Robert La Blanc. As a member of the CA Inc. board, La Blanc said that he has attended 14 board meetings, 18 audit committee meetings, and 4 governance committee meetings in the past year. “You have to be in a position to spend the time if you’re going to make a contribution,” he said. Time is certainly a factor, especially since a tendency toward micromanagement has emerged on some post-SOX boards. Some panelists thought that tendency is misguided. “SOX said that directors are supposed to do a better job of overseeing big decisions, understanding the company, and, on occasion, challenging the management, but not, in effect, trying to do management’s job,” said Ray Groves, director of Boston Scientific and Electronic Data Systems. “In the last three-to-four years, I’ve seen that creeping in by new board members … I found myself in the position of saying, ‘Wait a minute. If we don’t think they’re doing a good job running the company, then we need to replace them.’ We don’t do their job for them.” Added Joseph (Jay) Brown, non-executive chairman of Safeco, “I’ve been in six different boardrooms, and they all had different chemistry. It all depends on the CEO. If the CEO wants an open dialogue, you’re going to have an open dialogue. If not, you’re going to see a different style.”