Why Some Directors Want to Scream: Enough!

EDVARD MUNCH'S CELEBRATED painting, SEC chairman Christopher Cox once quipped, reminds him of the Enron investor. Judging from our second annual board survey, it also captures the mood of directors fed up with regulatory burdens that demand more of their time and push up opportunity costs to their companies for negligible economic benefit. Worse, one out of five worry that SOX has made CEOs risk adverse.

You have to wonder, why does anyone even want to be on a board?" corporate governance expert, Stanford law professor and former SEC commissioner Joseph Grundfest told Fortune in 2004. "The pay is lousy, there's potential legal liability, the workload has gotten much heavier, and your reputation can be tarnished by something you had no way of knowing about." This is still true despite many changes that have taken place in how boards operate today.

In a Directorship/RHR International survey conducted in late 2005 of 120 board members, most of whom are independent, directors say the rules of the game are tougher and that greater demands are causing some to rethink the number of boards and type of company they choose to serve. Compared to last year, board members are spending 15 percent more time on board activities. The typical directorship now requires about 134 hours a year as compared to 117 hours last year.

Two years ago, most directors, including many CEOs, conceded that the Sarbanes-Oxley Act provided a needed prod to shake things up. But sentiment has changed and not just due to Section 404 compliance. Most say SOX is not just a financial burden like other compliance obligations; it's becoming a drag on company productivity. The most damning indictment is that some believe that SOX has made their CEO more risk-averse—a direct consequence of what some regard as the ‘comply or be hanged' mentality among the regulators and business media.

Consider that:

• Almost 20 percent of directors surveyed believe their organization's CEO is inappropriately risk-averse in his/her decision making as a result of Sarbanes- Oxley oversight and compliance.
• Over 14 percent of directors surveyed have resigned from a board or chosen not to join one because of concerns regarding personal legal and/or financial risks.
• A strong majority (62 percent) of board members do not believe the benefits of Sarbanes-Oxley are worth the cost.
• On average, directors say their companies spent $4.4 million in 2005 to comply with Sarbanes-Oxley. (Some spend up to $27 million.)
• Only 40 percent of those surveyed believe current costs associated with SOX will decrease over the next two to three years. The rest are divided over whether costs will increase or stay the same.
• On average, companies spend $2.8 million to comply with Section 404 alone. (Some spend up to $15 million.)

SOX aside, over 98 percent of directors surveyed believe their board operates effectively. No doubt there is a certain Lake Wobegon effect in that each member surveyed thinks his or her board is above average. And over 84 percent are confident in the management team surrounding the CEO, down somewhat from 96 percent in 2004. But this is counterbalanced by the fact that 91 percent feel the board and management's senior team are having candid conversations. An equal percentage say the CEO keeps the board informed in a timely manner.

The survey revealed an inverse correlation between the number of hours devoted to board work and the confidence board members have in the senior management team. Correlation is not causality. We cannot say whether the lack of confidence in senior management prompts directors to put in more board time or if shaky confidence comes as a result of their spending more time finding out what's going on.

In addition, the single best predictor of board effectiveness— from the point of view of board members themselves—is the degree to which directors feel free to challenge, assist and engage the CEO to develop potential leaders two or more layers further own the organization. (See figure 8.) Leadership development clearly trumps other responsibilities in giving board members a sense of purpose and accomplishment in carrying out their duties. Yet only twothirds surveyed say they spend time getting to know these emerging leaders personally. And only two-thirds say their board links performance in this area to the CEO's overall compensation.

One suspects that too many directors are content to see the occasional presentation by handpicked rising stars as sufficient for this purpose.