Economic Ills Spur Greater Board Scrutiny

What are directors major concerns in the coming year?

At Directorship’s inaugural “Directors to Watch” Forum, hosted by Nasdaq OMX yesterday, Charles Elson quipped “solvency.” The chair of the University of Delaware’s Weinberg Center for Corporate Governance warned the more than 80 attendees that directors should be paying attention to new regulations on executive compensation likely to be included in any Congressional bailout package, and, in particular, severance packages.

Elson, in a panel moderated by PricewaterhouseCoopers’ partner Catherine Bromilow, also said that the Sarbanes-Oxley Act of 2002, passed to restore investor confidence in the aftermath of corporate accounting scandals, may also be subjected to renewed scrutiny.

“SOX and in particular 404 came up with internal controls to mitigate risk…but when highly regulated companies such as banks and insurance companies start to fail, where was SOX? How effective was that?” David Swinford, president and CEO of Pearl Meyer & Partners, an executive compensation consulting, said that the recent collapse or near collapse of so many once venerable firms serves to remind directors that “preserving the corporation” should be their top concern. To do that, he suggested that boards work to avoid “group think.”

The upcoming January through March “pay decision-making season” should also see directors “worried about how to balance pay for non performance,” Swinford said.

Julie Hembrock Daum, an executive recruiter who leads Spencer Stuart’s North American Board Services Practice, said concerns of governance committee members in particular should center on board recruitment and succession planning. Some boards are seeking younger directors while others are pushing the mandatory retirement age for directors up to 75 in an effort to retain their experience.

Daum also noted that one-third of all newly appointed directors have no prior board experience, which underscores the need for boards to understand what makes a good director. She expects boards to become more proactive in succession planning, and said she is being called upon more frequently to help with internal candidate assessment.

Elson pointed out that the level of anger and mistrust being directed at corporate management and boards of directors is nearly unprecedented. “We need to restore confidence in the system,” he said.