Corporate America is arguably in a state of transition. Despite this uncertainty, performance is a priority and shareholders demand positive results. Boards and management are under tremendous amounts of pressure to achieve. Companies, however, have not pursued either too much or too little risk in their attempts; rather, 87 percent of the respondents to the 2010 NACD Annual Survey of Public Company Governance (PCG) believe the amount of risk in their company’s current strategy is appropriate.
The director’s role is also in a state of transition. Economic turmoil of the recent past has given legislative and regulatory bodies the ability to reshape corporate governance and the way many companies do business. Several of these new laws and regulations are already in place, while many more have yet to hit American companies.
How have board members responded to all of this? The PCG shows that boardrooms have clearly placed their focus on strategic planning, followed by corporate performance and risk oversight. Directors have also taken advantage of educational opportunities. In 2010, more directors found that continuing education events enhanced their board’s effectiveness.
Despite the economic unease, boardroom structures have changed little since 2009. Nearly 96 percent of survey respondents believe their current governance structures and practices enhanced the board’s ability to effectively and efficiently fulfill its duties. This belief comes prior to the broad changes mandated by the SEC and the governance provisions of the Dodd-Frank Act. As these laws and regulations loom, 90.6 percent of survey respondents think their governance practices are sufficiently explained in proxy materials and other communications. Directors also felt that the current disclosure requirements were adequate, and 25 percent believed they were excessive.
One of the most widely discussed provisions to come from recent congressional and regulator action is proxy access. Despite the potentially huge shift in voting power, survey respondents had mixed feelings: 42 percent of respondents indicated that proxy access would likely hinder the current election process while 54 percent said there would be no change. Only a slim 4 percent said giving shareholders access to the proxy would improve director elections.
Critical to blunting the impact of proxy access or say on pay is engagement with shareholders. In 2010, 19 percent of respondents said a board representative should meet with institutional investors more than once a year, up from 15 percent in 2009. Additionally, 25 percent said the two parties should meet annually. On the other hand, 28 percent indicated that institutional investors should never meet with board representatives.
From the perspective of the boardroom, respondents said shareholders are mostly concerned with compensation risks, followed by director qualifications. Despite the attention on compensation, 74 percent of respondents believe pay matches CEO performance, while 16 percent feel pay is below performance.
While Corporate America faced dramatic changes this past year, 2010 was also a year of boardroom transition.
Governance Structures
More than 95 percent of directors believe the governance structures they have implemented enhance the board’s ability to effectively fulfill its duties. The use of audit, compensation and governance committees remains nearly universal in 2010. Otherwise, the most popular committees continue to be the executive and finance committees, although both have declined in use (25 percent and 18 percent, respectively, in 2010; 37 percent and 22 percent, respectively, in 2009). Other highlights of board structures include the following:
- Use of a lead director on 66 percent of boards, up from 58 percent in 2009. Ninety-two percent of directors who serve on boards with lead directors find the position enhances board effectiveness; 43 percent believe this to a great extent.
- Strategic planning and oversight remains the highest priority for boards in 2010.
- Risk oversight has continued to grow in importance since 2008.
- Average board size is 8.3 members, down from 9.1 members in 2009.
- Board-level risk oversight/crisis management committees are becoming more prevalent. Ten percent of survey respondents used this type of committee in 2010, five percent in 2009.
- Board culture has dropped significantly in importance since 2008, when it was listed as the second most important item.
Competency
Nothing is more important to boardroom performance than what directors bring to the table, individually and collectively. A balanced mix of skills and experiences is of critical importance to a board’s oversight responsibilities, and in the overwhelming number of cases, board members believe that they have the “right stuff.”
Maintaining a balanced mix of skills is often the product of two areas: education and evaluation. Only 36 percent of boards require continuing education, but a growing number of directors say that it has enhanced their board’s effectiveness. In 2010, 92 percent of directors said they believe that education has enhanced their board’s effectiveness; this is up from 80 percent in 2009.
Director time commitment has also undergone change in the past year. The number of full board meetings has decreased slightly in 2010, while the length of meetings has increased by over two hours.
Time Commitment
Just over one-third of boards have a policy limiting the number of boards on which a director can serve. If a policy is in place, directors are typically limited to three additional boards.
The number of full board meetings has decreased slightly in 2010, to 5.6, dropping from 6.1 meetings in 2009. On the other hand, the length of meetings has increased to 9 hours, up from 6.6 hours in 2009. This adds up to more than 50 hours of board time per year, up from a little over 40 hours in 2009—representing a 25 percent increase in board meeting hours.
Evaluations
Given the recent focus on board composition and the requirements to disclose board-member skill sets, the need for comprehensive evaluations is growing. The increased need for reflection has had little impact on director turnover; nearly 60 percent of boards did not replace a director in 2010; this is up from 55 percent in 2009.
Most boards (90 percent) are conducting full board evaluations, while a slightly smaller number of boards (81 percent) are also conducting committee evaluations. Almost half of boards conduct individual director evaluations.
One in five boards (19 percent) use consultants for full board evaluations, and a growing number (8 percent in 2010, up from 5 percent in 2009) use them to facilitate director evaluations. Survey data shows that boards using independent consultants are slightly more likely to replace directors than those who do not use such services.
CEO Evaluations
Maintaining an independent voice separate from the CEO is a crucial duty for the board of directors. In many cases, this duty is expressed through evaluating and compensating the CEO.
The financial metrics most often used for linking executive pay to long-term corporate performance are profits, sales and cash flow. The non-financial metrics most often used for executive compensation are customer satisfaction, legal compliance and employee morale. The overwhelming majority of boards evaluate their CEOs every year. Despite this near universal practice, the methods used to measure CEO performance can vary. Respondents indicated the following beliefs or practices related to CEO performance evaluations:
- CEO compensation, in general, is commensurate with the CEO’s performance.
- Directors more often establish short-term goals for the CEO’s performance than long-term objectives.
- More CEOs are being evaluated annually (89 percent, up from 86 percent in 2009).
Shareholder Input
Proxy access may become a reality for most public companies. As such, boards may want to put more consideration into the candidates suggested by shareholders. A majority of survey participants believe, however, that proxy access will not change the current election process.
Regardless of the potential impact that proxy access may have on director elections, board composition is still very much a question of skills and experiences. Survey participants have consistently ranked both specific industry experience and financial expertise as the most important factors in director recruitment. These preferred attributes have remained unchanged since 2006. Additionally, despite the increased call for diversity in the boardroom and the strong belief that diversity is important for recruitment, the prevalence of women and minorities (based on race and nationality) on boards has remained fairly consistent over the past several years.
Survey Takeaways
- Overall, directors have positive or satisfactory opinions on how their boards are operating.
- Almost all respondents agree that current governance structures and practices enhance the board’s ability to effectively and efficiently fulfill its duties.
- Most of these board structures separate the chairman and CEO roles.
- The top priority for boards in 2010 is “strategic planning and oversight,” noted by 67.5 percent of respondents, followed by “corporate performance and valuation” for 41.5 percent of directors. “Risk and crisis oversight,” “executive talent management and leadership development” and “CEO succession” are other top board priorities.
- The level of risk in corporate strategy is appropriate for 86.8 percent of respondents, although 32.4 percent of management teams do not have a comprehensive risk assessment and 11.7 percent of directors are not asked to approve the risk profile in the corporate strategy.
- Boards are largely satisfied with the skill sets of their fellow directors, with 34.5 percent agreeing and 61.9 percent strongly agreeing that the members of their board have the right type and level of skills and experience.
- A majority of directors recognize that director education enhances their board’s overall effectiveness; 92 percent either agree or strongly agree, up from 80 percent in 2009. Although many directors assert that director education is beneficial, 64 percent state that their board does not require continuing education.
- Director turnover remained low, with 59.8 percent of directors reporting that no fellow board members were replaced in the past year. The most common methods of director turnover are evaluation of individual directors (57.5 percent) and age limits (48.7 percent).
- Directors on boards that have a designated “lead” director (66 percent), largely believe (92 percent) that the position enhances the board’s effectiveness, with 43 percent of respondents indicating it enhances effectiveness to a great extent.
- Some 37 percent of surveyed directors have limits on the number of public or private boards on which they are allowed to serve, with the majority that had restrictions limiting directors to three other posts.
- Respondents tend to believe that compensation issues will be of most importance to shareholders in the near future. A majority (77 percent) believe that their executive compensation program improved corporate performance. Profits are listed as the most common financial measures of corporate performance at 66 percent. Customer satisfaction (54 percent) is the most commonly used non-financial measure.
- Boards feel adequately supplied with the information they receive, with 75 percent feeling they receive just enough, and a virtual split between feeling that they receive too much (12.4 percent) or too little (12.6 percent). Corporate performance is the subject with the best flow of information, with 97 percent feeling that the amount of information received is satisfactory or excellent.
Methodology
NACD sent approximately 18,000 email invitations and 2,000 paper surveys asking directors and others who serve on boards to participate in our annual governance survey. Respondents opted to answer a public or private organization survey, or both, as applicable; those who serve on multiple boards were encouraged to fill out a survey reflecting their experiences with each.
In analyzing the data, we calculated response percentages based on the total number of responses specific to each question. For example, if a question received only 550 out of 701 total responses, and 275 respondents answered “yes” and 275 answered “no,” then the result was reported as 50 percent affirmative.
Demographics
The 2010 survey respondents represent a mix of corporate directors serving on public boards. For 2010, 701 individuals responded, with the overwhelming majority describing themselves as outside directors. Participants also include inside directors and nonvoting attendees. Other participants are typically the corporate secretary or general counsel.
The director community that responded to this survey is almost uniformly spread out around the United States. On average, respondents served on 1.5 public boards, 1.4 private company boards, and 1.5 nonprofit company boards. Unsurprisingly, most respondents’ companies were listed on the NASDAQ or NYSE. Small-cap companies ($300 million to $2 billion) were the largest group with 37.4% of all responses, followed closely by mid-cap companies ($2 billion to $10 billion) at 25%.
To learn more about how directors responded to the 2010 Public Company Governance Survey, visit NACDonline.org. NACD members can buy the full report at a discounted price.