A further complication, and one which is widely misunderstood, is the concept of a single, cohesive shareholder group. Shareholders all have different expectations and investment strategies. Hedge funds do not have the same investment timeline as pension funds and yet, under the law, they have the same “rights” as any other shareholder group.
“There is no one, cohesive shareholder group and it is the board’s challenge to represent all of them,” Mader explains.
What Directors Do
The responsibilities of directors are the subject of a great deal of confusion and misunderstanding. Not least of the issues are perceptions around the amount of time that directors spend on the job. Directors often receive a great deal of criticism in the media and other arenas because they do not spend enough time working with the companies that are paying them. The problem is that this criticism may well be based on a fiction and lack of understanding about the job. A board seat is not intended to be a full-time role, but this perception frames conversations about performance, compensation and responsibility.
With the exception of financial analysts and students, all groups believe directors work 10 hours or less a month on board-related issues. Again, it is the C-suite that believes most strongly that directors work less. How does this compare to reality? Based on figures taken from the NACD 2010 Public Company Governance Survey, the average total time commitment of a U.S. board director is 204.5 hours annually, or just over 17 hours per month. This is down from 225 hours a year in 2009. Even though the actual time directors spend on their duties is far greater than what most people realize, it still does not match up to what most groups think they should be working. When looking at how many hours board members should spend on the job, most people said more than 30 hours a month. This is an increase from last year, when most respondent groups believed 20 to 30 hours was sufficient.
Perhaps the most interesting result of the survey is the admission by several groups, and an overall majority of those involved, that they do not know what a director does. More than half of the Main Street respondents (55%), 54 percent of academics, 62 percent of students and 39 percent of policy makers disagreed with the statement: “I am familiar with the responsibilities of a public company board director.”
“The role of the board is long-term value creation and it is clear from these results that the overarching theme of the report is that people do not really understand the role of the board. And, now with enhanced disclosure rules in place, companies may want to utilize their filings as one way to communicate the board’s role,” says Maureen Errity, director, Deloitte LLP, Center for Corporate Governance. “Further, with the new regulations, shareholder and even broader stakeholder engagement is becoming more critical as a means to inform.’
The percentage of respondents who admit to not understanding the role of directors is up sharply in all segments. The most interesting of these rises is among board directors themselves— almost 17 percent disagreeing that they understand their role.
One possible interpretation of this lack of understanding is that the many changes in recent years has beset the structure and operation of U.S. company boards, causing some directors to bemoan the fact that they don’t know what is expected of them anymore. This sentiment rings true among directors who express dissatisfaction with the amount of time spent on “non-core” issues.
Despite a significant number of respondents not knowing what a board does, they retain very strong feelings about the appropriate level of compensation, not just for directors, but also for CEOs and other executive officers.
In the case of directors, most people believe that pay rates are at the right level. Most respondents, with the exception of directors, analysts and management, feel that directors are being paid $200,000 annually and that this level is acceptable.
A slim majority of directors, however, put the figure for acceptable pay at $50,000, although it is worth noting that 45 percent suggested a figure exceeding $200,000 would be more commensurate with the function. According to the NACD Director Compensation Report, average total pay for directors at large-cap companies was slightly over $175,000.
The oft-heard refrain that directors are not motivated by money to perform the role is not entirely borne out by the data. While many board directors cite personal development, professional interest and “giving something back” as strong motivators for performing the role, a majority point to compensation as a leading factor. Many non-board respondents also believe that compensation is a significant concern for those seeking board service.
When asked, “What do you see as the main motivators for board service?” 52 percent of directors cited compensation as the most important factor. This was followed by 43 percent who pointed to power and prestige. So, clearly, compensation is an important motivator for the modern director. With the intense level of scrutiny and significant reputational liability, who can blame them?
The same holds true for CEOs. Asked the same question—“ What are the motivators of CEO performance?”—all except students and board directors put compensation firmly at the top of the list. Directors suggest that the main driving force for a CEO is a desire to improve conditions, although compensation is a close second. This focus on compensation is broadly similar to the beliefs of respondents from the 2009 survey.