Spencer Stuart's 25th Annual Board Study Highlights Major Changes in Governance

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Oct 20, 2010, 12:29 ET

NEW YORK, Oct. 20 /PRNewswire/ -- Spencer Stuart's 25th annual study of S&P 500 boards, the Spencer Stuart Board Index (SSBI), highlights major changes in board composition and growth of board independence, both near-term and since 1986. Much has changed over this period: there are far fewer inside directors; more companies now elect to split the chairman/CEO role; boards are smaller, more diverse, older and meet less often.

In 1986, the focus was on the "outsider/insider composition" of the board rather than the larger concept of "independence." The average board size was 15 with a 3:1 ratio of outsiders to insiders. Today the average board size is 11 with a 5:1 ratio of independents to non-independents.

In 1986, only three boards of the 100 reviewed had the chairman/CEO as the sole insider. Today, the chairman/CEO is the only insider on more than half of S&P 500 boards and 40 percent of boards split the chair and CEO roles with 19 percent of chairs truly independent.

The 1986 SSBI made no mention of companies separating the chair and CEO roles or the percentage of directors who were women and minorities or the functional backgrounds of directors. There was also no reference to shareholder communications, majority voting for directors and succession planning as these intense areas of interest for shareholders and boards today had not yet surfaced so visibly.

Seventy-one percent of boards today have adopted majority voting with directors who fail to secure a majority forced to offer their resignations. Nearly all boards (99 percent) responding to our annual board governance survey cite discussing CEO succession at least once a year, but 14 percent of boards still do not have an emergency succession plan.

"Importantly, seventy-four percent of boards have instituted mandatory retirement rules for directors versus 58 percent in 2000. However, retirement age is rising. Seventy-nine percent set it at 72 or older versus 37 percent in 2000; while 19 percent set it at 75 or older, versus just 1 percent in 2000," said Julie Daum, practice co-leader for the North American Board & CEO Succession Practice.

One thing hasn't changed: boards in 1986 and today prefer active CEOs as directors -- but they are not getting them now.

"In fact, more than 50 percent of CEOs in the S&P 500 today do not serve on an outside board and only 26 percent of new directors in 2010 are active CEOs versus 53 percent a decade ago. Boards are compensating for the dearth of active CEOs by hiring more retired CEOs, more divisional presidents and more functional leaders," said Daum

Boards also say they are searching for women and minorities. Forty-four percent of boards surveyed are looking for women, yet only 21 percent of new directors are women, and 10 percent of boards still have no women. Forty-seven percent of boards are seeking minorities, yet only 12 percent of new directors are minorities.

Demand is strong for directors who bring specific expertise. Forty-nine percent of boards surveyed want directors with a strong financial background, 48 percent are looking for an industry background, and 37 percent seek international expertise. Nearly 20 percent are searching for regulatory, risk, technology and marketing expertise.

Contrary to popular belief, despite the spotlight on governance practices today, boards actually met more often in 1986 than they do now. The average number of board meetings 25 years ago was 11 versus eight today. Nearly all boards (96 percent) now conduct annual performance evaluations – and 26 percent of this group evaluates individual directors in addition to the entire board. Seventy-one percent of boards also limit outside board service by directors to make sure they are available to their companies.

Director compensation now averages $215,000 annually with additional compensation for leadership of board committees. Total average compensation for a board is now $2 million per year with 57 percent paid in equity (43 percent in stock and 14 percent in options). Average additional compensation for leadership roles is significant. An independent chair receives an average of $166,810; a lead director $23,653 and committee chairs $11,692. In 2010, the average board retainer was near $80,000. By comparison in 1986, the average board retainer was just over $20,000.

Changes in regulations and laws during the last year may accelerate evolution in board composition and compensation over the next five years. SEC regulations in December 2009 led to greater transparency in 2010 proxies. The Dodd-Frank Act signed in July 2010 will impact board operations in the long run and while implementation of the SEC's new proxy access ruling has been delayed until spring 2011, it will have implications for director elections and board composition.

The Spencer Stuart Board Index, analyzes the proxies of all 500 companies in the S&P index and includes results from a survey of board practices of those companies. The SSBI will be published in its entirety and posted on Spencer Stuart's web site (www.spencerstuart.com) by November 1, 2010.

About Spencer Stuart

Spencer Stuart is one of the world's leading executive search consulting firms. Privately held since 1956, Spencer Stuart applies its extensive knowledge of industries, functions and talent to advise select clients — ranging from major multinationals to emerging companies to nonprofit organizations — and address their leadership requirements. Through 51 offices in 27 countries and a broad range of practice groups, Spencer Stuart consultants focus on senior-level executive search, board director appointments, succession planning and in-depth senior executive management assessments. For more information on Spencer Stuart, please visit www.spencerstuart.com.

SOURCE Spencer Stuart