Press Releases

What Directors Want

NEW YORK, October 2, 2003 - Corporate Directors doubt that extensive shareholder involvement in how companies are run would help - and believe that it could hinder - efforts to improve corporate governance, according to a recent survey by executive compensation consultants Pearl Meyer & Partners. Although Board members express support for most governance reforms, they are pessimistic about others, such as allowing easier shareholder nomination of Directors.

The Pearl Meyer & Partners survey questioned 84 Directors serving on Boards of the nation's 200 largest industrial and service companies. Because corporate Board members seldom express their personal opinions publicly, the survey offers a rare and timely glimpse into their views on the ongoing controversy regarding the adequacy of Board oversight. Just this week, the Securities and Exchange Commission announced plans to enact new rules that would ease direct nomination and election of independent Board candidates by shareholders.

Some Changes in Oversight Called Counterproductive
Board members who responded to the survey do not unilaterally oppose the current crop of enacted and proposed governance reforms, nor are they completely comfortable. Fully 50% of respondents -- among the largest margins of any governance change covered by the survey -- predict a negative long-term impact if SEC rules are changed to permit shareholders to more easily place independent candidates on Boards. Most of the other Directors say such a change would have little or no impact, with just 6% labeling it a positive move.

In contrast, appointment of a Lead Director is favored by 69% of Directors, and 40% support the idea of having a non-CEO Chair. Respondents also endorse two aspects of Sarbanes-Oxley -- nearly 75% say the year-old law's ban on company loans to executives will improve governance and 61% favor its stricter definition of Director independence. They are somewhat less impressed by the law's requirement that a company's CEO and CFO sign its financial statements, with just over one-half expecting it will have a positive effect and nearly all the other respondents predicting little change.

Directors are divided about the benefits of permitting more shareholder involvement in corporate pay decisions. Forty-two percent predict a new stock exchange requirement that shareholders approve all equity compensation plans will have little or no impact, with the rest about evenly split on whether it would be positive or negative. With respect to requiring shareholder approval of actual executive pay levels and practices, 40% say it will have a negative effect, with other Directors evenly divided between predictions of a positive impact or minimal effect.

"The extent of direct shareholder involvement is a classic debate that is being recast in a super-charged governance environment,' said Steven E. Hall, President of Pearl Meyer & Partners. Noting, as an example, shareholder dissatisfaction with how Boards oversee executive compensation, Hall said. "While Directors recognize the need to regain public confidence, they also believe that effective governance lies in their ability to exercise their business judgment in corporate matters."

Director Job Becoming Tougher
Sixty-three percent of respondents say fulfilling Sarbanes-Oxley mandates has significantly increased their Board workload and made it more difficult to obtain adequate Director insurance -- issues that have prompted nearly one-half of the Directors to consider relinquishing their Board seats. Recruiting Board members also has become more difficult, according to 83% of respondents, particularly to fill seats on the demanding audit and compensation committees. In a related finding, three-quarters of respondents support a current trend toward differentiating committee pay based on the responsibility, risk and workload involved. Overall, more than 70% of the Directors describe their own pay as appropriate, with the rest rating it "low".

Asked about equity use, 70% of respondents say at least half of Director pay should be equity-based, with the most favored formula a 50/50 mix of cash and either full-value stock or a combination of stock and stock options. According to Pearl Meyer & Partners' analysis of 2003 proxies, Director compensation at the largest 200 companies averaged $155,000 of which 60% was delivered in stock. More than 80% of respondents believe Directors should be required to purchase company stock and even more -- 94% -- say Directors should be required to retain at least a portion of shares acquired through grants or option exercise.

Why Serve?
Interest in the company is the most often mentioned motivation for Board service, named by three-quarters of respondents. It is followed by prestige, named by slightly under half the Directors. The reasons cited least are compensation, ownership, or camaraderie, each named by fewer than one-quarter of respondents.

Three-quarters of Directors support a mandated Board retirement age, with nearly all recommending somewhere between 70 and 75 years as most appropriate. By a slightly smaller margin, respondents take a positive stance on limiting Dirctors' other Board memberships, with most suggesting a limit of three to five seats.

About Pearl Meyer & Partners

For over 20 years, Pearl Meyer & Partners (www.pearlmeyer.com) has served as a trusted independent advisor to Boards and their senior management in the areas of compensation governance, strategy and program design. The firm provides comprehensive solutions to complex compensation challenges for companies ranging from the Fortune 500 to not-for-profits as well as emerging high-growth companies.These organizations rely on Pearl Meyer & Partners to develop programs that align rewards with long-term business goals to create value for all stakeholders: shareholders, executives, and employees. The firm maintains offices in New York, Atlanta, Boston, Charlotte, Chicago, Houston, Los Angeles and San Jose.