It was 90 years ago that Louis Brandeis, a future justice of the U.S. Supreme Court, wrote of the "financial oligarchy" controlling American business. "Usurpation," "encroachment" and a "long-concealed concentration of power" were occurring in corporations and banks, a circumstance, he noted, that was "dangerous…when combined in the same persons." Almost a century later, observers of recent corporate scandals might say that the situation in corporate America today isn’t much different. A study conducted last year by scientists in France and the United States found that cliques of well-connected businessmen do, in fact, tend to vote together and to control decision-making on corporate boards. And the more boards they serve on together, the more influence they wield.
During a decade when the CEOs of the Gap and Apple sat on each other’s boards, and when the Gap chairman sits on Charles Schwab’s board and Schwab himself sits on the Gap’s board, clubby connections certainly still exist. Charles Lee, chairman of Verizon Communications, serves on five boards, two of them--Marathon Oil and United States Steel--with U.S. Steel CEO Thomas Usher, who also serves on five boards. With so much power concentrated in so few hands, any suggestion that a pack mentality could have contributed to the corporate disasters of the last two years is hardly far-fetched.
Despite the reality that corporate relationships can still be a tangled web of who knows whom, there’s change on the horizon. Rob Reindl is one of the people fueling the transformation. As corporate vice president of human resources at Edwards Lifesciences, an $850 million cardiovascular technology company headquartered in Irvine, California, Reindl is deeply involved in a process that in the past was traditionally beyond the realm of human resources executives: the recruitment and selection of corporate board members.
Once a murky process conducted through interconnected networks of CEOs and their inner circles, the appointment of company directors is becoming an increasingly organized, transparent process. Since Congress passed the Sarbanes-Oxley Act of 2002, corporate boards have been under close scrutiny. In an effort to ensure ethical conduct at the highest levels, the legislation addresses, among other issues, independence in corporate governance, auditing, accounting, executive compensation and timely disclosure of corporate information.
In November 2003, the Securities and Exchange Commission adopted further reforms that require public companies to develop a specific process for finding and selecting new board members, and to make that information public. For support in creating these new methods, governing boards are turning to their in-house human resources experts. "We’ve instituted processes to help other people in the company be a part of talent scouting now, and that’s partially due to the shrinking pool of traditional candidates and Sarbanes-Oxley," Reindl says. "By being involved at this level, you’re helping to set the strategic direction of the company. And that’s the difference between the new HR leader and the traditional profile of someone in HR."
At Edwards Lifesciences, the 5,000-employee former cardiovascular branch of Baxter International Inc., Reindl has coordinated the board-member search process since the company separated from its parent corporation in 2000. By working closely with chairman and CEO Michael Mussellam, he analyzes board needs, and by communicating with the existing board and with the company’s chosen search firm, Korn/Ferry International, he executes much of the selection process.
The new challenge: a wider search
Even with the new help from human resources executives, however, board searches seem to be getting harder, not easier. Just as background and skills requirements are getting stricter, thus narrowing the pool of qualified people, the number of willing traditional candidates is also shrinking. The increased time commitment required of board members, as well as fears of liability, has some potential directors opting out of the selection process altogether.
Bill George, former chairman and CEO of Medtronic, who serves on the boards of Goldman Sachs and Novartis, says that the increased time commitment--an average of 19 hours a month, according to Korn/Ferry’s 2003 Board of Directors report--has led many directors to cut back on their board affiliations. In the past, responsibilities were often minimal, and sitting CEOs, traditionally the most desirable board members, would serve on several boards at a time.
"In the past, board members weren’t really taking their jobs seriously," George says. "It was more of an honorary position." Today’s sitting CEOs will serve on only one or two boards at most.
Even the most high-profile CEOs are shedding directorships. The chairman and CEO of Oracle, Larry Ellison, dropped his board position at Apple in 2002, saying that he didn’t have time to attend the meetings. Forbes Magazine reported that Ellison had missed 75 percent of Apple’s board meetings since he joined in 1997. Ivan Seidenberg, president, board member and CEO of Verizon Communications, also dropped two board positions last year, citing a lack of time, among other reasons.
George says that today’s board members simply have to be more committed than they were just a few years ago. The 2003 study by Korn/Ferry found that active participation of all board members has become the minimal accepted standard, a departure from the past. The research shows that boards "are asking directors to resign with unprecedented frequency, most often citing poor performance or a lack of participation as the main reason." Sixty-five percent of the companies that responded to the survey said that in the previous year, at least one board member had been asked to resign or not stand for re-election. That’s a jump from 54 percent in 2002.
"We’re seeing sitting CEOs on fewer and fewer boards," says Nancy Hahn, a client partner at Korn/Ferry International who has been involved with executive searches for 12 years. "With the economy the way it is and companies struggling to make their numbers, we’re hearing that some candidates don’t want to move forward because of a lack of time. They need to concentrate on their own businesses."
In addition to the increased time commitment, the new rules mandating a majority of independent directors and greater media scrutiny about interlocking directorships are encouraging some directors to resign from their posts. Last year, for example, Sanford Weill, chairman and CEO of Citigroup, announced that he was dropping his directorships at AT&T and United Technologies to comply with his company’s policy prohibiting interlocking directorships. Some experts say that another factor producing boardroom vacancies is a fear of liability. "There’s a professional risk, and the risk/reward trade-off just isn’t there for some of them," says Julie Daum, a practice leader at executive search firm Spencer Stuart. "They think, ‘I don’t want to see my name on the front page of the New York Times.’ "
The Korn/Ferry study reports that the average annual cash compensation for board members of Fortune 1,000 companies climbed to $43,306 last year, from $40,964 in 2000. At top companies, however, total compensation can be considerably higher. According to Forbes, General Motors pays its independent directors $200,000 per year, $60,000 in cash and $140,000 in restricted stock. A report by compensation consultants Pearl Meyer & Partners predicts that 2003 will see a dramatic rise in director compensation to counter "newly heightened commitment and time requirements, as well as potential reputational and financial risks of board service."
Hahn says that the increase is specifically due in part to the legal requirement that audit committees now have members with financial expertise. Competition, she says, is driving companies to offer better compensation for the best candidates.
"The audit committee is a real hot topic right now," Hahn says. "The biggest change we’ve seen in the last 12 to 18 months is an increase in searches for these financial experts. And there’s an increase in organizations saying, ‘Let’s see how we stack up against our peers.’ As a result, companies are increasing the retainer for the chair of the committee and the meeting fees. And the speculation from compensation consultants is that it will continue to increase."
Given the rigorous new standards for directors, as well as the independence, expertise, time and definitive absence of any conflict of interest that are now requirements for a seat on a corporate board, it isn’t hard to figure out why the task of recruiting board members is more demanding than ever before.
New process, new leaders
The new challenges of the hunt, given recent legislation and increased scrutiny of corporate governance, coupled with the tools that workforce execs are now bringing to the recruiting table, are transforming the entire board-selection process. Not only are the methods for identifying and retaining the best candidate changing, but so is the picture of the ideal candidate. The reforms outlined in Sarbanes-Oxley are intended to decrease instances of fraud by increasing accountability as a deterrent to unethical conduct, but regulations can do only so much. As George says in his new book, Authentic Leadership, "you can’t legislate integrity."
The ultimate solution lies with people. "We don’t need new laws," George says. "We need new leadership."
The damaging corporate scandals of the past two years have convinced experts and individual companies that the key to success lies in placing the right people in leadership positions. "We need to look at a much more diverse set of prospective board members," says George, now an executive in residence at the Yale School of Management. "In the past there was a much greater tendency to look for people you know, people you’d served on other boards with, and that leads to crony boards or board members that are not as challenging of each other as they should be." He says that traditionally, board candidates were selected by a company’s CEO and then received an almost automatic approval by the existing directors.
"The old-fashioned way of recruiting directors was to say, ‘Okay, who does the board know? Who does the CEO know?’ And then to go from there," Hahn says. "But given the economic landscape and the nature of business today, with all the scandals, it’s becoming a trend to separate the CEO or chairman from just picking a new board member. Now it’s the nominating committee, and the chairman and CEO are involved later on in the process."
Increasingly, nominating committees are looking to human resources executives like Reindl to facilitate the search process. The amount of work required for a high-quality, far-reaching search can be beyond what board members, who already are saddled with executive commitments at their respective companies, can contribute. So top workforce managers are stepping in to fill the gap. After all, this is the field’s traditional area of expertise: finding the best candidate for the job. There was a time not long ago when board directorships existed above the scrutiny of human resources departments. But now it often is the human resources executive who is conducting due diligence on potential appointments.
Drawing on experiences from Spencer Stuart’s more than 400 board searches in the last year, Daum has compiled a report on the new role of human resources in director selection. It was recently published in the Human Resource Planning Society’s book Restoring Trust: HR’s Role in Corporate Governance. "For the first time there is actually a process," Daum says. "That hasn’t always been true. HR executives are now helping to create this process because they are used to doing this kind of work. They can help the nominating committee by looking for outside counsel, and they can help recruit and evaluate candidates."
At Edwards Lifesciences, Reindl stays abreast of board hiring needs by maintaining profiles of existing board members. He tracks whether or not they are CEOs, if they have international experience, their level of technical expertise and even where they live. His list of necessary skills includes experience in leadership, mergers and acquisitions, financial expertise and knowledge of Sarbanes-Oxley. He also looks ahead to the terms of board member commitments and is able to predict when upcoming vacancies will have to be filled. With this information, the company CEO is then able to analyze the gaps in the board as a whole.
Despite the amplified criteria for the ideal director and the added challenges of the modern board-member search, George argues that high-quality candidates are out there. Human resources recruiters will simply have to cast a wider net. "There are actually a lot of new candidates coming into the pool," the veteran board member says. "It’s becoming more and more important to get diverse boards made up of people with diverse backgrounds. Ideally, the board should reflect the population base you are serving."
Workforce Management, January 2004, p. 47-49 -- Subscribe Now!