But there is hope. As the following article explains, the data show that some of the structural impediments to better governance, like boards packed with corporate insiders, have begun to abate. That the level of professionalism expected of board members is increasing. And, in a sharp reversal of fortune, the very scandals that have so tarnished the reputation of all corporate boards may have discouraged many of the unqualified, who fear liability, and encouraged the more experienced, who understand both the risks and the solutions because they have dealt with them before.
It continues to be relatively easy to spout pieties about the importance of good governance while encouraging behavior that stands in direct contradiction to approved practices and global norms. In much of the world, family-owned enterprises dominate the local economy, with grave implications for global commerce. For instance, virtually all of the companies forced to de-list from US exchanges in the past two years due to improprieties have been Chinese. Establishing sensible lines of authority and adherence to international standards often take second seat to more personal concerns. On the political level, developing economies, particularly China, have been reluctant to surrender authority to supra-national entities.
The US and Europe, however, have not proven to be exemplars in this regard. Particularly in some of the most dynamic areas of the economy, like technology, companies like HP and Yahoo have proven to be case studies of what not to do - repeatedly.
There is evidence to suggest, however, that despite these recurring problems, the corporate world at large understands that investors will not tolerate repeated examples of slip-shod board behavior. And that they will force companies which do not conform to face the ultimate punishment - loss of access to capital through reduced bank lending and lower stock prices. JL
John Bussey reports in the Wall Street Journal:
Watching recent missteps by boards of directors, it's difficult to imagine that governance in corporate America is actually getting better, not worse:
•A board at Yahoo that appointed six CEOs in five years (including two interim CEOs).
•Directors at Chesapeake Energy who didn't keep debt in check or show much control over their CEO.
• A board at Avon Products that didn't deal quickly with poor results and an investigation of corruption abroad.
•Directors at Duke Energy who forced out their new CEO a few hours after installing him.
The list goes on.
But take heart. By several measures—including board independence and elections—governance is improving, albeit slowly. A decade or so ago, shareholders were sheep, largely powerless. Now they're increasingly putting others under the shears. The boards of Yahoo and Chesapeake have been overhauled and the CEO of Avon ousted.
Directors themselves, meanwhile, have been empowered with greater independence from management. That gives them more influence to fix problems before they become catastrophic. And that's potentially good for business.
"The level of accountability for board members has jumped exponentially since 2002," says Patrick McGurn of Institutional Shareholder Services, an investor advisory firm. "But it's not mission accomplished."
Consider the structure of the board itself. In the days before problems at such companies as Enron, WorldCom, and the big U.S. banks focused attention on weak board leadership, boards were more sympathetic to management. They almost uniformly concentrated power in the CEO, who frequently also held the title of chairman.
These days, on a majority of the boards of S&P 500 companies, the only director from management is the CEO, says Spencer Stuart, the recruiting firm. ISS calculates that 21.5% of S&P 500 company boards now have an independent director as chairman, up from 3% in 2002.
"You see more independence in the boardroom," says Julie Daum, a leader of the board and CEO practice at Spencer Stuart. "It's just the pressure that board members feel to up their game. And it's from public attention."
Executive sessions led by an independent director, with the CEO not in the room, have been standard for years. And boards increasingly limit the number of other company boards that a CEO can sit on, viewing them as a distraction from the day job. Andrea Jung, the former CEO of Avon, for example, also sat on the boards of Apple and General Electric GE +0.71%—"while Rome burned," as one governance expert put it.
These days it's also slightly easier to boot underperforming directors. An increasing number of companies have abandoned staggered board elections, in which typically only one-third of a company's directors comes up for reelection annually. That process tended to entrench directors and frustrate shareholders pushing for change. Now, only a quarter of S&P 500 companies retain staggered elections. Instead, companies have moved to annual elections.
And roughly 80% of the companies in the S&P 500 now select directors based on a majority vote: If candidates are unopposed, they must get more votes in favor of their reelection than against or face resignation. Previously, the voting methods essentially gave shareholders the option only of withholding their vote from a director they disliked. A director could get reelected by getting just one vote, and the process tended to rubber stamp the slate proposed by the board.
Just this week, Procter & Gamble PG +1.13%had a nonbinding shareholder proposal adopted at its annual meeting that seeks to extend the company's existing majority vote for board elections and other matters to the removal of directors. Currently, 80% of shares have to be voted against incumbent directors to force their removal.
Then there's the matter of aligning directors' financial interests with those of shareholders. More companies are setting guidelines for stock ownership—getting director skin in the game, and making the numbers public. The median value of shares owned by nonmanagement directors of S&P 500 companies jumped to $698,390 in 2012 from $405,273 10 years earlier, according to Paul Hodgson of GMI Ratings.
Among the many things still to tackle: Boards tend not to have term limits—only 4% of the S&P 500 do, says Spencer Stuart. One of those companies, Integrys Energy Group, TEG +0.79%has pegged its limit at a generous 30 years. Mandatory retirement ages are also high, up to some 75 years old. This year, there are fewer new directors of S&P 500 companies than in any year of the past decade.
"Boards don't have enough turnover," worries Ms. Daum of Spencer Stuart. "They aren't nimble enough to bring on new areas of expertise. That's a problem."
The flip side, though, is this: When shareholders see a problem, they now have a bit more clout to get rid of it. The boot is increasingly on the other foot.
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