Dr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com
Companies must have professional governance to operate in the complex business and corporate finance environment prevalent in today’s business world. This is true for privately held companies as well as publicly traded ones. The question is one of risk mitigation as much as regulatory compliance. Corporate directors must have a working knowledge of Sarbanes-Oxley, compliance management, corporate finance and must demonstrate personal leadership, and a willingness to comply with corporate ethics. In return, directors must receive appropriate reimbursement for their performance.
High-profile corporate failures and the most recent ‘government bailout’ of the United States banking system has led many to believe boards are over compensated and often under-perform in executing their responsibilities of leadership and oversight. This judgment is without substantial facts or thorough assessment of all issues. There are boards that offer less than professional governance, and there are directors that skirt the legal boundaries and reap undeserved rewards. However, of the thousands of boards operating throughout the U. S. most quietly perform their duties without incident. Most boards execute their duties to enhance shareholder value year after year.
What are the norms of director compensation? According to an article compiled by Jill Jusko in Industry Week posted March 24, 2008, the compensation for directors varies wildly from company to company. She noted the following regarding a study of 3,000 U. S. companies:
- Average compensation, over $1 Million
- Nine companies paid over $2 Million in cash director fees
- Valero Energy spends over $30 Million with most of it going to a single director
- 32% of companies studied paid less than $500,000 in compensation to its full board
This last statistic is the most reflective of what is truly the norm in board of director’s compensation. Directors operate in the same free market most people in the workforce operate under, supply and demand. Directors with skills in high demand often land board position paying a high salary and high total compensation. Directors accepting these positions contend with overwhelming issues. Some are able to assist with turning around struggling companies, such as the famous case of Lee Iacocca at Chrysler. However, some are unable to affect the change needed or it was too late to save the company.
Most directors simply work to understand their business, report on their committee’s activities and recommendations and vote in the manner they feel will best assist their company to achieve its strategic goals. Most boards have established governance structures with ethical board members following corporate ethical behavior and protocol that prevents fraud. Most directors have a leadership style and ethics that go well beyond Sarbanes-Oxley regulations of transparent financial transactions.
Boards establish Audit Committees with strong authorities to review all financial documents and business relationships. Boards are composed of members deemed as independent from the company’s management to offer assessments of business practices and outside review of business relationships and financial reporting. These governance models instill investor confidence and protect shareholders from inside financial transactions.
Director’s responsibilities are growing as media and government scrutiny become tougher. Director’s assessment of management and CEO performance and compensation are often questioned, and the public only hears about the company with one or two rouge directors that managed to bilk the investors out of millions. Many directors serve with no pay on non-profit boards. Many directors sit on boards and are not even reimbursed for expenses choosing instead to serve and donate their time and talents to assist with programs they believe will enhance their community.
Board compensation is best approached via a survey of comparable companies and with a focus on the challenges that the directors will be asked to contend with. If a company is facing possible liquidation, the fees will have to be greater – the risk and time demands are going to be heavy. If a company is seeking a liquidity event, the same rules apply. In both cases, the effort required to protect and extend shareholder value should be factored into the fee structure.
© Dr. Earl R. Smith II
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Related Articles:
- Officer and Director Vetting
- Errors and Omissions Insurance – Necessary Protection of Officers and Directors
- The CEO’s role in board member selection
- Determining Board Compensation Structure
- Board Compensation – Cash versus Equity
- Governance and Risk Management Strategic Plans
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