As Boards Shrink, Responsibilities GROW.

• Author: Marshall, Jeffrey

Smaller, more independent, more diverse: These are key trends for corporate boards in this country, which are gradually losing their image as old boys' networks of golfing and fishing buddies.

The changes are evolutionary, and efforts to recruit women and minorities still tend to get bogged down in a debate about qualifications. Not long ago, a handful of top minorities -- C. Vernon Jordan and Aulana Peters among them -- were among the few blacks and women, respectively, on major boards. Now those ranks are growing, though not as quickly as some diversity advocates might like. It's still easier, recruiters say, to find a white male with the right qualifications than a minority person or a woman with similar credentials.

But the big, unwieldy board, often an unplanned agglomeration resulting from several mergers, is starting to disappear. Executive recruiting firm Korn/Ferry International's latest annual survey of board practices, released last fall, found that at Fortune 1000 corporations, boards now average 11 members, with two being "insiders" -- members of company management sitting as directors. That's down from as many as five insiders a generation ago.

These and other board trends -- like awarding stock grants to directors, to make them more like major shareholders -- have been affecting corporate governance in companies everywhere. So, too, has the sense that allowing CEOs to serve on outside boards (especially multiple boards) is too much of a distraction in an era when internal strategies need constant fine-tuning. As such, board observers conclude, corporate governance is continually improving.

Two-thirds of those responding to the Korn/Ferry survey reported that their boards were making efforts to adopt policies recommended by shareholder associations and institutional investors. For example, 64 percent said they have a formal process to evaluate CEO performance, up from 56 percent the year before, while 60 percent have a formal committee that oversees corporate governance, versus 56 percent the year earlier.

"This is a far cry from as recently as 10 years ago, when corporate governance was a rarely used term," says Peter Crist, vice chairman of Korn/Ferry. "There's no question that boards are much more effective today. And, while a few major corporations still give only lip service to their governance disciplines, most of our leading companies have measurably improved their governance practices and are setting a good example for others to follow."

The trend to fewer inside directors is largely a result of prolonged and strident campaigning by pension funds, other institutional shareholders and corporate governance advocates. Ironically, however, this makes it more likely that CFOs and other top finance executives will be kept off their boards, and look for opportunity in the form of audit committee service on other company's boards.

That's far from a vain hope. Susan F. Schultz, founder and head of SSA Executive Search International in Phoenix, says that one of the prime targets for board recruitment these days is "the financial executive who has the scope to be strategic. A key expertise is financial, because the liabilities and demands [of corporate governance] are so large."

Audit committees have garnered special attention from regulators (see "Registry's Goal: Helping Audit Committees"). H. Stephen Grace, president of H.S. Grace & Co. in Houston and an FEI vice president-at-large, says there "has been an intense focus on the workings of corporate audit committees -- on the relationships that audit committee members have with the company and management, on the experience and qualifications of audit committee members and on the internal working processes and policies of the audit committee itself. We see focus on how many times a year the committee meets, its charter, what kinds of discussions and reports occur with management and the auditors, and many other aspects of the audit committee operation."

Grace adds: "It is clear the bar is being raised, in subtle ways as well as in direct ways. Shareholder activists and litigants in troubled company situations are already looking to use the various studies, expressions of opinion and new regulations to their advantage. This makes it more important than ever for board members and company management to be aware of new developments impacting their activities."

In a presentation to CFOs, Grace and former RJR Nabisco CFO Robert Roath argue that:

* Audit committees should meet, or at least have a conference call, every quarter. Rather than do these "as needed," they say, boards should plan them regularly, and vary the length depending on what needs to be covered.

* Audit committees need to "follow the money" -- look at where it comes from, where it goes and the cash needs forecasts. Company management should be able to clearly explain to the committee what the key business drivers are and talk about how they are affecting cash flows.

* Every audit committee can benefit from a comparison of its actions under the new rules with those of similar panels at other companies. The committee would gain from briefings by senior financial managers and internal auditors, as well as the external auditor. Independent outside sources, including law firms, might do full reviews.

Recruiter Schultz, who wrote The Board Book (Amacom, 2000), allows that "the audit committee could be almost full-time" these days, and that responsibilities for all board commit tees "have really escalated." That's put increased pressure on directors as boards shrink and there are fewer people to turn to.

Some boards are still too large, however, especially in financial services, Schultz says. "Companies tend to treat their boards as an after thought to the merger -- they don't think of...