Portrait of boards on the cusp of historic change.

• Author: Daum, Julie
• Position: Spencer Stuart: Governance Letter

A more targeted approach to selecting directors...increased pay for audit committee service...a wave of director retirements...these are just some of the brewing trends documented in the latest Spencer Stuart Board Index.

IT HAS BEEN a rocky ride for many companies -- and their investors -- during the past year. And while, in previous years, many have likened governance trends to watching a glacier move, it seems that the glacier has begun to melt.

The 2002 Spencer Stuart Board Index (SSBI) report provides an in-depth portrait of boards and board governance on the cusp of an historic change wrought in U.S. board governance by the Sarbanes-Oxley Act and pending stock exchange rules. Boards have a long way to go to reach SEC, exchange, and legislative mandates, and we would expect to see movement toward greater compliance in next year's data.

One headline that emerged from this current SSBI is the fact that in just one year there has been a 44% jump in the number of new outside directors added to S&P 500 boards (the SSBI is based on an annual analysis of S&P 500 company proxies). We have witnessed this greatly increased demand in our Board Services Practice and expect it to continue.

To fill positions, boards will have to look beyond the traditional candidate: sitting CEOs who are busy with their own companies and boards and the one or two outside boards they may already serve on. Increasingly, companies that wish to recruit directors will focus on strategic skills and experience, then identify directors who fit the profile. Whether they are seeking financial expertise to strengthen their audit committee or human resources expertise to assist with recruiting and compensation issues, we will see more of this targeted approach.

With change in the wind, here are summary highlights of the latest SSBI.

Board Composition

Boards Are Getting Smaller:

* In 2002, the average S&P 500 board comprised 10.9 directors compared with 11.1 the previous year, 12 in 1997, and 15 ten years ago.

* One-quarter of S&P 500 boards have between eight and nine directors; five years ago, the figure was 16%.

* Given increased demands on independent directors, the trend toward smaller boards may well reverse.

Outside Directors Predominate:

* There are about three outside directors for each inside director, a ratio that has remained constant for the past decade.

* As boards have grown smaller, there has been a net reduction in inside directors. In nearly one-third of S&P 500 boards, the CEO is the only inside director, compared with less than one-quarter of boards only two years ago, and fewer than one in 10 in 1992.

* In light of the new, tighter definition of "independent" director, we anticipate a significant shift in these data.

Age of Outside Directors Indicates a Younger Trend:

* The average age of outside directors on S&P 500 boards remains 60, unchanged in the last five years.

* However, while nearly two-thirds of outside directors were in the age 60 to 63 category in 1992, currently less than one half are. And while only one in five outsiders in 1992 was in the age 57 to 59 category, now one in four is - an increase of more than one-third in 10 years.

Significant Recruitment of New Outside Directors:

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