AMONG THE MANY EFFECTS on corporate governance wrought by the wave of regulatory reform is the renewed focus on the effectiveness and independence of the board and the recruitment of directors.
No longer is a director position easily filled by a friend of the board or the CEO. Nominating committees comprising independent directors now have responsibility for selecting new directors and have adopted a more methodical and transparent process for recruiting them. Meanwhile, prospective board candidates are weighing more carefully the risks and rewards associated with each directorship. As a result, recruiting new directors has become a more complex, time-consuming and, often, more difficult process than in the past.
This new rigor has benefits. Boards are giving careful consideration to the types of skills and experience needed on the board and recruiting directors best suited to the position. They also are making more use of experts to help them make these decisions. In short, boards are establishing thoughtful search processes aimed at achieving a more targeted recruitment.
While they have delivered many improvements to corporate governance, reforms aimed at the board of directors have had the unintended consequence of increasing the demand for directors, while decreasing the supply. Why is this happening?
During the past several years, Spencer Stuart has seen a dramatic increase in the number of director searches. We've conducted more than 300 director searches this past year alone, giving us a unique perspective on the forces shaping demand and supply as well as the best practices that have emerged.
Reforms spur searches
The growing demand for independent directors is a direct result of governance reform requirements. Boards have had to recruit directors who meet the newly tightened definition of "independence" and have the qualifications to serve on board committees--the audit, compensation, and nominating committees--which now must be wholly independent. We're also seeing more director searches for a specific skill set, such as financial expertise, in order to have a director who meets the Sarbanes-Oxley definition of a financial expert. Finally, board turnover is increasing as directors pare back the number of board commitments they make.
While demand has increased, the supply of willing and capable candidates has decreased, particularly among the traditional source of director candidates--sitting CEOs. There are several causes for the shrinking candidate pool, including the following:
* Board service now requires a greater time commitment, as directors typically must attend more and longer board and committee meetings than in the past.