SSBI: audit committees are leading the change; The latest Spencer Stuart Board Index captures a compelling snapshot of the post-Sarbanes-Oxley shifts under way in governance.

• Author: Daum, Julie H.
• Position: Spencer Stuart: Governance Letter - Spencer Stuart Board Index - Related article: Balance Compliance and Needs When Building Your Board

THE 2003 SPENCER STUART Board Index (SSBI) study of corporate governance in S & P 500 companies details how the Sarbanes-Oxley law is transforming boardrooms and corporate governance. Audit committee service and pay are dramatically changing. Companies are rushing to increase the financial expertise on their boards of directors, paying sharply higher retainers in some cases to the chairs of their board audit committees and holding more audit committee meetings. In addition, the data reflect a significant increase in companies seeking for their boards active or retired CFOs.

As in years past, Spencer Stuart extracted the information for its 18th annual SSBI report directly from company proxies, adding to the portrait of long-term corporate governance trends and highlighting emerging trends at the earliest stage. The firm also conducts a separate survey of S & P 500 companies to assess corporate governance issues not recorded in proxies and, for the first time, researched company Web sites to determine what the corporations say about their governance.

Many more boards this year changed audit committee chairmen, with 69 new to the role. Audit committee meetings are being held more frequently, with a median of seven a year, up from five a year in 2002. Further, there is a significant increase in retainers paid to some audit committee chairmen--more than double the retainer paid to other committee chairmen.

Membership change in audit committees reflects compliance with the Sarbanes-Oxley law. Of more than 300 director searches Spencer Stuart undertook in the past year, 39% focused on finding directors with financial expertise. Most boards are adding CFOs, and the number of retired accounting firm partners who are being recruited, although small, is growing. This previously untapped group is helping to fill the demand for financial sophistication.

Active CEOs are more reluctant to serve, especially with increased time demands and perceived risks associated with board service. The risk-reward equation is less attractive. Retired CEOs are picking up some of the slack, but boards are also recruiting directors with an eye toward specific skills they now require.

Spencer Stuart's analysis reveals a number of other interesting insights into the changing corporate governance environment. Here are the summary high-lights:

Board Composition

Smaller Board Size Has Stabilized

* In 2003 the average S & P 500 board comprised 11 directors, compared with 12 in 1998 and 14 in 1993.

* Nearly one-quarter of S & P 500 boards have between eight and nine directors, while five years ago only 18% did.

* Only 18% of boards currently have more than 15 directors, compared with 16% five years ago.

* The four largest S & P 500 boards are SBC Communications (with 21 members), and Charter One Financial, Comerica, and Marshall & Ilsley (each with 19 members); while the four smallest S & P 500 boards, with five members each, are Broadcom, Linear Technology, Maxim Integrated Products, and Zimmer Holdings.

Outside/Inside Ratio = 4:1

* 80% of directors are outsiders.

* Smaller overall board size is a factor in the net reduction in inside directors.

* The trend to have the CEO as the sole inside director continues:

-- Five years ago 23% of boards surveyed indicated that the CEO was the sole inside director;

-- In 2002 that group grew by more than a third to 31% of boards;

-- In 2003 the group again increased to 35% of boards surveyed.

Age of Outside Directors

* Average age of S & P 500 boards has stabilized at 60.

* For newly added directors, average age is 56.

Demand for New Directors

* Demand remains strong for second year running: 393 executives elected to S & P 500 boards in 2003 closely matches the 401 added in 2002, in comparison with 278 additions in 2001.

* As Sarbanes-Oxley takes hold, finance and accounting backgrounds are in great demand:

-- New outside directors with financial management or CFO experience increased from only 1% of total new outsiders in 1998 to 5% in 2002, then doubled to 10% in the 2003 survey.

-- New...